Home Games: How YouTube, Netflix and the gaming industry are benefiting from the shift to staying in

Susannah Streeter: Hello and welcome to Switch Your Money On. I’m Susannah Streeter – the Head of Money and Markets here at Hargreaves Lansdown – and, as usual, I’m with Sarah Coles – the Head of Personal Finance.

Sarah, we’ve been trying and failing to meet up for an evening out over the past month, and something is always getting in the way in our rather crazy schedules.

Sarah Coles: Yes – I always say this, but the kids have so much of a better social life than I do!

Susannah Streeter: We’ll be organising virtual drinks – just like pandemic times – if we’re not careful.

Sarah Coles: Yes – although it does feel distinctly like we’re not alone. I think staying in’s starting to feel like the new going out.

Susannah Streeter: I suppose – yes; the ongoing squeeze on budgets isn’t really helping – despite the reprieve we’ve had with interest rates being kept, of course, on hold in September. I mean, inflation might be heading in the right direction, but prices are still rising, and it’s certainly not cheap to get a round in many city centres!

Sarah Coles: Yes! Plus, of course, many alcoholic drinks have gone up in cost since August – so, after new tax-rises were introduced on most tipples – except for low-alcohol drinks and fizz – so an excuse to drink fizz.

Susannah Streeter: Yes – always a good excuse, Sarah! It has, though, been tough for hospitality of late with pub operators dealing with mounting payroll costs, fuelled by those ongoing staff shortages. It seems two pubs a day disappeared in the first half of this year – a pretty sorry statistic – and those that remain have little choice but to pass on the costs.

Sarah Coles: So, if more people do tighten belts and stay home more – instead of going to the pub – in the months to come – who could be the winners instead? Well that’s what we’re looking at in today’s episode which we’re calling ‘Home Games.’

Susannah Streeter: We’ll be focusing on the streaming services and gaming giants who may be poised to benefit if more people choose the sofa over the barstool. And Doki Tops is here – he’s the Founder and CEO of Cloud game streaming service, Utomik, to tell us what life is like at the sharp end.

Doki, is this an exciting time for the gaming industry?

Doki Tops: Yes – I’ve been in it for almost 20 years now – and it’s always been exciting – but I think now it’s really getting into a transformation with Cloud gaming, and also the subscription gaming – all the things that you guys were talking about.

Susannah Streeter: It’s gonna be really interesting to dive deeper into this with you a little bit later in the podcast, Doki.

Sarah Coles: We’ll also have a chat to Sophie Lund-Yates – our Lead Equity Analyst – about the companies she’s watching – plus we’ll hear from Emma Wall – our Head of Investment Analysis and Research – from a funds perspective.

Susannah Streeter: But first, there was a sigh of relief that the Bank of England’s Monetary Policy Committee did decide to keep rates on hold – at their last meeting – at 5.25% – although it’s still gonna be pretty tough for companies and consumers, as interest rates are expected to stay higher way into 2024 – with the bank saying it can’t be complacent, even though inflation is coming down.

Sarah Coles: Yes – I mean, we haven’t even felt the full effect of previous rate hikes yet – and our HL Savings and Resilience Barometer showed that people are really struggling with their financial resilience, and they’re building problem debts.

Susannah Streeter: The hospitality industry is worried about the effect of recent tax increases on alcohol which came in in August. Pub and wine bar owners say they’ve already had to deal with some really crippling effects of inflation, and the extra tax just adds to their problems at a time when they’re seeing fewer customers coming into their venues.

Sarah Coles: But, even if more people shun the pub for a place on the sofa or gaming chair, it doesn’t necessarily mean it’s plain sailing for streaming services and video games manufacturers.

Competition for hard-earned pounds and pennies is intense, and the trimming of household expenditures is set to continue. It’s been a challenging time for companies running streaming services.

The writers and actors strike caused production of films and TV series to grind to a halt – and that’s at a time when content is considered king and it’s hugely important to compete against rivals for eyes on screen. There are signs that disputes are drawing to an end – and the prospect of film sets whirring into life again in Hollywood is now on the horizon.

Susannah Streeter: And things are looking up for the gaming industry too after a more challenging 2022, and this year 3.4bn players around the world are expected to get stuck into online games. More than $187bn in revenue is expected to be generated right across the industry this year – representing growth of 2.6% year-on-year – and console games are driving the lion’s share of revenues – and that’s despite all the economic headwinds whipping around the world at the moment.

