The thrill of it: dopamine, loot boxes and gaming investments Finance
In the latest edition of his column, Tom Waterhouse from WaterhouseVC examines the evolving landscape of the video gaming industry, with a keen focus on developers innovating within the realm of live-service products, including popular features like loot boxes. Waterhouse emphasizes the necessity of striking a balance when integrating these elements to enhance player experience.
Dopamine plays a pivotal role in driving engagement in both gaming and gambling environments. This neurotransmitter is released during pleasurable activities—whether it’s scoring a goal, achieving a victory in a game, or hitting a jackpot in a casino. This intrinsic reward mechanism is crucial in maintaining player interest and excitement.
The Thrill Factor
A fundamental question arises in the analysis of gaming and wagering products: "Is the experience exciting for the customer? Does it deliver a thrill?" In gaming, this thrill may present as substantial jackpots or frequent, smaller rewards, ensuring that players remain engaged and invested in the experience.
Transformative Trends in Gaming
According to a survey by the Entertainment Software Association (ESA), there are currently 3 billion video gamers globally, with 54% of them noting that gaming enhances their social connections. The gaming world has dramatically transformed since the release of the first PlayStation in 1994 and the original Xbox in 2001. The emergence of MMORPGs (Massively Multiplayer Online Role Playing Games) like Runescape has been a game-changer, fostering large online communities through competition and social interaction.
Historically, during the 1990s, game developers primarily relied on upfront sales for revenue, with CDs costing approximately $40. As technology advanced, online platforms, such as the Xbox Live Marketplace, emerged, enabling updates and in-game purchases.
The synergy between advancing technology and the MMORPG trend led to the explosion of “live-service games.” These games continually add new content post-launch, significantly extending player engagement and driving increased revenue per user. For example, industry leaders recognized this revenue potential as early as 2010, leading to fresh business strategies.
John Riccitiello, former CEO of Electronic Arts, aptly noted in 2010: “I used to buy a whole bunch of titles, play them for three weeks, and move on… the business model needs to evolve.”
Today, live-service games like Fortnite and Grand Theft Auto V (GTA V) regularly introduce new weapons, skins, maps, and missions. Remarkably, GTA V continues to generate over $250 million in revenue quarterly, even nine years post-launch.
Electronic Arts: A Case Study in Success
Founded in 1982, Electronic Arts (EA) has solidified its position as a leading digital entertainment company, with a portfolio that boasts popular franchises such as FIFA, Apex Legends, and Battlefield. With 580 million active players across multiple platforms, EA’s ‘Live Services and Other’ segment has emerged as its fastest-growing revenue stream, accounting for 71% of total revenue in FY2022 compared to 59% in FY2017. This growth is largely driven by successful titles like FIFA Ultimate Team and Apex Legends.
Furthermore, EA’s mobile gaming division is poised for exponential growth, with forecasts suggesting that the mobile sector could double its revenue to $2 billion annually by 2024.
Loot Boxes and Ethical Considerations
Loot boxes—purchasable in-game "mystery boxes" containing random virtual items—have been a contentious topic within the gaming community. Their presence has sparked debates regarding gambling-like mechanics, especially as they involve real monetary transactions for uncertain digital rewards. Recent legal scrutiny in Europe highlights this issue; for instance, EA successfully contested a fine in the Netherlands, clarifying that loot boxes in FIFA Ultimate Team are centered around skill rather than being classified as gambling.
While loot boxes enhance the player experience and amplify dopamine release, they should be incorporated thoughtfully to avoid becoming a central feature of games, ensuring ethical monetization practices.
Financial Health and Valuation Metrics
As a testament to EA’s robust financial performance, the company recorded an impressive operating cash flow of $1.9 billion in 2022, supporting approximately $1.5 billion in share buybacks and dividends. Valuation metrics reflect EA’s favorable position, trading at 11.4x EBITDA, as compared to the median EBITDA multiple of its peers at 17.4x.
| Company | 5-Year EPS CAGR (%) | Current EV/EBITDA | Current Free Cash Flow Yield (%) |
|---|---|---|---|
| Activision Blizzard | +11.1 | 17.4 | 3.5 |
| Bandai Namco | +14.4 | 13.5 | 0.0 |
| Capcom | +30.0 | 19.4 | 4.3 |
| CD Projekt SA | -4.6 | 22.1 | 0.1 |
| Konami Group | +17.7 | 9.8 | 6.8 |
| Take-Two Interactive | +17.4 | 22.8 | 0.6 |
| Electronic Arts | +12.4 | 11.4 | 4.7 |
Conclusion
The gaming industry is undergoing a profound transformation, driven by technological advancements and shifting consumer preferences. Companies like Electronic Arts demonstrate the immense potential of live-service games to not only enhance player engagement but also to unlock new revenue streams. As the industry continues to evolve, ethical considerations surrounding monetization strategies, particularly regarding loot boxes, will remain a focal point of discussion.
Tom Waterhouse
Since its inception in August 2019, Waterhouse VC has achieved an impressive total return of 1,957% as of July 31, 2022.
Disclaimer: All information pertaining to Activision Blizzard, Bandai Namco, Capcom, and other companies mentioned is derived from publicly available sources and should not be interpreted as financial advice. Always consult professional investment experts tailored to your individual circumstances.
