Tencent – Feathering the nest

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Rovio could help Tencent spread its wings.

  • Rovio is almost certainly past its prime but it has an asset that could be capitalised on should the right buyer come along.
  • Tencent is not showing any real signs of being the right buyer at the moment but its ownership of Supercell makes Rovio a good strategic fit.
  • Rovio is the creator of the well-known Angry Birds franchise where its revenue from games has been revitalised by the recent good performance of the Angry Birds movie.
  • 2016 revenue / EBIT was Euro190m / Euro17.1m with a bump in games, thanks to the movie, bringing the company back into profit.
  • The revenues from the movie will be recognised over the 2017 and 2018 financial years.
  • Tencent has had some success in taking Western games and leveraging them into China as League of Legends has become a major hit in China through Tencent’s patronage.
  • I have been fairly disappointed with Tencent’s acquisition of Supercell so far as while it is now able to leverage Supercell’s hugely popular games into China, I think the real opportunity lies outside.
  • The Chinese market is starting to slow meaning that the BATmen will need to look elsewhere long-term for sources of growth.
  • Of all of the BATmen, Tencent has the greatest opportunity as the Digital Life segment in China within which it is the strongest remains unoccupied in developed markets.
  • This is kargely because the big multiplayer gaming communities Xbox Live, PlayStation Network, Valve (see here) have all failed to leverage their communities from PCs and consoles into mobile.
  • Activision Blizzard, which I think purchased King Digital exactly for this purpose, is also not doing a great job of it as active users of King mobile assets have gone into freefall.
  • This leaves the way open for Tencent to begin to build its assault on developed markets starting with the all-important segment of Gaming which it dominates at home.
  • However, it has not shown much intent to make the most of this opportunity instead concentrating on leveraging overseas games into its home market.
  • In Supercell it considers itself to be a financial investor which is why it seems to have been left pretty much to its own devices.
  • Rovio would be a good fit for Tencent alongside Supercell but I still think that the real opportunity lies in using these assets to grow its presence overseas.
  • Tencent has by far the strongest ecosystem in China with 77% coverage of the Chinese Digital Life pie which is why I think there is so much upside.
  • It makes almost all of its money from selling media and games with only a small proportion coming from monetisation of the ecosystem it has created.
  • If it was to effectively monetise its ecosystem at home and aggressively push into developed markets, it could become one of the biggest digital ecosystems globally.
  • However, there is still a long way to go in recognising this opportunity and it needs to structure its assets appropriately to take advantage of that.
  • Consequently, I don’t see Tencent seeing the benefit of this for some time to come but the good news is that there is still enough growth left at home to sustain the valuation for a while.
  • Tencent, alongside Baidu and Microsoft are my favourite ecosystems at the moment.

E3 2017 – Glaring omission

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Very little interest in mobile gaming at E3.

  • E3 is the biggest trade show for the computer games industry but it still seems to be ignoring one of its most important segments: gaming on mobile devices.
  • Mobile gaming is radically different from gaming on PCs and consoles in three ways:
    • First: PC and console games are much more expensive and more complex.
    • Second: They require high-end PCs or dedicated hardware to run optimally compared to mobile games which run well on most smartphones.
    • Third: They are played for long periods of time whereas mobile games are played for a series of short periods.
  • This means that the software and hardware required to address this segment is completely different but that does not mean that there is no opportunity for the PC and console players in mobile.
  • This is because, I think that the hundreds of millions of users who play PC and console games also play games on their mobile phones.
  • These are different games, played in a different way with a different monetisation system but because the players are the same I see no reason why the big game communities should not be leveraged into mobile.
  • Sony, Microsoft and Valve have all spectacularly failed to leverage the multiplayer communities that they have on PCs and consoles onto mobile phones.
  • I believe that this is why the Digital Life segment of Gaming in mobile remains almost completely unoccupied.
  • This is very different to China where mobile gaming is dominated by Tencent with NetEase coming a distant second.
  • Hence, because Gaming is the single largest segment of Digital Life (30%), I think there is a big opportunity being left on the table.
  • This is the rationale for why I think Microsoft should be prepared to sell Xbox if the right offer comes along.
  • Someone with the ability to do with Xbox what Microsoft cannot should be willing to pay more for the asset than it is worth to Microsoft.
  • It is under these circumstances that I have advocated for its sale as it would generate more value for shareholders than remaining inside Microsoft (see here).
  • The same could be said for PlayStation but because it is such an important part of Sony, I seriously doubt that it would sell under any circumstances.
  • I can’t say the same for Microsoft which is continuing to do very well in dominating the Digital Work ecosystem but is letting its consumer ecosystem fade away.
  • Activision Blizzard looked to be making move on mobile gaming with its acquisition of King Digital but unfortunately, the mobile user numbers for King Digital have fallen by around 35% since the acquisition.
  • Hence, I think that this segment remains wide open creating a big opportunity for someone who has the skill and determination to do in mobile what Microsoft and Sony clearly do not.

