Important Trends in Tech: Mobile Gaming
- Posted by Tech Insidr
- on March 9th, 2011
Note: The following post is part 2 of a 4 part series about the 4 biggest trends in the technology world. Join me as I take a deep dive into the biggest game-changing technologies of 2011.
We all enjoy spending money on entertainment. Whether it’s buying tickets to a hockey game, going out to the movies, or buying the latest video game system – we all enjoy spending our hard earned cash on entertainment.
Based on data from the U.S. Bureau of Labor Statistics, the average consumer spends roughly 5.6% of their annual income on entertainment related expenditures. As incomes increase, consumers are spending more and more on entertainment – especially digital content such as iTunes songs, eBooks, and streaming video services like Netflix.
As consumers, we all enjoy spending money on entertainment but the economic climate has forced everyone to tighten their belt. Some folks are struggling just to pay their mortgage and cover the bills, so their entertainment budgets are seriously squeezed as a result. Higher energy prices and a bad job market have taken its toll on the consumer, but entertainment is still a necessary expenditure. In this tough economy, consumers have learned to be very conscious about their spending habits when it comes to entertainment related purchases.
Technology has helped make these tough times easier for consumers by providing a wealth of affordable entertainment options. Here are a few examples that come to mind:
- The Rise of Streaming Video – Instead of spending $3 on a movie rental at Blockbuster, consumers switched to a $15/month “all-you-can-rent” DVD plan. Needless to say, Blockbuster is now out of business and Netflix’s stock price is hovering over $200/share.
- Deal Sites Raking in the Cash – Deal sites like Groupon.com have cropped up allowing consumers to pool their resources together to get special discounts on local restaurants, products, and services. Instead of cutting coupons and scanning the newspaper, Groupon emails customers each day alerting them of the latest “hot deal”. The site has been growing at an amazing clip and was recently valued at $6B.
- eBooks are Taking Over – Even the local bookstores is quickly becoming a thing of the past. Borders recently filed for bankruptcy protection. Consumers used to visit their local Barnes and Noble store, but now they can download $5 eBooks on their $99 Amazon Kindle. What makes more sense – driving to Borders and paying for a pricy book or staying at home and downloading the cheaper, digital copy?
Consumers are always going to have a high demand for entertainment related purchases, but in this economic climate they have been forced to adapt. As a result, entertainment budgets are being stretched further and further.
The video gaming arena is one industry where this trend is even more magnified. Video game revenues have been flat as consumers find it difficult to justify spending big bucks on the latest video games. With retail video game sales falling and intense competition in the gaming space, developers have had to adjust to this new model. The normal industry pricing arrangement is $30-$60 for the average video game, but that pricing structure is currently under assault.
$1 games for the iPod like “Angry Birds” are taking the old model and throwing it out of the window, much like Netflix disrupted the whole video rental business. For a budget conscious consumer, spending $1 on a game that they can play on their cell phone makes much more sense than buying a $200 Xbox Console, $150 Kinect, a pricy HDTV, and a $60 video game.
According to research, the bulk of gaming revenues are still tied to console and PC platforms, but mobile gaming revenues are on the rise. Mobile gaming revenues increased by $900M year over year and they are poised to balloon to $11.4B by 2014.
In this rough economic climate, more and more consumers are looking to find cheap entertainment alternatives and mobile gaming is right in that sweet spot. One of the most appealing parts of mobile gaming is that the platform is already in the hands of consumers.
Instead of having to buy a pricy Playstation 3 console and video games, consumers can use their existing smartphone as a gaming platform. For a budget conscious consumer looking for cheap entertainment this is a win/win situation.
I can relate to this personally as I was thinking about spending $60 to buy Madden 2011 for my X-Box, but I opted to purchase the iPhone version for $1. The game provides great entertainment for $1 and I can play it while I am sitting on the Subway… or during a boring meeting (Don’t tell my boss!).
As consumers buy more smartphones and tablets, it’s only natural that mobile gaming starts to really take off even more. The iPad 2 offers a great gaming experience and OEM’s are releasing a slew of new Tegra2 / Snapdragon based tablets into the market, which boast cutting edge 3D Graphics.
The key takeaway here is that smartphones and tablets are becoming legitimate gaming platforms. As the software ecosystem advances, more and more games will be cropping up that are optimized for these platforms.
So as an investor… how can you profit from this trend? It’s pretty simple actually.
As with any market in its early stages, the mobile gaming market is extremely fragmented. You have several incumbents like Electronic Arts, THQ, and GLUU mobile who develop mobile games for various handsets. You also have small development shops and independent developers who hit it big by developing a hit game – I call this the Angry Birds phenomenon.
Trying to predict what the next hot iPhone or Android game is nearly impossible. Most of the highest grossing applications in the Apple market place were created by small game studios or in some cases an individual developer.
The main point here is that it’s extremely difficult to predict who the beneficiaries will be in the software ecosystem. Most often, the silliest games make the most money – such as $0.99 “Tap Tap Revenge”, which pulled in a whopping $4M+ in 2010.
Ok, so we have established that the software fragmented, but what about the hardware side of mobile gaming? It’s the complete opposite.
Every smartphone and tablet runs on ARM-based processors, so clearly it’s a one horse race when it comes to the hardware side. The Apple iPhone 4, both the iPad 1 and 2, and every mainstream tablet runs on an ARM processor. Not only does ARM have a huge share in smartphones/tablets, the latest Nintendo 3DS and Sony PSP 2 are sporting ARM processors as well.
The market is too uncertain right now as far as the software ecosystem, but it’s clear that ARM is the clearcut winner when it comes to the hardware side. Unless MIPS can gain inroads into smartphones/tablets, ARM stands to have a virtual monopoly on all mobile gaming devices.
In the mobile gaming sector, there is a hardware side and a software side. The software side is extremely fragmented and fuzzy, but the hardware side is clear as day. ARM is in a great position to benefit from this growing trend. The best way to get upside from mobile gaming is clearly ARMH.
The Strategy: Long ARMH @ $28.50/share
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Rob a.k.a. Techinsidr has been trading stocks and following the stock market since 1997. He formerly worked at Intel Corporation in a Financial Analyst role, responsible for overseeing an annual budget of $160M... More »