Making a Play in the $175 Billion Video Game Industry

How to get into the mind of a 14-year-old...

My eldest son is now nearly 14 and loves playing video games.

It's not unique to him. All of his friends are passionate about the time they spend together online.

Thankfully my son also enjoys school – he always enjoyed reading from a young age and still brings his Kindle everywhere.

Unfortunately for me, my son hasn't adopted my love for martial arts...

The idea of dragging him into a dojo to practice punching and being punched is not his preference.

So instead of martial arts, my son and I found another way to enjoy meaningful father-son time.

We created our own two-person book club.

This is not a "book of the month" type of club. Many would agree that some books deserve more time and others less.

We also aren't stuck to strict days and times for each meeting. It's a bit more fluid to fit both of our schedules.

The structure only really allows us to discuss one chapter at a time, leading to deeper discussions.

Right now, we are talking through chapters of the book Success Is For You: Using Heart-Centered Power Principles for Lasting Abundance and Fulfillment by my favorite author, Dr. David R. Hawkins.

Hawkins, an experienced clinician, is also a world-renowned authority in fields such as consciousness and spirituality. He offers tremendous advice on how to inhabit the traits of a successful mind.

The chapter we're reading hits on many important topics with passages like this one:

Once we know how to be truly successful in any single area of life, we can become as successful in any other area of life.

Hawkins says that success in anything starts with being better at everything. In other words, learning how to master the process is just as important as mastering any subject.

Video games can be a channel for exercising life lessons...

Somehow the discussion about Hawkins and his philosophy of success with my teenage son transitioned to his favorite activity: video games.

He wanted to know how he could apply the topics discussed in the book to become the best possible gamer.

I'm not a gamer, so I couldn't argue with my son's way of thinking here. But training for success in any area of life is something I believe in so deeply.

Naturally, there is the caveat that my son still needs to focus on getting good grades in school.

Fortunately, he is doing very well in the classroom. Otherwise, it would likely be a very different discussion, and I am still his father after all, "mini book clubs" notwithstanding.

So assuming his grades stay where they need to be, why not dive into the activities he's passionate about using the best techniques for doing so?

If becoming more successful in his "meta life" leads to understanding and applying lessons from real life, I'd be chalking up big wins in the father-son scorecard.

One industry leader understands the value of gaming life lessons...

Smart gaming companies understand the importance of helping kids learn valuable lessons from their time online.

A big reason is that designing video games that require important life skills like strategic thinking creates greater connections between players and games.

Take a company like Activision Blizzard (ATVI) as an example.

The gaming giant thinks and acts much like a movie studio in Hollywood. Its designers and engineers create engaging characters and quests that make its games incredibly sticky.

Both young kids and adults spend hours upon hours in the virtual worlds of Call of Duty, World of Warcraft, and Overwatch.

Avid players like my son can develop detailed strategies for beating their peers. The critical thinking skills gained translate back to the real world and keep players coming back for more.

This all would suggest that companies like Activision Blizzard are money-minting machines.

Yet, the company appears to be quite the opposite on an as-reported basis. Its as-reported return on assets ("ROA") has wavered between 5% and 8% over the past five years, which is less than the corporate average of 12%.

As you can see from the chart below, this suggests making successful video games is a lackluster business.

In reality, Uniform Accounting highlights how Activision Blizzard's investments in its massively popular franchises have led to tremendous profitability.

Removing distortions inherent to the as-reported numbers, we can see that the company's Uniform ROA has ranged between 33% and 52% over the past half-decade.

Activision Blizzard's true performance suggests that making video games stickier by creating more valuable in-game experiences is a powerful strategy.

In fact, the global video game market could generate $175.8 billion in revenue, according to forecasts by gaming industry analyst firm Newzoo... And that number could rise to more than $200 billion in 2024.

What does it all mean? Look for more video game companies like Activision Blizzard to continue down this path going forward.

Altimeter subscribers can click here to see how Activision Blizzard is valued based on Uniform Accounting...

If the market is undervaluing Activision Blizzard, ATVI shares could be primed for upside ahead.

All the best,

Joel Litman
December 14, 2021

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