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The winner takes it all

04 December 2018

Russell Harrop – Head of International Equites

When researching companies for clients to invest in one has to be a good student of history. This is because as well as it rhyming rather than repeating, the bells of the past can often cause monster headaches in the future. Often the best guide for looking at companies that will make great future investments is to look to see how a business performed in the past. But (and there's always a but), history is littered with examples of seemingly great companies either imploding overnight or slowly seeing the water of the economic moat that's protected their high profits gradually drain away. Nokia? Kodak? There's little denying too that the rewards of being a 'winning' company in the global economy are higher than ever. One suspects that even the much-maligned Neanderthals would be doing their Christmas shopping on Amazon and searching with Google had they not been 'out-moated' by their smaller limbed and brained cousins, us. The risks of being a 'loser' though are to be always stuck watching Amazon drop its prices, speed up its delivery times and up its customer service. While you offer? Something different for sure, but with us sapiens too lazy to do much more than one-click on Amazon, the chances are the loser's never going to become a 'second winner'.

The speed with which these changes are happening are frightening for company management and investors alike. We were reminded of this when it popped up that today is the twenty-fourth anniversary of the launch of Sony's all-conquering Playstation games console. It was a huge success with the first version going on to sell 120 million and the second derivative PS2 an even bigger 155m. This put the once mighty Sega out of the console business once and for all as their Dreamcast console launched in 1998 sold only a paltry 10 million units. And yet, 2006's PS3 sold only 84 million and 2013's PS4 86m so far (Source: Wikipedia) as more and more gaming shifted first to the PC and then on to mobile phones.

Activision, the maker of the hugely popular Call of Duty shooter game, has ridden the first part of this wave brilliantly by turning the once hit or miss video game market into a franchise to make James Bond blush. Call of Duty games have brought in an astonishing $15bn in revenues since the first game was launched in 2003 (Source: Company). However, the model looks like it might just have turned on its axis once more as the company has struggled to command enough of its users' time given the massive attractions of free-to-play last-one-standing game Fortnite. Even though Activision is making $1bn a quarter from customer buying stuff within their games (they have lots of other franchises), just the single game Fortnite is on track to pull in $2bn in 2018 – all from customer buying clothes and dance moves made from ones and zeros. Suddenly £60 for a game seems like an awful lot of money and we wonder how long it will be before Activision's management are forced to embrace the cold-hearted reality of free to play games.

Making sure old winners don't become new losers is where our head's at a lot of the time.