Ord Minnett has analysed the features, trends and metrics in the social and online gaming market, along with the product offering from Aristocrat Leisure in this rapidly growing market segment. We make the following key observations:
- The global mobile gaming market saw US$59bn of revenue in 2017, growing 31% from 2016;
- The casual gaming demographic is different from the mid-core or social casino demographic; and
- Intense competition limits monetisation rates for casual gaming and in-app purchases are the primary source of revenue.
We have adjusted our earnings estimates due to a lower US tax rate, and to reflect a higher contribution from the Plarium and Big Fish businesses in FY18. We maintain our Accumulate recommendation on Aristocrat and have increased our target price to $27.50 from $24.20.
- Casual gaming – The key features are simple rules, low time commitment and player skill. The average session length is typically low. Well-known titles include Candy Crush, Angry Birds and Gardenscapes, with King, Supercell and Playrix being some of the top developers. The typical casual gamer demographic is different from – and probably complementary to – Aristocrat’s social casino demographic, which was likely a driver of the acquisitions. Aristocrat’s casual game portfolio now includes the successful Gummy Drop! and Cooking Craze apps as part of the Big Fish acquisition.
- Monetisation – There are limited monetisation avenues in this segment, with ‘freemium’ the preferred model. Casual gaming apps are mostly free-to-play, with in-app purchases the primary source of revenue. Only 5% of users pay, but in-app purchases contribute $37bn in annual revenue, driven by a significantly higher number of players versus other categories, as one in every three people in the world play free-to-play games.
- Key 2017 industry developments – M&A action has been prominent in this industry. Besides Aristocrat’s acquisitions, the most notable moves included:
- The purchase by Zynga – owner of the Words with Friends and Farmville titles – of Harpan and Peak Games’ casino games;
- The acquisition by Take-Two Interactive – owner of Grand Theft Auto, the world’s biggest-selling video game, and the NBA basketball and NHL hockey titles – of game developer Social Point; and
- The successful introduction of new game titles by Playrix, Peak Games and Nintendo.