The UK games industry is a real success story too – with game sales growing to £4,664m in 2022. Around 80% of studios are micro businesses, but there are real opportunities to scale-up – and the announcement of a £5m content fund – on top of the UK’s games fund – is designed to provide the funding to help studios develop.

Sarah Coles: This feels like a good time to bring back Doki Tops – Founder and CEO of Utomik.

So, Doki, can you introduce us a bit to Cloud game streaming?

Doki Tops: Yeah – I’ll try to keep it really simple. You run the game on a server – so it’s not on your laptop or on your TV, actually – and then it streams the video and the sound to the user. So, essentially, it’s like a video stream of a game but it’s real time – does that make sense?

Susannah Streeter: It certainly does in my house, Doki – because my boys are particularly interested in Cloud games – but they do get frustrated when the Broadband – they say – is not up to scratch, and it causes glitches. Is that a bit of a problem?

Doki Tops: That’s a good question – I think that has been a challenge for Cloud gaming over the years, but I think we’ve now reached a point where it can still happen, but the user experience is very good.

We measure this – I can’t give exact details – but well over 90% of all streams – people say that they experience it as ‘Good’ – but it does, of course, depend on the market that you are in.

Sarah Coles: So, presumably, the big advantage for people is a lot more access to a lot more games. Can you explain a little bit about the structure of how it’s paid for and funded?

Doki Tops: Yes – so Cloud gaming – Utomik runs a subscription business, where you can even get Cloud gaming for eight quid a month, and then you can play on your mobile, TV, and PC, and then the cost structure is you get 1,400 games – unlimited access.

You have different models, depending on companies. Some companies, you just pay for streaming – so, essentially, you still need to own the game and then you can play it – basically on another platform, such as Steam or the Epic Game Store – or you can have some of the free-to-play games – which are kind of free – but, if you want to get the nice suits, and all the nice-looking stuff, then you have to start paying – and, for Cloud gaming, essentially, the business model is that, as a business, you have to pay for the usage of the servers, and that has always been the challenge for Cloud gaming because you’re running, essentially, a high-end game on a server, and that needs to be paid for as well – but the big benefit is that you can use that hardware for multiple users, and then the cost of scale really benefit you.

Susannah Streeter: But, as we pointed out, the console game market – it still has the lion’s share of business right now. Where do you see growth opportunities, though? – because it still must be quite challenging right now, given the fact that some people are still cutting back because of the cost of living crisis.

Doki Tops: I think ‘Console’ will be on a relative decline. It could still grow – but, as a percentage, if you look at Cloud gaming, the forecast is that it will hit 8bn by 2025, and 80bn by 2030 – or round-about – so that is a massive growth – year-on-year – way beyond anything else in gaming.

I think the adoption of Cloud gaming and TV gaming, specifically – we are currently partnered with LG and Samsung – and we’re now at the early stages of adoption, but this will accelerate – as the market research shows.

Basically, you do not need a console to play high-end games on your TV, and I think there’s a big market – and this is already happening in South America and Asia Pacific, and India. All these markets will skip the console – they have a real head-start on Broadband, which means those people are introduced to gaming through Cloud gaming – or PC download.

I think Cloud gaming is where you want to be – and you can also see how Xbox and Microsoft is repositioning itself.

Susannah Streeter: Now, when it comes to AI, there is a lot of excitement around right now – do you share in that excitement – particularly for your business? How much of a game-changer could it be?

Doki Tops: I think AI – for our business – is mostly impacting marketing. If you want to write a press release – if you want to write newsletters – you can get so many ideas – or, if you want to have a, ‘Please re-write this newsletter for an older audience.’ You can ask it so many questions, and our development – it has an impact. So, our programmers are using it – so they were immediately onboard – and, from a game-development perspective, it’s also starting to happen, but it’s also leading to all kinds of conflict.

I am creating something, and the AI learns from that – and uses that – and ‘How does that work?’

That’s an interesting time, but I’m really excited for it, and really happy that quite a few people in our company starting using it at an early stage – because I do feel this is the future.

Susannah Streeter: Just finally, Doki – I just wanna ask you for your take on the gaming industry in the UK. Just how healthy would you say it is?

Doki Tops: I really see that a lot of the UK publishers and developers are doing quite well. I have a high esteem of the British gaming industry – as a Dutch person. I really think it has a really great scale and great games.

Susannah Streeter: Doki, thank you so much – it’s certainly gonna be a really interesting industry to watch over the next few years, and we shall do just that.

So, thanks very much for coming on the podcast!

Doki Tops: Very welcome – was really fun to do.

Sarah Coles: There are, of course, plenty of listed companies in the business of home entertainment too.

