In this week's edition of "Game On," The Fly spoke with Stephens analyst Jeff Cohen. The interview, which was conducted on April 1, included questions pertaining to the impact of COVID-19 on the video game industry.
WHO BENEFITS: When asked which of the major game publishers has benefited most from shelter-in-place policies, Cohen said that "all of them are seeing pretty strong engagement across the board," but noted that Activision (ATVI) has probably benefited more than the others due to recent "Call of Duty" releases. "It was very fortuitous timing that [Call of Duty] Warzone just happened to come out right during the beginning of this shelter-in-place period," the analyst said. "And [on March 31] they announced that they were releasing Modern Warfare 2 Remastered. It released [first on PS4] and then the Xbox and PC versions will release April 30. So I think this is a good job by Activision’s management team. They’re getting content out there when people are looking for things to play, and they’ve just shown the strength of the Call of Duty brand. But I think across the board, we’re seeing strong engagement from all the publishers that I cover.”
NEW COD: Eyes are on Activision with its new free-to-play "Call of Duty" game "Warzone," as well as the recent release of "Modern Warfare 2 Remastered." When asked if Activision even needs to release a brand new, full version of "Call of Duty" this year, Cohen said that anytime a big publisher can bring out a new game, "there will be premium demand there." "I would view making Warzone free to play almost similar strategically to how they talk about Call of Duty Mobile," he added. "It’s really just bringing new players into the top of the funnel and introducing new people to the Call of Duty brand.”
“I’m not worried," the analyst continued. "There are some worries from certain bearish investors that the fact that they made [Warzone] free to play will hurt demand for next year’s sales. I don’t subscribe to that notion. Free to play games have been around for a long time, and we’ve still, in the face of that, seen very strong demand for single-player premium games.”
DELAYS: On the possibility of big publishers postponing game releases slated for later this year as a result of the coronavirus pandemic, Cohen said that the companies he has spoken to still believe things are running on schedule. "First I would say that all the companies that I’ve spoken to have maintained that they still think that everything’s working on schedule, and that they have the work-from-home procedures to mitigate this," Cohen told The Fly. "But it’s certainly possible that we could see delays.”
In terms of publishers with the highest level of risk in terms of game delays, Cohen said, "Ubisoft (UBSFY) has to be at the highest level just because they have the biggest slate and they have the biggest AAA games coming next fall, so they’re at the highest risk. I’d probably put Activision second, just because they had to change up the Call of Duty developer lineup. They had to pull forward Treyarch in that lineup last year, which gave them a little less time than they would normally have. But Activision hasn’t missed a Call of Duty launch in 15 years, so I wouldn’t expect them to. But just because of that little shake up, there’s a little more risk than normal. Then I would put EA (EA) just because they have the plethora of sports titles that they always have out. But those guys are pretty well baked at this point, I would imagine, so I don’t think there’s a ton of risk there. Last I’d put Take-Two (TTWO) because there’s nothing in their pipeline at this point outside of NBA 2K that they really have.”
“I think it’s a bigger risk for these companies if the new consoles come, but their software is delayed," the analyst added. "If Microsoft (MSFT) and Sony (SNE) have their consoles out on time, but Ubisoft doesn’t have their software, I would say that would be a much bigger problem than if the console launches were also delayed.” The Fly notes that Sony last Thursday delayed the upcoming releases of "The Last of Us Part II" and "Marvel's Iron Man VR" indefinitely.
SPORTS TITLES: With nearly every major sports league suspending or canceling events in response to the coronavirus outbreak, the Stephens analyst said that he has received questions from investors about various Ultimate Team modes in sports sims, as well as other in-game modes linked to real season play that generate a lot of net bookings for big game publishers. “They’re very predicated on live events that are happening in the sports world, so there is some worry out there that there could be less engagement because of that," he said. "I still think that, with the quarantine and the fact that these sports aren’t on TV, there’s a lot of interest for sports fans to engage with video game content.” Cohen noted that Take-Two did a "really interesting thing" by having an "NBA 2K20" tournament featuring real NBA players competing in the video game on live broadcasts.
“We’re still going to have [an NFL] draft. So anyone who wants to play with Joe Burrow or any of the top draft picks are going to have to buy the new game," the analyst noted about EA's Madden NFL franchise. "I think there will be enough changes that they could make to the game to make people want to buy it even if there’s no season. But, if we get to a point over the summer where we’re canceling football and canceling basketball completely, it could be a different conversation. But as of right now, I think there’s enough that they can do to spark interest.”
NEW CONSOLES: GameStop (GME) said on its recent quarterly earnings call that the PlayStation 5 and Xbox Series X remain on track for release later this year despite the COVID-19 pandemic. When asked about whether or not he believed this to be true, Cohen said he doesn't have any knowledge on the matter outside of what Microsoft and Sony have said. "They all seem to be saying that everything is still on track," he said. I’ll take that to be the answer at this point.”
LONG-TERM IMPACTS: When asked what kinds of long-term impacts he sees on the video game sector as a result of the coronavirus outbreak, the analyst said that it could help "accelerate the digital transformation to some extent." "What I’ve found from experience and talking to people: once you buy your first game digitally, you realize there’s very little reason to go back to a GameStop or a Best Buy (BBY) to buy a game," Cohen said. "It’s a better experience, buying it digitally. So I would imagine as you have people stuck in their houses wanting to play new games, you’re going to see that digital penetration increase, and that’s something that as it increases, it’s not going to come back down."
“The other thing I would say is around esports," he added. "I do think you are seeing with the [2K tournament] and just this void that sports have left right now, from an entertainment and a gambling perspective, there’s just a lot that esports can do to fill that hole. Fantasy sports gambling, and being on mainstream broadcast TV. I think in the coming months, you’re going to see more of that. And that has the potential to accelerate that industry.”
"Game On" is The Fly's weekly recap of the stories powering up or beating down video game stocks.
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