fbpx

The Next Killer App for Telcos

Gaming Market’s Energy Bar at Full Strength

The gaming market is huge! In 2019, it was an estimated US$192 billion market, forecasted to grow at an 11% CAGR to almost US$400 billion by 2026. Compare this to the music industry, which had US$20.2 billion of revenue in 2020 or the movie industry which had a $42.5 billion global box office in 2019. Gaming is starting to catch up to the global sports market, which is expected to grow from US$388 billion in 2020 about US$600 billion by 2025.

Sophic Capital has published research (Report 1, Report 2, other gaming industry research) about the gaming industry/market and catalysts accelerating growth. As we previously wrote, lockdowns during the COVID-19 pandemic accelerated gaming interest as many people looked for new forms of entertainment in the absence of sporting events, concerts, and cinema outings. Not only did the gaming industry benefit but so did the streaming of video games – Twitch, Facebook Gaming, and DLive all saw year-over-year growth of content watched in 2020. In fact, esports audiences could grow to 474 million viewers in 2021.

Sophic Capital - Logo - Colour

Mobile gaming is set to benefit from increased interest in gaming. In 2020, mobile gaming was a US$71.9 billion industry posed to grow to US$153.5 billion by 2027 (NewZoo and Standard Chartered estimated over US$80 billion). Prior to implementing restrictions on play time, China was set to account for US$48 billion of this 2027 market. Virtually all game sales for mobile gamers happens online, driven by Gen-Z (those born between 1996 and 2012) being both the world’s largest demographic and the demographic that spends the most time on their mobile phones. Gaming is Gen-Z’s favourite entertainment activity (Exhibit 1) – in fact, it is a lifestyle, a way to meet friends and socialize. And as telecommunications companies (telcos) across the world upgrade to 5G infrastructure, Gen-Z’s mobile gaming experiences are about to be enhanced as is Gen-Z’s ability to build communities with like-minded peers.

Exhibit 1: Playing Video Games is Gen-Z’s Favorite Activity

Telcos Need to Become Business Platform Service Providers

Before entertainment companies adopted OTT models, telcos were the dominant technology companies. Music offerings were never a telco strength, and Over-the-Top (OTT) music services (services that are streamed over the Internet, bypassing network operators and potentially competing against similar operator services) like Spotify, removed any potential for telcos to gain market share. Video packages (cable) continues to lose market share as people “cut the cable”. Telcos have even lost their dominant position in teleconferencing due to OTT video conferencing services like Facebook Messenger, WhatsApp, and Zoom. In effect, OTT services have relegated telcos to the suppliers of data pipes – in other words a utility – providing the data highways for OTT services to extract revenues from telco subscribers. Worse yet, when OTT services falter, subscribers don’t complain to Netflix or Amazon Video – they complain to telcos, and telcos are left to spend on opex and capex while OTTs pay nothing.

To counter the lost revenue opportunities, network operators attempted to bundle services (telco, broadband, SMS) to extract higher Average Revenue Per Customer (ARPU). ARPU did increase, but telcos are still the same, low-growth utilities. What telcos need to do is transform into business platform service providers.

Telcos Need to Target Gen-Z, the Largest Demographic

Here is a summary of the evolution of telco networks:

  • First generation (1G) networks were analog-based and only offered voice communications;
  • 2G transitioned to digital communications from analog, and SMS messaging introduced;
  • 3G offered video and mobile data;
  • 4G and 4G+ brought high-speed access and mobile internet;
  • 5G downloading will be 10 times faster than 4G.

Gen-Z is the next generation for telcos to monetize. Most of Gen-Z’s first exposure to mobile communications has been via 4G networks. Even in emerging markets, 4G networks covered 46% of the population 2015 which grew to 82% by 2019 (Exhibit 2) and have driven much of Gen-Z’s mobile communications adoption. Beyond the cost of mobile data, Gen-Z doesn’t care who provides their mobile data – they only want reliable access to their favourite OTT services. Given this, it’s incumbent on telcos to not only give Gen-Z reliable access to keep them as subscribers but also add extra value to increase Gen-Z ARPU. Reliability will come from 5G networks; reliability will come from the “killer app” for 5G – gaming.