So, let’s bring in Sophie now for a dive into some of the companies operating in this space.

So, Sophie – what is it about gaming that’s making it so popular right now?

Sophie Lund-Yates: There are a couple of things, really – and one of the big ones is tech. So, games are simply an awful lot better than they used to be in terms of user experience – which, ultimately, makes them more attractive – and then, at the same time, the pandemic left us all cooped up indoors, and gaming was a way to either pass the time or connect with others in a social way without needing to go outside.

That is a habit that hasn’t been kicked by all the newer gamers – so the market’s got bigger. There are also more immersive and virtual social spaces than before – and I’m, of course, talking about the Metaverse and its huge opportunity.

Susannah Streeter: Yeah – it’s certainly a lot to dig into.

We could just talk about this the whole time! – but, with all of that in mind – and staying in the main theme – let’s also look at the staying-in implications for a company like Netflix. What can you tell us about Netflix?

Sophie Lund-Yates: So, yes – I have, indeed, been looking at Netflix. We can’t really discuss staying in without looking at Netflix.

So, as our listeners will know, Netflix is a streaming giant, and subscriptions skyrocketed during lockdowns – and now the group has repositioned itself to look at how to re-accelerate growth – after the pandemic, essentially, stole membership from further down the line.

Now, streaming – more generally – is an incredibly exciting area. So, looking at just the US, the share of screentime is now 37.7% streaming – that’s up from 26% in 2021 – with cable coming in second at 30.6%.

Now, this is an interesting point to make because therein lies Netflix’s biggest challenge – competition – and it’s not just from streamers. YouTube rakes in more revenue than Netflix does, and actually has a higher share of streaming.

YouTube content isn’t just old-school tutorials these days – it has a growing user base for a wide variety of audiences – and, for those listeners who may not know, I should point out that YouTube’s owned by Google parent, Alphabet.

Sarah Coles: So, competition is definitely something to watch – but it’s not like Netflix is doing badly, is it?

Sophie Lund-Yates: No – definitely not! So, this is still a company with 238m subscribers – with millions more being added each quarter.

Netflix’s reputation for strong and popular original content also really helps it to stay ahead. There are some intriguing growth levers that Netflix can pull too – and one is – ‘Surprise’ – gaming! – which is an area that management has said it’s keen to branch out into – and I think it’s really exciting, but I will just flag that details have been very thin on the ground in terms of exactly what this might look like.

The other thing Netflix is rolling out is an ad-supported tier and cracking down on password sharing. So, these are both strong sources of extra income – and, come results due later in October, and we’ll get a better idea of exactly how these initiatives are going – so definitely a lot to watch.

Susannah Streeter: So, you touched there on Netflix and gaming, but what about a company which is even more focused on gaming?

Sophie Lund-Yates: I’ve been looking at Keywords Studios.

Keywords is, essentially, a one-stop shop service for the video gaming industry – and, crucially, it’s an outsourced supplier – so that means it’s not on the hook – doesn’t rely on the success of individual titles – which helps revenue to be a bit smoother than the more volatile-wide industry, which sees ebbs and flows, depending on how titles perform.

Sarah Coles: That sounds good, but the valuation’s come under quite a bit of pressure lately, hasn’t it? So, why is that?

Sophie Lund-Yates: It has – I mean, Keywords is now trading at a price-to-earnings ratio of about 14 compared to 28 on a 10-year average.

Now, as a reminder, the forward price-to-earnings ratio looks at how much the market’s prepared to pay for £1 of expected profits.

So, sales have more than doubled in the last four years, and operating profit has come along for the ride – with organic growth now in low double-digit territory, it’s perhaps no surprise that investor enthusiasm has retreated. At the same time, industrial action in the US is causing issues too.

So, by some estimates, up to 9% of Keywords revenue is related to TV and film – so the strikes are likely causing a slowdown.

There’s also uncertainty about AI. So, Artificial Intelligence is an integral part of today’s gaming strategies – which creates opportunity for Keywords as the market leader in its field, but it also increases risks, as there isn’t a clear-cut AI strategy from the group yet.

I think the recent valuation sell-off has been overdone, and there should be room for some upsides – as long as performance comes in in line with expectations – but, of course, this isn’t guaranteed, and there are a few unknowns swirling around.

Susannah Streeter: Okay, Sophie – thank you very much – plenty of food for thought there.

Now, it’s time to bring in Emma Wall – our Head of Investment Analysis and Research. She’s been talking to James Dow – Manager of the Scottish American Investment Trust.