Microsoft – Empty harbour.

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I think the video game streaming ship has sailed.  

  • Microsoft is showing no signs of giving up on gaming but it will have to do something really special with Mixer if it wants to make any dent at all in Twitch.
  • Microsoft has renamed the video streaming service that it acquired in 2016, Mixer, and relaunched it with a host of new features in order to compete with Twitch.
  • Twitch is the gorilla in the video game streaming business that Amazon acquired in 2014 for around $1bn (see here).
  • At the time of acquisition Twitch had 55m users but the engagement that it generated was quite staggering with 7m logging in every day with an average watch time of 2 hours.
  • In the last 2 and a half years these numbers have continued to grow with now than more than 100m MaUs of which around 10m login every day.
  • Even more surprising is that engagement has further increased with nearly half of all its users spending 20 hours per week using the service.
  • When compared to the other players (YouTube Gaming, Mixer and Hitbox), I think that Twitch is more than 10x the size of its nearest rival.
  • Twitch is a network based business where sellers (game streamers) and buyers (viewers) are put together with Twitch sharing the revenue with its content creators.
  • Twitch is the standout go to place for streaming video games and given its size advantage, I think there is almost nothing that Microsoft or anyone else can do about it.
  • Mixer is launching with some pretty cool new interactive features that takes sharing videos to a new level, but I am far from convinced that it can ever gain the critical mass needed to put even a ding in Twitch.
  • For example, in April 2016 Mixer had just 100,000 users and even its big launch event today has only around 600 users watching it.
  • Furthermore, if every Xbox Live user was to start using Mixer, it would still be less than half the size of Twitch.
  • This issue is exacerbated by the fact that Mixer is not available on PlayStation which is a much bigger community than Xbox.
  • Consequently, I think that Mixer will end up as a niche offering that has a very small, but loyal following.
  • Whether that is enough to cover the cost of the service remains to be seen.
  • Microsoft recently made a robust defence of its presence in gaming at its financial analyst briefing at the BUILD conference (see here) with which I do not necessarily disagree.
  • However, both Microsoft and Sony have made a horrible mess of trying to leverage their gaming communities into mobile and I do not buy the argument that these communities are not applicable on mobile.
  • These users almost all have smartphones upon which they will play games albeit different from those that they play on consoles and PCs.
  • Twitch is big but there are billions of users playing games on mobile devices and gaming is by far the biggest revenue generating segment for developers.
  • This is why I think that if these communities were properly leveraged into the mobile, they would be orders of magnitude more valuable than they are today.
  • Furthermore, in developed markets, this space is vacant with the only really big player (Tencent) being only present in China.
  • This is why I think that someone with the ability to do with Xbox what Microsoft cannot would be willing to pay more for the asset than it is worth to Microsoft.
  • It is under these circumstances that I have advocated for its sale as it would generate more value for shareholders than remaining inside Microsoft.
  • As it stands today, I think Xbox can generate some value for Microsoft but far more for someone else.

LINE Q4 16 – Game off.

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Gaming could save LINE but the focus appears to be elsewhere. 