 

Exhibit 2: Growth of 3G and 4G Coverage

Telcos Absent from Gaming

To meet growing demand for wireless bandwidth, telcos are upgrading their communications networks. Although 4G networks dominate global coverage, network operators are investing in 5G infrastructure. Customers will benefit from these upgrades; so will OTT service providers, and telcos do not want to repeat the missed opportunity of failing to investing in services subscribers demand (like music streaming in the past). Telcos are looking for new services that will generate new subscribers, reduce churn and extract more ARPU from existing customers, and (mobile) gaming is a growing opportunity (Exhibit 3).

Exhibit 3: Gaming ARPU by Channel

Cloud and edge gaming could provide new revenue streams for telco operators. Gaming does exist over 4G networks, but 5G networks will provide faster download speeds and lower latencies (the time it takes data to travel across a network to its destination).

Cloud Gaming

Cloud gaming streams games from a server to the gaming device. It centralizes processing and pushes content to the gamer’s device, making the gaming experience largely dependent on the network coverage, capability, stability and distance from cloud server locations. There are no storage requirements for the phone and reduced processing requirements. Every player input from the gaming device is sent to the cloud engine, graphic changes computed and encoded as video, and then streamed back to the gaming device. Gamers can access cloud games whenever they have network coverage and do not have to download or install games. Although cloud gaming simplifies access and hardware requirements for games, game providers need to invest in data centers and manage processing to ensure gamers have seamless access and error-free experiences.

Cloud gaming provides the opportunity for telcos to host game processing. For example, rather than process and pull game data from a centralized Facebook data server that then has to connect the Internet to deliver the data to the end user, a telco could provide the service. The advantage of shifting the data processing to the telco is a reduced data path (from thousands of kilometers to tens or hundreds) thereby reducing latency. As well, the telco generates new revenue through this service.

Sophic Capital - Logo - Colour

Edge Gaming

Edge gaming pushes processing closer to the user’s device (the edge of the network) rather than to a centralized server. Processing at the edge removes the need to upload data to a server and then wait for the server to process the data and return video. The “edge” device can be a cell tower, a data center, or even the user’s phone. Pushing the processing to the edge minimizes the amount of data that needs to be processed at a centralized server, thus reducing network bandwidth requirements.

Telcos Could Game the Gaming Consoles

Cloud and edge gaming could disrupt traditional gaming business models. Major gaming publishers distribute their titles via consoles like PlayStation and XBOX. By partnering with telco operator and leveraging their networks, game publishers can remove their dependency upon consoles. This is no different from video publishers bypassing cable networks or cinema chains by offering an OTT service (Disney+, Amazon Prime, for example). Gaming OTT subscription models seem to be the next entertainment disruption, providing telcos opportunities to attract new subscribers, increase ARPU with existing customers, and build customer stickiness. It’s even possible that telcos themselves could start producing gaming content.

Telcos Need to Own the Edge

To attract new subscribers and in increase ARPU from existing customers, we’ve made the case that telcos need to:

  • Evolve from being utilities to business platform service providers;
  • Target Gen-Z, the largest demographic, and;
  • Offer gaming services to attract and keep Gen-Z subscribers.

We’ve also established the case that EDGE gaming and 5G networks are the path to provide seamless gaming experiences. Thus, we conclude that telcos need to own the edge and offer edge computing. There are numerous edge computing use cases: for example, autonomous vehicles are edge devices that are suited to process data locally rather than by transferring data to a centralized server. Remote monitoring of assets such as off-grid power systems is another use case. Hospital monitoring of patients, where the hospital is the edge, not only reduces reliance on cloud processing but also reduce data privacy risks. But as it applies to attracting and maintaining Gen-Z subscribers, telcos need to offer edge computing gaming, especially on fast 5G networks. On top of this, they can add value-add gaming services that add value for Gen-Z. Sophic Capital will detail these gaming services in our next report.

Coming Up…

In our next report, we’ll introduce Sophic Capital client Swarmio Media [CSE:SWRM], a global gaming and esports technology and media company that provides a turnkey gaming platform and community for telcos to quickly launch and start leveraging their customer base today.

