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The Growing Market Significance of Video Games

Portfolio Manager Sean Sun discusses the video game industry, its market outlook, and technological future.

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The Growing Market Significance of Video Games

Zack Wehner:   Hi, welcome to another episode of Away from the Noise, Thornburg Investment Management’s podcast on key investment topics, economics, and market developments of the day.  I’m Zack Wehner, a crime portfolio manager here at Thornburg.  Today, we’re joined by Thornburg’s Sean Sun.  He’s a managing director and portfolio manager on Thornburg’s International Growth Fact Sheet.  Sean, it’s nice to have you today, and welcome to the show.

Sean Sun:  Thanks for having me, Zack, glad to be on.

Zack Wehner:  Yeah, so, I think a lot of things investors have heard about are these sort of themes in work from home, learn from home, but you know, an overlooked topic is really entertained from home, and I think it’s becoming a big part of people’s lives.  So, can you talk to me a little bit about gaming and how that fits into people’s lives and the industry as a whole?

Sean Sun:  Yeah, Zack, so video games are this interesting combination of not only entertained from home, but socialized from home.  So, video games as an industry is extremely large, globally.  You have two and a half billion gamers worldwide, and you have annualized spending, about $150 billion today.  Gaming really fits into this broad trend that we’re seeing of entertainment becoming, you know, less linear and much more interactive.  We are seeing the shift away from say, linear TV towards a Netflix.  We’re also seeing a shift away from linear forms of entertainment towards gaming, which is highly interactive, but also highly social.  You know, when you’re playing games, you typically don’t play by yourself.  You play with your friends.  So, in this current environment where it’s been difficult to, you know, meet your friends at a restaurant or go outside and hang out, gaming has been the, the perfect anecdote to not only entertaining yourself, but socializing and staying connected with friends and family and stuff.

Zack Wehner:   So, staying on this topic of sort of connecting with your friends in the social aspect, one topic sort of within gaming generally that’s gaining more mainstream understanding is this notion of the metaverse.  Can you walk me through, like, what this is and, you know, how it’s impacting gaming as a whole?

Sean Sun:  Great question.  I think it’s helpful to start with kind of the origins of the phrase, “the metaverse”.  This phrase was first coined in the 1992 Sci-Fi book Snow Crash and what – in that book the – it describes basically a virtual reality-based internet with user-controlled avatars.  These avatars – these digital avatars, also varied based on varying quality based on your social economic status and wealth, so it was essentially kind of an extension of the physical world into a digital world.  A recent example of that depicted media is the movie Ready Player One, but I think the metaverse, as it’ll evolve, will be more than just a virtual reality video game.  It’ll certainly have elements of that and today, no one knows exactly what it’ll look like, but we are moving towards that kind of world, but it’ll broader than the game.  When I think of what the metaverse will have overtime, and this is some elements that it’ll have and this is as predicted by um, like a Matthew Ball, as well, it’ll – it’ll have elements of, like, persistency.  It’ll be very much real time.  There’ll be no user caps.  It’ll be infinitely scalable.  You – everyone can be on the metaverse.  The metaverse will also have this fully functional digital economy.  It’ll be interoperable, and it’ll also have elements of user-generated content, as well as professionally-generated content.  Another way to think about, you know, what the metaverse will be is I think it’ll be this natural evolution of, of the internet.  When you think of the original internet, it was essentially a bunch of, like, academic people finding – trying to find a way to share information online, so it comprised a lot of hyperlinks, very basic core infrastructure, but as technology advanced and computers became faster and we had more memory, you know, we had all these kind of businesses and applications built on top.  A good example is, kind of, the Windows Intel Agomoni but then, as the – over time, as the internet became, you know, more ubiquitous and cheap and people became comfortable living parts of their lives online and digitally, we had services like, uh, you know, Facebook, like social media services kind of arise, and then over time, you know, things evolved further, and then we advanced to kind of the smart phone era, and then we had all these mobile first companies arise, like an Instagram or a Snapchat and maybe more recently an example is TikTok.  What I think will happen is that as technology continues to advance and build upon each other and it kind of stacks together, the metaverse won’t come together as, like, this big bang, it’ll evolve gradually over time.  What it’ll be is, like I said, this natural evolution of the internet where much more stuff that was happening physically today will move towards digital, and when you think about, like, how big our economies are from a physical standpoint and that shift towards, towards a digital format, it’ll, it’s, it’s a huge amount of, kind of like, potential market opportunity that’s in commerce and whatnot that’s going to move from a physical standpoint to a digital standpoint.  In terms of who the winners are in that environment, you know, it’s – we don’t, we don’t know yet, but it’s something that doesn’t quite exist yet today, but there will be companies that kind of are metaverse first-type companies, just like there are companies today that are smart phone first-type companies.