  • LINE reported a difficult set of results which laid bare how difficult it will be to return to growth without expanding either its coverage of Digital Life or its user base.
  • With the shares trading on 5.7x 2016A EV / Sales, I think that a return to rapid growth is required just for the shares to stand still.
  • Q4 16A revenues / EBIT were JPY37.5bn ($332m) / JPY1.6bn ($14m) substantially missing consensus estimates of JPY38.7bn / JPY5.3bn.
  • Even with a one-off charge against EBIT removed from the figures, LINE still missed consensus EBIT by 50%
  • The lower profitability was primarily caused by marketing expenses, general and admin expenses all of which grew substantially more than sales.
  • The main issue is that LINE is trying to change its business model from one based on stickers and games sold through its IM platform to one based on advertising.
  • This is because revenues from stickers and games is beginning to decline in the face of competing services (like Facebook Messenger and WhatsApp) which offer similar content for free.
  • Furthermore, RFM calculates that LINE’s current offering is not broad enough to return the company to real growth.
  • However, it should be able to replace existing revenues should they decline to zero.
  • When I look at LINE, I think it is capable of driving monetisation through the Digital Life services of Instant Messaging, Shopping and Telephony giving it total Digital Life coverage of 18%.
  • I do not think that its Smart Portal is mature enough to give it credit for Social Networking or any other Digital Life segment that it is trying to address.
  • Furthermore, its user base is pretty stagnant at 217m leading RFM to calculate that LINE could generate around $1.5bn in advertising revenues on an annual basis or $373m per quarter.
  • During Q4 16 LINE generated $139m in advertising with content generating $193m giving $332m in total.
  • This clearly shows that replacing content with advertising will only allow revenues to expand to $373m per quarter, some 12% above where the company is now.
  • To return to growth LINE will have to successfully expand its coverage of Digital Life or start growing its user base once again.
  • Growing the user base will be a major challenge as LINE has consolidated its focus onto the four countries of Japan, Thailand, Taiwan and Indonesia which considerably limits its scope.
  • Hence, I think it will have to improve its Digital Life coverage which will be difficult given that the other segments of Digital Life are pretty well covered already.
  • The one exception I see is Gaming and here there is an opportunity for LINE given its heritage in selling games through its platform.
  • This is a big segment and if LINE can generate a thriving multiplayer gaming community, then I can see its revenues expanding once again.
  • Unfortunately, of this there is no sign with much of the effort being places on other areas which to date have resulted in increased investments but no real revenues.
  • To justify its valuation, LINE must start to grow again as 5.7x EV / Sales is way to high for a company with low growth and heavy investments hitting profits.
  • I can see the valuation making a major adjustment downward from here.

Tencent Q3 16A – Work in progress.

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Still a lot of work needed to realise its full potential. 

  • Tencent reported another excellent set of results but the fact that expectations are already so high meant that the numnbers felt more like a damp squib.
  • Q3 16A revenues / EPS were RMB40.4bn / RMB 1.12 compared to consensus at RMB39.0bn / RMB 1.17 and RFM at RMB35.3bn / RMB 1.15.
  • The combination of greater investments being made in sales and marketing and a higher tax rate was responsible for the lower profitability that the company experienced.
  • When one looks at gaming, the importance of the transition that Tencent is going through becomes apparent.
  • Although Tencent did manage to grow revenues from PC gaming, the daily active user count was down by 9% YoY and the number of concurrently active users for casual PC-based games was down 18% YoY.
  • This is an indication that usage is shifting to mobile and that PC users are spending more time playing each other rather than on their own against the AI.
  • Tencent has responded to this by offering more game related activities such as tournaments, video streams of popular gamers and so on.
  • This shift is also nudging Tencent closer and closer to becoming a fully-fledged ecosystem but in that regard, there is still a lot of work to do.
  • Its biggest assets here are Weixin / WeChat, its social network Qzone and its mobile gaming offering.
  • All together Tencent has 77% coverage of the Chinese Digital Life pie but its assets remain quite disparate and fragmented and it is this that needs to change.
  • Tencent needs to become the place where Chinese users go to spend 77% of their digital lives perhaps with the occasional outing to Alibaba to shop and Baidu to search.
  • To achieve this, Tencent needs to fully integrate its offering and make it as consistent, easy to use and as fun as possible.
  • Tencent shows little sign of doing this on the surface but the investments that it is making in data centres and in sales and marketing are some indication of what is taking place behind closed doors.
  • This is encouraging because on its current trajectory, Tencent is heading for a big slowdown in 2017 and beyond as the Chinese market matures.
  • However, RFM calculates that Tencent is very far away from fully monetising the ecosystem that it is creating, meaning that there is an opportunity for another leg of growth in the medium-term.
  • To achieve this, Tencent needs to really integrate all of its assets into a single experience for users rather than a series of different services.
  • It is at this point that further growth is possible both in terms of profits and the share price.
  • However, I don’t see Tencent being ready to grab this opportunity in 2017, and so in the short-term a slowdown looks inevitable.
  • The good news is that even without the ecosystem there is still some headroom in Tencent’s valuation.
  • Hence, I am happy to keep it on my list alongside Microsoft and Baidu.

