Story of the month
On October 13, Microsoft succeeded in finalising its acquisition of Activision, the American video games publisher, after months of legal battles with three of the world’s most powerful regulators (in the US, the UK and Europe). Microsoft was already the world leader and pioneer in Generative AI (= content-generating Artificial Intelligence), since its investment (recently reinforced) in Open AI, the company that developed and launched ChatGPT. It’s no coincidence that Microsoft is acquiring the world’s leading video games publisher at the same time. We couldn’t think of a better excuse to revisit one of our favourite themes since the launch of our Fund Insights: the challenges of AI, and in particular Generative AI, for the video games sector.
AI WILL BRING TANGIBLE BENEFITS TO THIS INDUSTRY…
The global video games market is gigantic: $300 billion this year, according to Morgan Stanley. In comparison, the global music market (CDs, downloads, streaming, etc.) only represents $26 billion in 2022, i.e. 12 times less! It is also a steadily growing market: +4% annually over the period of 2023-2026.
These strengths fully justify the substantial investments that have been made: Morgan Stanley estimates that over USD 100 billion will be invested in the development of new products between 2023 and 2026. Generative AI should make a significant contribution to the success of this industry, in particular through the following benefits:
1) A reduction in costs and a simplification of the video game development process. In particular, we believe that the coding and testing phases could be largely automated thanks to Artificial Intelligence.
2) The possibility of developing more personalised
and elaborate games. This qualitative improvement is likely to encourage player commitment (i.e. bringing together more players, who are prepared to pay more, participate in longer sessions, for longer periods of time, etc.). As a result, it is hoped that games will be better monetised. The interest for publishers is therefore obvious. With tools such as these, it’s a safe bet that AAA publishers (Take Two, EA, Ubisoft and Activision Microsoft) will succeed in strengthening their supremacy with ever better games and Intellectual Property, which will also be accompanied by growing capital intensity
According to Morgan Stanley, the combination of these two effects should make it possible to reduce video game development and operational management costs (such as those of game platforms) by 15%.
…BUT THE INCREASED USE OF AI ALSO RAISES FUNDAMENTAL QUESTIONS FOR AAA PUBLISHERS
Beyond its advantages, Generative AI is also likely to shake up the video games industry. Indeed, because of the ease with which it can be deployed, the speed with which it can be adopted and the quality of its contribution, Generative AI raises a number of questions, all of which pose challenges for the players in this sector:
1) Are we going to see a reduction in the barriers to entry when it comes to developing new games, which could allow small or new entrants to challenge the supremacy of the major publishers (the so-called ‘AAA’ ones)?
2) Are we going to see a certain “commoditisation” of this sector, with generative AI potentially causing the major publishers to lose their supremacy in terms of Intellectual Property?
3) Could we see a transfer of the industry’s added value, to the detriment of video game publishers (e.g. EA, Take Two, etc.) and to the benefit of distributors (such as Google, Apple, Epic, etc.)? If so, what does the future hold for IT tools such as video game ‘development engines’ (e.g. Unity, the main listed player in this field)?
4) In the wake of Microsoft’s takeover of Activision, could other games publishers (e.g. TakeTwo, or even EA) attract the attention of the tech and media giants? In the short term, this is unlikely to be the case for French publisher Ubisoft, whose capital position appears to be locked in for the time being, following Tencent’s acquisition of a stake in the company.