 

Disclaimer

The information and recommendations made available through our emails, newsletters, website and press releases (collectively referred to as the “Material”) by Sophic Capital Inc. (“Sophic” or “Company”) is for informational purposes only and shall not be used or construed as an offer to sell or be used as a solicitation of an offer to buy any services or securities. In accessing or consuming the Materials, you hereby acknowledge that any reliance upon any Materials shall be at your sole risk. In particular, none of the information provided in our monthly newsletter and emails or any other Material should be viewed as an invite, and/or induce or encourage any person to make any kind of investment decision. The recommendations and information provided in our Material are not tailored to the needs of particular persons and may not be appropriate for you depending on your financial position or investment goals or needs. You should apply your own judgment in making any use of the information provided in the Company’s Material, especially as the basis for any investment decisions. Securities or other investments referred to in the Materials may not be suitable for you and you should not make any kind of investment decision in relation to them without first obtaining independent investment advice from a qualified and registered investment advisor. You further agree that neither Sophic, its, directors, officers, shareholders, employees, affiliates consultants, and/or clients will be liable for any losses or liabilities that may be occasioned as a result of the information provided in any of the Material. By accessing Sophic’s website and signing up to receive the Company’s monthly newsletter or any other Material, you accept and agree to be bound by and comply with the terms and conditions set out herein. If you do not accept and agree to the terms, you should not use the Company’s website or accept the terms and conditions associated to the newsletter signup. Sophic is not registered as an adviser or dealer under the securities legislation of any jurisdiction of Canada or elsewhere and provides Material on behalf of its clients pursuant to an exemption from the registration requirements that is available in respect of generic advice. In no event will Sophic be responsible or liable to you or any other party for any damages of any kind arising out of or relating to the use of, misuse of and/or inability to use the Company’s website or Material. The information is directed only at persons resident in Canada. The Company’s Material or the information provided in the Material shall not in any form constitute as an offer or solicitation to anyone in the United States of America or any jurisdiction where such offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation. If you choose to access Sophic’s website and/or have signed up to receive the Company’s monthly newsletter or any other Material, you acknowledge that the information in the Material is intended for use by persons resident in Canada only. Sophic is not an investment advisor nor does it maintain any registrations as such, and Material provided by Sophic shall not be used to make investment decisions. Information provided in the Company’s Material is often opinionated and should be considered for information purposes only. No stock exchange or securities regulatory authority anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. Sophic and/or its principals and employees may have positions in the stocks mentioned in the Company’s Material and may trade in the stocks mentioned in the Material. Do not consider buying or selling any stock without conducting your own due diligence and/or without obtaining independent investment advice from a qualified and registered investment advisor. The Company has not independently verified any of the data from third party sources referred to in the Material, including information provided by Sophic clients that are the subject of the report, or ascertained the underlying assumptions relied upon by such sources. The Company does not assume any responsibility for the accuracy or completeness of this information or for any failure by any such other persons to disclose events which may have occurred or may affect the significance or accuracy of any such information.

The Material may contain forward looking information. Forward-looking statements are frequently, but not always, identified by words such as “expects,” “anticipates,” “believes,” “intends,” “estimates,” “potential,” “possible,” “projects,” “plans,” and similar expressions, or statements that events, conditions or results “will,” “may,” “could,” or “should” occur or be achieved or their negatives or other comparable words and include, without limitation, statements regarding, projected revenue, income or earnings or other results of operations, strategy, plans, objectives, goals and targets, plans to increase market share or with respect to anticipated performance compared to competitors, product development and adoption by potential customers. These statements relate to future events and future performance. Forward-looking statements are based on opinions and assumptions as of the date made, and are subject to a variety of risks and other factors that could cause actual events/results to differ materially from these forward looking statements. There can be no assurance that such expectations will prove to be correct; these statements are no guarantee of future performance and involve known and unknown risks, uncertainties and other factors. Sophic provides no assurance as to future results, performance, or achievements and no representations are made that actual results achieved will be as indicated in the forward looking information. Nothing herein can be assumed or predicted, and you are strongly encouraged to learn more and seek independent advice before relying on any information presented.