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Not Netflix: Will all lockdown winners suffer the video streamer’s fate?

High profile investors such as Bill Ackman sold their holdings after the company forecast further falls to come in the second quarter, despite a strong release slate.

Netflix is not alone as other ‘stay-at-home winners’ are struggling to lap last year’s numbers, facing higher costs and dwindling demand. The pandemic boost may have obscured some underlying trends that were mounting anyway. Other companies had been encroaching on Netflix’s territory – for example companies with valuable IP (Disney, with its Marvel, Pixar and original franchises) and those that have considerable distribution in place (Amazon).

This has led investors to think about which companies are likely to have exposure to a proper, permanent shift in consumer behaviour post Covid. Consumers are being faced with an abundance of choices, and other calls on their cash, including unprecedented increases in non-discretionary spend on utilities, food and housing costs. This hits the poorest hardest, and in times like this entertainment spend must be ‘good value’.

Video games can offer several hours of entertainment, much of it socially involving and engaging, through multi-player games. So far, Steam – the PC gaming platform – data shows that concurrent user engagement in January and February 2022 was 77% above levels seen in 2019.

Total industry revenues in 2021 squeaked a rise of 1.1% to $180.3bn on 2020 levels (which were already 20% higher than 2019), driven by new console releases, more game play on mobiles and growth of cloud gaming, according to NewZoo. The industry is attracting considerable levels of corporate takeover attention, with, according to Drake Star Partners, spend already at a record $86bn in 2022 on top of $38b in 2021 – the most notable being Microsoft’s $49bn acquisition of Activision Blizzard.

While gaming attracted and retained many more players during the pandemic, it’s not been universally easy for publishers to fill and predict demand – as harsh reminders of how risky and operationally geared some of these companies can be have been delivered to investors.

Even quite established companies have had issues around glitchy launches (Cyberpunk) as the pandemic disrupted sufficient quality assurance and testing. A crowded schedule has led to some disappointment in some releases, for example Frontier Development’s Jurassic World Enterprise 2 – the game was released on time, but the coinciding movie release was delayed by the pandemic shutdowns – and another game, Age of Empires, competed for players.

Perhaps a way to play the underlying momentum is through the ‘picks and shovels’. Keywords Studios is an outsourcer to 23 of the top 25 game publishers and 10 of the top 10 mobile publishers, delivering game development, localisation, marketing, and artwork services.

For those fortunate to have accumulated savings during the pandemic, alternative calls on discretionary cash have appeal, such as taking a first holiday abroad since 2019, or a non-masked visit to a gym, pub, or theme park. Supported by furlough payments and rent and rates holidays, sectors that were locked down have had the opportunity to regroup and assess their cost base and service proposition.

There is vast potential for improvement and modernisation.

Accesso Technologies is interesting in this regard. Accesso provides software solutions for ticketing and electronic queue management across a range of entertainment venues, with significant contracts with Six Flags and Merlin.

For the last decade, e-commerce, google maps and social media have become pervasive through the ‘computer in our pocket’ and customers have come to expect instant access to information and payment by mobile phone for anything. The provision of tickets, passes and refreshments at an entertainment venue is no different. These technologies also help leisure companies manage capacity, save on the cost and provision of staff at the venue, and enable visitors to ‘make the most’ of their time – by queuing less you can ride more often and buy more snacks, drinks and souvenirs.

The pandemic masked competitive forces that existed for companies such as Netflix. With the Nasdaq entering a bear market, fears about inflation and flagging growth rates threaten to tar good and growing companies with the same brush. Satya Nadella, CEO of Microsoft, said this week, while announcing another strong set of quarterly numbers, “I don’t hear of businesses looking to their IT budgets or digital transformation projects as the place for cuts, if anything, some of these projects are going to accelerate their transformation.”

If we can see a normalisation of much of customer behaviour but not a normalisation in supply chains, this will tend to favour companies that can deliver services that customers need and expect, at reasonable prices, or those that they really want, like a family day out.

Anna Macdonald is fund manager at Amati Global Investors

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