Facebook – Gamification.

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Facebook does not intend to play second fiddle to Tencent for long. 

  • Facebook is increasing its position in gaming aiming to come at this critical Digital Life service from all angles to ensure that it ends up dominating the segment in developed markets.
  • Facebook has launched a new app for the desktop called Gameroom which is a client, much like Steam, which allows games that are developed in Unity to be easily published and accessed via Facebook’s platform.
  • Steam is a PC gaming platform that serves as a distribution channel for digital games, supports multiplayer and has a thriving community of PC gamers.
  • Gameroom aims to be very similar with the added kicker that it will provide game developers with much easier access to its 1.6bn users which is an asset not to be sniffed at.
  • Facebook’s aim is to help developers sell more of their games to users and to encourage users to play games on its platform rather than elsewhere.
  • Steam gamers are mostly hard core players but it does also distribute casual games and I think that it is this segment that Facebook is going after at this stage.
  • This makes complete sense because when it comes to the ecosystem, it is the smartphone and the tablet that really matter as the vast majority of games played on these devices are casual games.
  • Hence, when Facebook is trying to entice users to spend more time within its properties, it will be on these devices where it will need to generate the most traction.
  • This is because it is based on the experience on these devices that the user’s ecosystem decision is taken.
  • Hence, I do not see Gameroom as a real challenge to Steam but instead a play to fully colonise the Gaming segment of the Digital Life pie which in developed markets remains largely unoccupied.
  • Facebook is coming at gaming from all angles from VR and Occulus at the high-end to experimenting with gaming within its chat app Messenger.
  • Gameroom adds another string to Facebook’s bow when it comes to conquering gaming and of all of the major ecosystems, it is probably in the best position for gaming (except Tencent in China).
  • Microsoft and Sony also have thriving gaming communities but have completely failed to convince any of these players to play casual games within their systems on mobile.
  • This has left the largest (30%) segment in Digital Life wide open which is why I think Activision bought King Digital (see here).
  • I also believe that this is why Tencent purchased Supercell (see here) but the consortium structure that it is building around this acquisition makes me think twice.
  • This launch further reinforces my belief that Facebook is working at becoming the largest ecosystem of them all with over 2bn users and 80% Digital Life coverage.
  • This would put Facebook in undisputed leadership with Tencent in second place with 77% coverage and over 1bn users.
  • This is how Facebook goes from being a US$20bn revenue company to US$50bn, a large slice of which is likely to come out of Google.
  • However, in the meantime, Facebook has a lot of work to do as its current Digital Life coverage is just 36% and it remains really just a collection of apps rather than an ecosystem in its own right.
  • This is why I am nervous on the short-term outlook for Facebook as market estimates are assuming that revenues materialise from the new ecosystem services long before I see them as being mature enough to generate revenue.
  • I think the slip comes pretty soon, which is why I remain short-term cautious on Facebook despite the fact that it has a lot of long term potential.
  • There will be a better time to get in.

Microsoft – Wood for the trees.

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Microsoft is so focused on the future that it misses the opportunity in the present. 