Zack Wehner:   Well, you said something interesting.  Now, we’re all familiar with TikTok and user-created contents, but do you think the next phase of user-created content is actually going to occur within gaming?

Sean Sun:  I think gaming has shown to be, um, a very rich source, source of user-generated content.  I’ll give you an example of game today that is essentially kind of a collection of all sorts of user-based content, and it’s this game called Roblox.  So, Roblox is extremely popular with children in the United States.  I think somewhat, somewhere like 75 percent of all kids in the U.S., ages 9 to 12, are on Roblox, but what Roblox is, it’s a platform for people to create games for other people to play, and some of the most popular games on Roblox are actually just created by, you know, regular people, not, not big corporations.

Zack Wehner:   And I think a follow-up question of this is, do you think content creators are sort of a new small business in gaming?  I mean, do you think this is the way that small business is moving away from brick and mortar, you know, mom and pop shops to content creators?

Sean Sun:  I think what technology has done and what the metaverse will do over time is really democratized, you know, creativity and democratized, um, the ability to create content.  You know, and historically, if content was typically created by big production studios, big Hollywood studios or there was an element of content was created by the masses, but now with barriers to entry kind of lowering for content, you know, we’re really going to see, like, really talented and creative people be able to create content that other people can consume.

Zack Wehner:   All right, Sean.  Well, we’re going to move a little bit more into the controversial, and this is controversial amongst sports fans.  There has always been a debate about what is a sport and what is not, and in the context of gaming, I want to talk about Esports, and can you just tell me a little bit about how it’s growing in popularity and how it stacks up to traditional sports?

Sean Sun:  Yeah, Zack, so Esports is – it’s a very interesting part of the video gaming, kind of, segment.  When you think about the skill involved in playing many of these games, it takes a lot of skill to play these games and it’s also very entertaining to watch.  These are the kind of elements that traditional sports have, as well.  We’re seeing – just like with traditional sports, you, you grow up playing a particular sport, you kind of understand the rules, but you also enjoy seeing someone who’s really good at doing that particular thing, as well, and so, we’ve seen Esports evolve over the years, and some of the most popular Esports out there are like, Counter-Strike, which is by Valve, League of Legends, which is created by Riot, which is owned by Tencent and, like, Overwatch from Activision Blizzard, and each of these games have kind of nuances to them, but what is common is that they have huge player bases, huge audiences and they’re growing really fast.  To give you an example, kind of the most popular Esport right now is this game called League of Legends, and the most recent League of Legends world championship is called LTS Lead Championship Series, actually drew over a hundred million viewers, more than the Superbowl.  So, it’s – it just gives you a sense of, kind of, like, how big these Esports are and how popular they are, and they’re very much global, as well.

Zack Wehner:   It sounds like it’s a, it’s a pretty popular thing, and so, obviously, this isn’t just a U.S. story, it’s also really an international story.  Is it – how is it taking hold in the international market?

Sean Sun:   It is incredibly popular internationally because you think – these video games are actually – the mechanics in some ways are very easy to learn, but difficult to master, and they transcend cultures and languages and things like that.  So we’re seeing these most popular Esports, like The League of Legends is played globally and you have leagues – you have Amer, North American leagues, you have leagues in Asia, leagues in Latin America and these – the – it shows that you can – if the right game has been created, it can be popular everywhere, and that really is great because it just expands the total adjustable market.  Uh, it’s much like soccer, how soccer’s global because it’s, it’s really simple and easy to learn, but difficult to master.