Emma Wall: Hi, James.

James Dow: Hi, Emma – how are you?

Emma Wall: Very well, thank you – how are you?

James Dow: I am excellent – thank you – just chewing a ‘Curly Wurly’ here before we started, so I’m feeling ‘Chipper.’

Emma Wall: Well, for those people who are wondering why James is mentioning chewing a ‘Curly Wurly,’ it’s because we’re talking about changing consumer habits – and that is consumers perhaps spending less money on those non-essentials – and we’ve designated a ‘Curly Wurly’ an essential. So, they are then – instead – spending money on what we call ‘Consumer staples,’ or ‘Consumer defensive stocks.’

What are those companies, James, and why, potentially, is now the time that they might be looking more attractive versus things like consumer discretionary stocks?

James Dow: Those are the kinds of business where the products that they manufacture and sell are these kind of everyday items that we use in our lives.

A classic example would be a company like Proctor & Gamble. So, it’s making those Head & Shoulders shampoos – it’s making those nappies – detergents – those everyday user items. There’s not a lot of discretion – unlike the consumer discretionary sector – and whether you buy those or not. It’s the very stable, staple nature of those items that makes those businesses what they are.

Emma Wall: And why, then, are we talking about them now? I’ll give you a clue – it’s that phrase that has affected us all – ‘The cost of living crisis.’

James Dow: Well, exactly – and so, when investors are thinking about, ‘What’s a good business to invest in right now – is now the right time?’ – they’re looking, particularly, amongst the consumer names about whether the staples names might be a better place to be invested – when consumer incomes are a bit under pressure – than your more discretionary name.

So, your discretionary names like your housebuilders – your car makers – and those kinds. When times are tough, people tend to pull back on those things.

Emma Wall: And, although there are no guarantees, consumer staples also can give you some inflation hedge because they’re more likely to pass on inflationary pressures to consumers?

James Dow: Yep – exactly. Look – the fund I manage – the prime reason why we own them is that, across cycles, we have a high conviction that they have that pricing power.

So, even when times are tough – if Fairy Liquid goes up by three pence, the chances are you’re gonna still buy Fairy Liquid. You see a little bit of downtrading sometimes into a private label – or a supermarket offering – but the sums are quite small – and so, typically, you see the ability of these companies to raise prices at least in line with inflation.

So, if you’re looking for a really solid stock that will keep compounding away and grow – even in a time of high inflation, this is a great place to be.

Emma Wall: I suppose, also, these are the types of companies – and, indeed, products – that aren’t so impacted by some of the other shifts in socioeconomic backdrop. I mean, things like working from home – because that sort of seismic shift has impacted huge sectors of the market, but I suppose working from home doesn’t necessarily make any difference as to whether you’re buying toothpaste or washing powder.

James Dow: Yes – exactly. Now, I will say – my experience has been you do need to still be a bit careful – you can’t indiscriminately buy these names because there are trends always going on in the background – and this is particularly with a view to the long term – that can still impact those.

A classic example is – when I started investing 20 years ago, one of the strongest names out there was ‘Campbells’ – as in ‘Campbell’s Tinned Soup.’

The tinned soup business has been in structural decline, actually, for some time – and so, over the long-term, you could have said, ‘Oh, inflation and pricing power, and it’s immune to trends,’ but there are still trends that go on within the consumer staples sector.

Emma Wall: And there are no guarantees – as ever – with investing – but are there any particular companies in the portfolio that you think are doing this well?

James Dow: One of my favourites is L’Oreal – the cosmetics company. Now, cosmetics – or shampoo – or whatever – is a bit of a discretionary. I don’t think it’s a discretionary – I think it’s a staple – but I would put it in the staples category – an everyday item – but they’re brilliant in spotting the trends that are coming – how consumers are changing – package sizing – whatever it might be – and being front-of-foot on those changes.

They have this expression – ‘Cedes Aquikamos’ – which means, ‘Seize whatever is new’ – this is a big part of their culture.

Emma Wall: That’s really interesting – basically, just because you are a staple, ‘Don’t rest on your laurels,’ and you’ve got to be innovative.

James Dow: Absolutely – even Warren Buffett has said – you remember he invested, some years ago, in Kraft and Kraft Heinz – after the merger – and that’s been a really disappointing investment for him – and he’s been asked about that, and ‘What went wrong?’ – and he said, ‘Well, I actually made a mistake – I falsely assumed that just the nature of the businesses would carry on forever – and I missed, actually, that, even here, tastes and things are changing, and the company hasn’t kept up.’