  • Microsoft has moved even further away from the consumer with its Creators Update for Windows 10 and the launch of the Surface Studio complete with the Surface Dial accessory.
  • At the same time, Microsoft continues to ignore the huge opportunity presented to it by the obsolescence of the laptop form factor which I find strange as it claims to be all about creating new product categories.
  • Microsoft unveiled two new innovations as well as an incremental update to the Surface Book.
    • First: Windows 10 Creators update
    • In addition to a host of other incremental improvements, the Creators Update focuses on enabling 3D objects on the PC as well as in both AR (HoloLens) and VR, gaming and easier connections and sharing with close contacts.
    • None of this is desperately new except that the degree to which content now works across different devices is far superior to anything else that has been launched to date.
    • Microsoft hopes to include the mobile phone in this range of devices but how well it can do that on Android and iOS remains to be seen.
    • These platforms are now critical as Windows Phone is rapidly losing all of its remaining users.
    • Also key to this update is the focus on content creation as the upgrades in this update are aimed at improving functionality for those that draw, write, broadcast and so on rather than those that consume.
    • This is a tacit admission that the battle with iOS and Android for content consumers has long been lost.
    • However, it also shows Microsoft aggressively acting in both software and hardware to keep the content creator users and corporates on its platform.
    • Second: Surface Studio.
    • This is very high specification all-in-one PC with a 28” monitor that can transform to become a work surface exactly like the drafting table used by anyone that draws or designs for a living.
    • Surface Studio comes with the Surface Dial which is designed to go in the non-pen hand to alter characteristics such as ink colour, brush size, opacity and so on.
    • The Surface Dial works both on and off the screen and is backwards compatible with all Surface products.
    • This device is clearly aimed at professionals and it is priced accordingly at $2,999.
    • Third: Surface Book.
    • The top end i7 model has been upgraded to offer double the graphics capacity than its predecessor as well as 30% more battery life.
    • Microsoft now claims that the device can provide 16 hours of battery life.
    • However, the single biggest failing if this product has been carried through into the next version as the keyboard stops working as soon as the screen is detached.
  • The net result is an update to the Microsoft Windows proposition that is aimed at keeping content creators and corporates on its platform.
  • In that vein, this is a good update with nice looking and relevant products but I still think that Microsoft is missing the wood for the trees.
  • I have long argued that the laptop form factor is obsolete as having the keyboard, mouse and screen permanently locked together offers a substandard user experience that is both uncomfortable and unhealthy (see here).
  • This is why the Surface Pro line of products is a game changer as it enables a desktop like user experience to be enjoyed from anywhere.
  • This works by allowing the screen to be at the correct height and distance from the eyes with a wirelessly connected mouse and keyboard to be in the most comfortable and ergonomic position.
  • However, this does not work with the Surface Book as the minute the screen is detached from the keyboard, the keyboard ceases to function.
  • I think it would cost Microsoft less than $1 per unit to put this right and it would enable it to really push a whole new use case for content creators out of the office.
  • I have long believed that this could lead to a huge replacement cycle where ageing laptops are replaced with PCs in the tablet form factor which could even kick the PC market back to growth for a few years.
  • However, this failing indicates that Microsoft has still not realised the opportunity that lies before it.
  • Intel and the PC makers are equally guilty of this oversight but these companies have not taken it upon themselves to re-imagine computing.
  • I suspect that the main issue here is that these companies have been selling laptops for over 30 years and it is very difficult to break out of that mindset.
  • It would also require a big marketing campaign as laptop users are also so ingrained with this form factor that they have not realised that there is something much better on offer.
  • The net result of this event is a software and hardware update that goes a long way to keeping content creators faithful to Windows but continues to ignore the possibility to create a large replacement cycle in its core product.
  • Fortunately, Microsoft’s valuation does not demand this vision to come true in order to be attractive which is why I continue to like it alongside Tencent and Baidu.

Sony – Achilles heel

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User experience remains a huge risk in the next generation. 