Zack Wehner:   Oh, yeah, it sounds kind of the World Cup except for we don’t have to wait every 4 years, so it is a, it is certainly an interesting development in sports.  I think the last thing I’d like to touch on in the gaming industry is that the gaming industry, in some platforms, have certainly been rewarded by the market this year with strong price appreciation.  Do you still think the market underappreciates these companies in this phenomenon?

Sean Sun:  Yeah, I, I think so.  When you look at the winner – the COVID winners and put them in the various buckets, ecommerce is appreciated that sector of 40 to 50 percent this year, software’s appreciated somewhere in the 30 percent range, but video game stocks have done very well, but they’re still only up maybe 25-ish percent or 30 percent.  So from a relative standpoint, they haven’t done quite as well as other COVID winners, and I think they’re still underappreciated in the sense that I think investors underestimate how recurring the revenues are in the video games space.  Like I mentioned earlier, you know, you play video games with your friends, so video games are like these mini-social networks, with really sticky user bases and pretty, pretty highly recurring revenues.  So, from that standpoint, the durability of revenues are probably slightly underappreciated, but also, when you kind of dig deeper into a typical video game company, they’re, in many ways, software companies.  Games are created on soft, software platforms.  Software is a quarter of these businesses.  Game engines, which these, uh, video game companies use to create their games are highly sophisticated pieces of software, you know, complex math and physics and things like that and – but yet video game companies don’t trade anywhere near SaaS software multiples, and I think that – there, there is probably room for a rewrite in that respect.

Zack Wehner:   Well, thank you very much for your time today, Sean, and sharing your knowledge on the industry.

Sean Sun:            Thanks, Zack.

Zack Wehner:   Today’s episode was produced and edited by Michael Nelson.  You can find us on Apple, Spotify, Google Podcast, or your favorite audio provider or by visiting us at Thornburg.com/Podcast.  Please subscribe, rate us, and leave a review.  Please join us next time on Away from the Noise.

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The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management Incorporated.  This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

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The Video Game as a Social Platform, its Technological Future and Market Outlook – Portfolio Manager Sean Sun dives into how gaming will drive social interaction and creativity on its long growth path.

Transcript:

Zack Wehner:   Hi, welcome to another episode of Away from the Noise, Thornburg Investment Management’s podcast on key investment topics, economics, and market developments of the day.  I’m Zack Wehner, a crime portfolio manager here at Thornburg.  Today, we’re joined by Thornburg’s Sean Sun.  He’s a managing director and portfolio manager on Thornburg’s International Growth Fact Sheet.  Sean, it’s nice to have you today, and welcome to the show.

Sean Sun:  Thanks for having me, Zack, glad to be on.

Gaming as a Social Platform

Zack Wehner:  Yeah, so, I think a lot of things investors have heard about are these sort of themes in work from home, learn from home, but you know, an overlooked topic is really entertained from home, and I think it’s becoming a big part of people’s lives.  So, can you talk to me a little bit about gaming and how that fits into people’s lives and the industry as a whole?

Sean Sun:  Yeah, Zack, so video games are this interesting combination of not only entertained from home, but socialized from home.  So, video games as an industry is extremely large, globally.  You have two and a half billion gamers worldwide, and you have annualized spending, about $150 billion today.  Gaming really fits into this broad trend that we’re seeing of entertainment becoming, you know, less linear and much more interactive.  We are seeing the shift away from say, linear TV towards a Netflix.  We’re also seeing a shift away from linear forms of entertainment towards gaming, which is highly interactive, but also highly social.  You know, when you’re playing games, you typically don’t play by yourself.  You play with your friends.  So, in this current environment where it’s been difficult to, you know, meet your friends at a restaurant or go outside and hang out, gaming has been the, the perfect anecdote to not only entertaining yourself, but socializing and staying connected with friends and family and stuff.

Zack Wehner:   So, staying on this topic of sort of connecting with your friends in the social aspect, one topic sort of within gaming generally that’s gaining more mainstream understanding is this notion of the metaverse.  Can you walk me through, like, what this is and, you know, how it’s impacting gaming as a whole?