So that is a great example of – even a legendary investor can get caught out by this. So, really important to make sure you stay on the front-foot, and your companies are staying on the front-foot.

Emma Wall: And then, one other example for our listeners – L’Oreal and…?

James Dow: I’d say Proctor & Gamble, actually – a very longstanding company – people think, ‘Oh, it’s really boring’ – but it’s full of people who’ve devoted their lives – believe it or not – to a washing detergent and nappies – and are really passionate about it! – and they’ve got a really good track record of thinking through, ‘Right, how is the consumer changing – are we giving them the right things – should we be changing the formulation – should we be changing the way that it’s consumed – should we be coming up with pods rather than powders?’

Personally, I have quite a high level of conviction that, however the world changes, Proctor & Gamble is one of those companies that’s gonna be saying, ‘Right, let’s find the best product for the consumer, going forward.’

Emma Wall: James – thank you very much.

James Dow: Most welcome – great to join you.

Susannah Streeter: That was Emma Wall, there – talking to James Dow – the Manager of the Scottish American Investment Trust – on Friday 29th September – and, please remember, those are the views of the Fund Manager and are not individual stock recommendations.

You’re listening to Switch Your Money On from Hargreaves Lansdown – and now, to end this episode, we’re gonna power down our consoles and the TV, and head down a greener alley of conversation!

Sarah Coles: Yes – this week, it was ‘Good Money Week’ – so an annual event, promoting sustainability and finance. So, it was only fitting we bring in ESG Analyst Laura Hoy for this week’s sustainably-themed stat of the week.

Laura Hoy: Thank you, Sarah – it has been a super-busy week for the ESG team – this is one of our favourite events of the year.

So, responsible investing looks different to everyone – but a recent survey of our clients showed that nearly 70% of them consider climate change as ‘Extremely’ or ‘Very important.’

Susannah Streeter: That’s really interesting – particularly, given that recent announcement from Number 10, suggesting climate change is no longer a top priority.

Laura Hoy: Yeah – absolutely – you know, a lot of people wrongly assume that the energy transition will only be a drag on the average person’s bank account – but, in many cases, the opposite is actually true.

So, for example, delaying minimum energy efficiency requirements for rental properties by two years is expected to increase private renters’ energy bills by about £1bn.

Sarah Coles: Yes – it’s gonna be interesting to see what comes out of all this backpedalling – and whether investors start to reverse course on their opinions around sustainable investment.

Lauar Hoy: Yeah – there’s no doubt that the Government’s position is a speedbump in the push to slow climate change – but it is unlikely to completely derail things.

There has really been a clear shift in the public’s mindset around responsible investing.

Since 2020, the amount that UK investors have funnelled into responsible investments funds has risen by 73% - and we’re not just talking about younger investors. There’s been strong demand from all ages – and that brings me to our stat of the week.

As I mentioned, not so long ago, we asked our clients what they cared most about in terms of responsible investing. Now, on the environmental side, there were two main themes that emerged as being the most important – with over 80% of respondents saying they were ‘Extremely,’ or ‘Very important.’ So, any guesses what they were?

Sarah Coles: ‘Pollution’ is a key one – not sure exactly what the other one might be.

Laura Hoy: Yeah – you’re absolutely right with the first one. The other one was ‘Deforestation.’

Sarah Coles: So, I suppose that suggests that, while companies might not see strict sustainability-based regulation coming down the pipeline, they will still have to answer to their investors.

Laura Hoy: Yes – exactly.

Susannah Streeter: And that is crucial to keep in mind.

Thank you, Laura – and to everybody else – really interesting perspectives on not just, of course, ‘Good Money Week,’ but AI, gaming, and staying in.

Well, that is all from us for now – but, before we go, we do need to remind you that this was recorded on October 2nd, 2023, and all information was correct at the time of recording.

Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you.

Unlike the security offered by cash, investments rise and fall in value, so you could get back less than you invest.

Susannah Streeter: Yes – this is not advice or a recommendation to buy, sell, or hold any investment. No view is given on the present or future value – or price of any investment – and investors should form their own view on any proposed investment.

Sarah Coles: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research. However, HL has put controls in place – including dealing restrictions, physical and information barriers – to manage potential conflicts of interest presented by such dealing.

Sarah Coles: You can see our full non-independent research disclosure on our website for more information.

So, all that’s left is for me to thank our guests – Doki, Laura, Sophie, Emma, James, and our Producer, Elizabeth Hotson.

Susannah Streeter: Thanks so much for listening – we will, of course, be back again soon. Bye!