  • Sony’s launch of two new PlayStation 4 consoles broadens the appeal of the platform nicely but these devices do nothing to alleviate the issue that could cost Sony its lead in the console gaming market.
  • Sony launched two new consoles at an event in New York on Thursday, each of which is aimed at spreading the appeal of the platform more widely.
    • First: PS4 update.
    • This is a slimmer, sleeker PS4 with all the same specifications as the original except that it comes in a smaller box with a lower price tag.
    • This is selling at $299.99 and is aimed at bringing new gamers into the world of PlayStation.
    • Second: PS4 Pro.
    • This is device is roughly the same size as the original, except that the graphics have been beefed up to support 4K, HDR as well as higher frame rates.
    • This is aimed at hard core end of its fan base which is always looking for ways to enrich the gaming experience.
    • Developers are already creating downloadable patches that will upgrade existing 1080p games to 4K as well as expanding the colour gamut and frame rates.
    • The 4K will also support video streaming services like Netflix which are already moving to 4K.
    • This device will be priced at $399.99 pretty much where the old PS4 was selling for.
  • These updates are great for widening the appeal of the PS4 for playing games but they nothing to improve the user experience.
  • Sony and Microsoft have carved up the console market between them with Sony doing extremely well in the current generation taking roughly 2/3 of all gamers onto its platform.
  • I have long believed that this was more due to mistakes made by Microsoft at the launch of the Xbox One (see here) rather than the PS4 offering a substantially better gaming experience.
  • Microsoft scrambled to fix these issues but the damage had already been done resulting in PS4 outselling Xbox by 2 to 1.
  • However, I think that the next generation could be very different because then the user experience and the ecosystem will be much more important and here Microsoft utterly destroys Sony.
  • When I compare the Xbox One’s rich and fun user experience to the bare bones of Sony, there is simply no comparison.
  • The PS4 experience appears to be aimed at allowing the gamer to launch the game and little more.
  • Furthermore, doing basic things like uploading a gamer photo, changing a password or setting up payment is tortuous and frustrating. (see here).
  • When one is trying to develop an ecosystem, the user experience has to entice the user to stick around and explore what else is on offer.
  • This is how user loyalty will be generated and how an ecosystem will get its users to spend more time within its community.
  • Furthermore, the look and feel of that experience can then be replicated across other devices creating a feeling of ease and of being at home.
  • With the Sony PS4 user experience it is almost a relief to fire up a game as Sony has provided the user with no reason whatsoever to hang around and explore.
  • This will be much more important in the next generation as most games will be available on both platforms meaning that how well the device delivers other functionality could be the deciding factor.
  • Microsoft is languishing when it comes to its Digital Life ecosystem but the assets themselves are in good condition and Microsoft has long understood what it needs to do to make its console appealing.
  • Furthermore, Microsoft is unlikely to repeat the mistakes it made at the launch of the Xbox One meaning that Sony really needs to pull its socks up.
  • Unfortunately, software is not something that Sony does very well and the company has a habit of ceding commanding market positions with very little resistance.
  • I see no signs of Sony working on improving its user experience and I fear that Microsoft will take a large bite out of its market share when the next generation consoles launch.
  • This is one reason why I fear that Sony’s improved fortunes may end up being short-lived as I think that Hirai-san has applied a Band-Aid rather than addressing the root of the company’s woes.
  • Hence, I would be very wary at getting involved with Sony’s stock even though it remains the only Japanese consumer electronics company with any real chance of longevity.

Sony – Game off.

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Sony misses the wood for the trees. 

