Technically, I am classified as a “millennial” according to the unofficial date range of “early 1980s through the late 1990s, however, I just turned thirty and I don’t actually identify myself as a “millennial”. To me, millennials are younger and have a far better grasp on current trends, something you seem too loose after a few years out. That being said, I ran a creative business and worked in a creative field where I caught wind of these millennial trends. I made an effort to keep up with the “cool kids” and as a result had didn’t usually miss cultural references. That all changed one day when I observed someone doing the “fortnight looser dance”, confused I asked a friend of mine what it was. He replied, “that’s the dance from Fortnight, it’s the biggest most popular video games ever”. That evening, I found myself Googling “fork knife” and was schooled yet again. Feeling extremely old and stupid, went to bed thinking I wouldn’t hear of Fortnight again, after all, it’s a video game and these things have a short lifespan these days.
Fast forward a year, Fortnight has been all over my radar, but this time it’s because of the business and finance section of the Wall Street Journal. It turns out this game has an incredible business model, from the countdown clock that creates a sense of urgency to the social pressure to purchase non-game enhancing add-ons, Fortnight is disrupting the gaming industry in a big way and the usual suspects don’t know how to react.
Fortnight is produced by a small private company called Epic Games based out of North Carolina. They have around 700 employees and were founded in 1991. They don’t have any huge prior hits, however, they have been a consistent performer of typical shooter style games. In 2012, Epic was valued at $825 Million. Many called this extremely overvalued given they lacked core IP and only had one franchise game to date. From an acquisition standpoint, Epic seemed like a poor choice however Tencent saw things differently. In 2012, Tencent acquired 40% of Epic for $330 million including stock options. As of October this year, Epic games were valued at $15 billion dollars.
While other people are enjoying the gameplay aspect of Fortnight, I have enjoyed the business and financial implications of the game and the industry. Earlier this week. Activision Blizzard, the creators of “Call of Duty” recently announced they would be cutting around 8% of their workforce in an effort to restructure and compete with games like Fortnight. As a part of this restructuring, Activision Blizzard is planning on increasing the number of its developers by around 20%, allowing it to provide more content at speed and scale in an effort to capture more users. In conjunction with these announcements, Activision’s quarterly earnings were softer than predicted. Both of these issues causing the stock price to slide early this week to lowest since February 2017. To make things even worse for Activision, Electronic Arts recently released Apex Legends which has been deemed the fastest growing video game in history. Apex Legends capitalizes on everything good in Fortnight, plus adds in an additional social networking aspect to the game which has created a huge network effect. While Apex Legends has yet to prove itself over time, it is currently the only game coming close to competing with Fortnight.
So where is the opportunity and how can I make money.
There is no doubt that the video game industry will continue to grow globally for the foreseeable future. The Asian Games in 2020 will recognize e-sports as an event for the first time in history and will hand out medals for video game play. Over 50% of households in the US currently own one gaming device, a statistic that has continually increased since the early 2000s. Tencent is the frontrunner in the space, however, due to recent trade tensions with China, plus limits and restrictions on Tencent’s games by the Chinese government, the stock has plummeted by $18 per share in the past year. This has created an incredible opportunity for investors looking to buy into the next Facebook or Apple. Furthermore, Electronic Arts stock has rebounded since its release of Apex Legends proving that the freemium game model is the future of gaming. Currently, they are priced at $50 less per share than they were at their peak this past July, this is sure to increase as Apex continues to grow along with the space. Lastly, I wouldn’t count out Activision Blizzard as they have been an innovator and a fighter for decades. This recent news is good but will require investors to be patient and do their diligence. I predict Activision’s stock will slide into the 30s before the company’s restructuring has time to take effect, after which I would expect to see them produce several competitive offerings.