Very interesting thoughts on the video game industry (and specifically the large distributors) and similarities to distributors of other "sin" products (spirits, tobacco, and soda).
I believe this was the genius of Buffett’s investment in Coca Cola. Coca Cola’s business model was about creating distribution across the globe, to the point where it was easier to find a bottle of Coca Cola than a bottle of water in far flung places. With this massive distribution network, it was easy to simply acquire new brands or create new products and gain impressive topline and margin growth from pushing various products through your large horizontal channel.
And the gaming sector analogy:
– Relative low price point and inelasticity
– Highly addictive products
– Cyclical defensive
– Ability for some to capture consumer surplus
– Consistent high margins and ROE
In many ways, gaming has many of the same characteristics as the other addictive sin products.
However, the rapid release and innovation cycles of gaming resemble more those of movie and tv studios.
Unlike tobacco and alcohol, which have had the same recipe for hundreds if not thousands of years, video games must innovate in a timely matter less it becomes stale and monotonous, requiring large amounts of re-investments.
The post then dives into the Chinese market and how mobile is changing the gaming industry.
Full blog post here: Gaming Sector Primer