Sean Sun:  Great question.  I think it’s helpful to start with kind of the origins of the phrase, “the metaverse”.  This phrase was first coined in the 1992 Sci-Fi book Snow Crash and what – in that book the – it describes basically a virtual reality-based internet with user-controlled avatars.  These avatars – these digital avatars, also varied based on varying quality based on your social economic status and wealth, so it was essentially kind of an extension of the physical world into a digital world.  A recent example of that depicted media is the movie Ready Player One, but I think the metaverse, as it’ll evolve, will be more than just a virtual reality video game.  It’ll certainly have elements of that and today, no one knows exactly what it’ll look like, but we are moving towards that kind of world, but it’ll broader than the game.  When I think of what the metaverse will have overtime, and this is some elements that it’ll have and this is as predicted by um, like a Matthew Ball, as well, it’ll – it’ll have elements of, like, persistency.  It’ll be very much real time.  There’ll be no user caps.  It’ll be infinitely scalable.  You – everyone can be on the metaverse.  The metaverse will also have this fully functional digital economy.  It’ll be interoperable, and it’ll also have elements of user-generated content, as well as professionally-generated content.  Another way to think about, you know, what the metaverse will be is I think it’ll be this natural evolution of, of the internet.  When you think of the original internet, it was essentially a bunch of, like, academic people finding – trying to find a way to share information online, so it comprised a lot of hyperlinks, very basic core infrastructure, but as technology advanced and computers became faster and we had more memory, you know, we had all these kind of businesses and applications built on top.  A good example is, kind of, the Windows Intel Agomoni but then, as the – over time, as the internet became, you know, more ubiquitous and cheap and people became comfortable living parts of their lives online and digitally, we had services like, uh, you know, Facebook, like social media services kind of arise, and then over time, you know, things evolved further, and then we advanced to kind of the smart phone era, and then we had all these mobile first companies arise, like an Instagram or a Snapchat and maybe more recently an example is TikTok.  What I think will happen is that as technology continues to advance and build upon each other and it kind of stacks together, the metaverse won’t come together as, like, this big bang, it’ll evolve gradually over time.  What it’ll be is, like I said, this natural evolution of the internet where much more stuff that was happening physically today will move towards digital, and when you think about, like, how big our economies are from a physical standpoint and that shift towards, towards a digital format, it’ll, it’s, it’s a huge amount of, kind of like, potential market opportunity that’s in commerce and whatnot that’s going to move from a physical standpoint to a digital standpoint.  In terms of who the winners are in that environment, you know, it’s – we don’t, we don’t know yet, but it’s something that doesn’t quite exist yet today, but there will be companies that kind of are metaverse first-type companies, just like there are companies today that are smart phone first-type companies.

User-Generated Content in Gaming

Zack Wehner:   Well, you said something interesting.  Now, we’re all familiar with TikTok and user-created contents, but do you think the next phase of user-created content is actually going to occur within gaming?

Sean Sun:  I think gaming has shown to be, um, a very rich source, source of user-generated content.  I’ll give you an example of game today that is essentially kind of a collection of all sorts of user-based content, and it’s this game called Roblox.  So, Roblox is extremely popular with children in the United States.  I think somewhat, somewhere like 75 percent of all kids in the U.S., ages 9 to 12, are on Roblox, but what Roblox is, it’s a platform for people to create games for other people to play, and some of the most popular games on Roblox are actually just created by, you know, regular people, not, not big corporations.

Zack Wehner:   And I think a follow-up question of this is, do you think content creators are sort of a new small business in gaming?  I mean, do you think this is the way that small business is moving away from brick and mortar, you know, mom and pop shops to content creators?

Sean Sun:  I think what technology has done and what the metaverse will do over time is really democratized, you know, creativity and democratized, um, the ability to create content.  You know, and historically, if content was typically created by big production studios, big Hollywood studios or there was an element of content was created by the masses, but now with barriers to entry kind of lowering for content, you know, we’re really going to see, like, really talented and creative people be able to create content that other people can consume.

Esports Games

Zack Wehner:   All right, Sean.  Well, we’re going to move a little bit more into the controversial, and this is controversial amongst sports fans.  There has always been a debate about what is a sport and what is not, and in the context of gaming, I want to talk about Esports, and can you just tell me a little bit about how it’s growing in popularity and how it stacks up to traditional sports?