  • Sony has decided to have another go at the mobile gaming market but the structure of the company and its lack of understanding of the ecosystem will make success very difficult.
  • Sony appeared to up its commitment to mobile gaming at IFA by stating that it was aggressively getting into mobile gaming but how it intends to succeed remains unclear.
  • I suspect that incredible rise of Pokemon Go has reminded Sony that although it has the by far the strongest multiplayer gaming community outside of China, it has failed to do anything with it beyond the console.
  • I have long believed that gaming in developed markets is by far the biggest opportunity for a new entrant because it is the biggest slice of the Digital Life pie (31%) and currently completely unoccupied by a dominant player.
  • Almost every other Digital Life segment has a strong player (Google, Facebook, Amazon) but in gaming there is currently no-one.
  • This is exactly why I think Activision bought King Digital (see here) and why Tencent is buying Supercell (see here).
  • It is also why Google wanted to buy Twitch but failed much to the benefit of both Sony and Microsoft (see here).
  • To become dominant in this space, a gaming offering has to have both a good stable of games but most importantly a thriving community of online players.
  • Sony has neither of these things in mobile and its efforts to date to bring PlayStation Network into mobile have been ignominious failures.
  • These failures came before Sony was re-carved up into a series of independent legal entities with each being focused on their particular activity.
  • This gives them greater autonomy, allowing them to act quickly, but it also makes them hostile to any form of co-operation with the other members of the Sony group. (see here).
  • One of these entities is called ForwardWorks which was tasked in April 2016 with producing games for mobile devices.
  • ForwardWorks is a fully owned subsidiary of Sony Interactive Entertainment which also owns PlayStation and PlayStation Network but it appears to operating in a vacuum.
  • Consequently, I see ForwardWorks as nothing more than a game studio and not an attempt to really create a thriving community in mobile by leveraging its existing world leading gaming assets.
  • For me, the top contenders in this field are Activision, Tencent and Amazon but all of these remain pretty far away from having a thriving community on mobile in developed markets.
  • However, they understand the importance of the community and they have some grasp of the importance of bringing together as many Digital Life segments as possible.
  • Sony appears to have none of this understanding and its moves in the last year to re-organise into silos is a case in point.
  • Consequently, while Sony may make some extra revenues if it has a couple of mobile hits, it is almost certain to miss out on the incremental value that a thriving gaming community on mobile could bring.
  • RFM estimates that if Sony was to migrate its PSN network successfully into mobile, it could generate at least $1bn in incremental revenues per year not including sales from games or content.
  • With its current trajectory, this opportunity is likely to accrue to others, of which Tencent is by far my favourite way to play the opportunity in mobile gaming.

Mobile Gaming – Pokemon went.

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Tencent and Activision can breathe a sigh of relief. 

  • Pokemon Go is already showing all the hallmarks of being a craze rather than a revolution as the appeal of the game is already beginning to pall despite only being 6 weeks old.
  • Data from Apptopia shows that daily active users peaked at around 45m users three weeks after launch but have since declined by 40% in the last month to 27m users.
  • Google Trends is also showing that the spike of interest in augmented reality caused by the launch of the game has also declined precipitously as it is almost back to where it was prior to launch.
  • Furthermore, in the last two weeks Pokemon Go has fallen in the US Apple App Store to No. 16 although it remains at No. 4 on Google Play.
  • The good news is that Pokemon Go remains No. 1 on the grossing chart for both iOS and Android.
  • This indicates that the number of new users joining the game is collapsing fast although revenue generation from those that are still playing the game remains very healthy.
  • I suspect that this will translate into rapidly stalling revenue growth at Niantic and how long existing players will keep paying is the real question mark.
  • From my perspective, the real potential for Pokemon Go was to fill the vacuum that exists in developed markets when it comes to mobile gaming.
  • Both Xbox and Playstation Network have failed to gain any traction on mobile devices leaving the largest Digital Life segment unoccupied.
  • To fill this segment a thriving multiplayer gaming environment is needed that has comfortably more than 100m MaUs but to dominate it, I think 300m MaUs or more is needed.
  • With Pokemon Go having made just half of that and now showing signs of decline, those that are working quietly to fill this segment can breathe a collective sigh of relief.
  • Top of this list are Activision which has purchased King Digital (Candy Crush with 500m MaUs) and Tencent which has purchased Supercell (Clash of Clans 100m DaUs).
  • These two need to take these single game franchises and entice their players to try the other games and services that they have to offer.
  • This is how they can turn a single game community into a place where users come to play games against each other.
  • Pokemon Go seems to have fallen short of the critical mass needed to challenge the scale of King Digital or Supercell, Tencent and Activision remain the most likely winners.
  • The Gaming segment remains unoccupied and I suspect that there is room for one dominant service and a host of smaller followers.
  • Tencent has the most experience of mobile gaming with its dominant position in China but it knows very little of the market outside of China.
  • However, at the same time Activision has no experience of mobile which could prove to be an even greater challenge.
  • Tencent is the company I would look at for exposure to gaming on mobile devices but I think that Nintendo could fall further as it is still meaningfully above pre-launch levels.