Growth prospects for the video game industry for 2023

Video games go for the win in 2023.

After a slow 2022, the video game industry is poised to unlock new levels of growth next year as more high-profile, high-budget games and next-gen consoles hit the market. In fact, 2023 is likely to be a turning point year, as long as publishers continue to release new “triple-A games,” considered the best in the genre. The recovery could even start as early as the end of this year, as new titles are released ahead of the holiday season, creating an early window of opportunity for investors.

“Game development teams are seeing better productivity and have improved efficiencies. At the same time, titles that were strategically delayed are now more likely to launch in 2023,” says Seyon Park, an analyst at Morgan Stanley Research who covers telecom and internet stocks in Seoul. “We see an abundance of quality content as the most important factor behind our expectations of a strong market recovery heading into the upcoming holiday season.”

A few key factors are likely to spur growth in games, Seyon says, including:

More next-generation consoles and new games: Updated game consoles will be available to more households next year as supply chain issues ease. For example, a major console manufacturer is expected to sell around 18 million units by March 2023, bringing the installed base of game consoles to a total of approximately 37 million units sold since 2020. The increase in game consoles Next-gen games, in turn, fuel triple-A game development. Many third-party publishers delayed game releases amid these global supply chain disruptions, so Morgan Stanley Research expects new title releases to accelerate to 2023.

Regulatory change in China: To curb gaming addiction among youth, the Chinese government in 2021 restricted gamers under the age of 18 from playing on school nights and one hour of gaming on weekends and holidays. That is likely to change, Seyon says. “We see the impact of regulatory measures in China diminish and gradually recover as restrictions on minors normalize,” she says, noting that China approved several new gaming licenses in September. “These are initial signs that the regulatory environment has turned around,” adds Seyon.

Defense in a possible recession: Recessions aren’t necessarily bad for gaming: staying at home fighting zombies is often cheaper than a night out with friends, even with the initial investment in games and consoles. “Game sales have proven resilient to downturns,” says Omar Sheikh, an analyst with the European Media team. This provides investors with the opportunity to accumulate early shares in a sector that offers attractive valuations.

Historically, consumers have continued to spend on video games during recessions.

Despite the general optimism, there are a few factors that could mean it’s game over for growth:

  • Relying on proven content instead of developing new games: Like many entertainment industries, game publishers often invest in proven winners rather than invest in new genres. That mindset is a potential problem, as “innovative content is what draws new players into the world of gaming,” Sheik says. “The strong pipeline of new games in 2023 may show that creativity is still flourishing in the gaming world, but if this falls short, we could see our long-term growth outlook hit a downside.”
  • A slowing mobile market: There is already a high user base, and mobile gaming penetration is starting to reach saturation, particularly in the US, Korean, Japanese and Chinese markets. “This implies that spend per player should be a major driver for growth, which is why we emphasize content quality,” says Seyon.
  • The threat of short-form video: Short-form video platforms have captured the attention of many potential players, who are choosing the format over other online entertainment, particularly in China. Quality gaming content has long been an industry driver, Seyon says, but “short-form video could be a risk for more casual genres.”

Overall, though, Morgan Stanley analysts remain bullish on the industry. “Content is a key driver for market growth, especially for more mature markets, and investors should focus on publishers with well-established intellectual property and creative development teams,” Sheikh says. “Valuations at multi-year lows are very attractive to long-term investors, as those companies with a track record of development and a strong portfolio could see earnings growth beyond the next year.”

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