Sean Sun:  Yeah, Zack, so Esports is – it’s a very interesting part of the video gaming, kind of, segment.  When you think about the skill involved in playing many of these games, it takes a lot of skill to play these games and it’s also very entertaining to watch.  These are the kind of elements that traditional sports have, as well.  We’re seeing – just like with traditional sports, you, you grow up playing a particular sport, you kind of understand the rules, but you also enjoy seeing someone who’s really good at doing that particular thing, as well, and so, we’ve seen Esports evolve over the years, and some of the most popular Esports out there are like, Counter-Strike, which is by Valve, League of Legends, which is created by Riot, which is owned by Tencent and, like, Overwatch from Activision Blizzard, and each of these games have kind of nuances to them, but what is common is that they have huge player bases, huge audiences and they’re growing really fast.  To give you an example, kind of the most popular Esport right now is this game called League of Legends, and the most recent League of Legends world championship is called LTS Lead Championship Series, actually drew over a hundred million viewers, more than the Superbowl.  So, it’s – it just gives you a sense of, kind of, like, how big these Esports are and how popular they are, and they’re very much global, as well.

Zack Wehner:   It sounds like it’s a, it’s a pretty popular thing, and so, obviously, this isn’t just a U.S. story, it’s also really an international story.  Is it – how is it taking hold in the international market?

Sean Sun:   It is incredibly popular internationally because you think – these video games are actually – the mechanics in some ways are very easy to learn, but difficult to master, and they transcend cultures and languages and things like that.  So we’re seeing these most popular Esports, like The League of Legends is played globally and you have leagues – you have Amer, North American leagues, you have leagues in Asia, leagues in Latin America and these – the – it shows that you can – if the right game has been created, it can be popular everywhere, and that really is great because it just expands the total adjustable market.  Uh, it’s much like soccer, how soccer’s global because it’s, it’s really simple and easy to learn, but difficult to master.

Gaming Stock Prices

Zack Wehner:   Oh, yeah, it sounds kind of the World Cup except for we don’t have to wait every 4 years, so it is a, it is certainly an interesting development in sports.  I think the last thing I’d like to touch on in the gaming industry is that the gaming industry, in some platforms, have certainly been rewarded by the market this year with strong price appreciation.  Do you still think the market underappreciates these companies in this phenomenon?

Sean Sun:  Yeah, I, I think so.  When you look at the winner – the COVID winners and put them in the various buckets, ecommerce is appreciated that sector of 40 to 50 percent this year, software’s appreciated somewhere in the 30 percent range, but video game stocks have done very well, but they’re still only up maybe 25-ish percent or 30 percent.  So from a relative standpoint, they haven’t done quite as well as other COVID winners, and I think they’re still underappreciated in the sense that I think investors underestimate how recurring the revenues are in the video games space.  Like I mentioned earlier, you know, you play video games with your friends, so video games are like these mini-social networks, with really sticky user bases and pretty, pretty highly recurring revenues.  So, from that standpoint, the durability of revenues are probably slightly underappreciated, but also, when you kind of dig deeper into a typical video game company, they’re, in many ways, software companies.  Games are created on soft, software platforms.  Software is a quarter of these businesses.  Game engines, which these, uh, video game companies use to create their games are highly sophisticated pieces of software, you know, complex math and physics and things like that and – but yet video game companies don’t trade anywhere near SaaS software multiples, and I think that – there, there is probably room for a rewrite in that respect.

Zack Wehner:   Well, thank you very much for your time today, Sean, and sharing your knowledge on the industry.

Sean Sun:  Thanks, Zack.

Zack Wehner:   Today’s episode was produced and edited by Michael Nelson.  You can find us on Apple, Spotify, Google Podcast, or your favorite audio provider or by visiting us at Thornburg.com/Podcast.  Please subscribe, rate us, and leave a review.  Please join us next time on Away from the Noise.

 

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Markets & Economy

Observations in Fixed Income: Central Banks Dominate the Year

Jeff Klingelhofer, Co-Head of Investments & Managing Director, looks to a period when the Fed's mandates of low inflation and high employment may not peacefully coexist.
Markets

Emerging Investment Opportunities in Cell and Gene Therapies

Cell and gene therapies are biopharma’s next frontier. We see significant investment opportunities in biopharmaceutical manufacturers and biotech companies.

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