Investors in UK gaming stocks should heed fast-fashion parallels

The picture is a familiar one. Workers based in industrial towns race to make products on contracts agreed at what appear to be impossibly low prices. Split into clusters that provide little in the way of job security, these teams are required to sweat through the night to hit clients’ tight deadlines.

At the top of the supply chain are the companies selling the end-product. These businesses can appear to care more about winning favour from the influencer community than monitoring working conditions below.

Should it matter that the workers at the bottom of the chain are hunched over computers rather than sewing machines?

Veterans of the video-game industry may have spotted a few parallels in this week’s stories about the fast-fashion retailers. Boohoo’s shares have fallen 30 per cent since early July after the spotlight fell once more on conditions at the factories that supply its clothes.

The UK’s gaming sector should take note. From the outside, it is viewed a world leader. On the inside, it has long been associated with a culture of nightmare hours, unpaid overtime and job uncertainty.

For investors, games have been a 2020 success story. Interest surged as lockdowns were imposed to halt the spread of coronavirus. US video game spending hit $5.5bn in the year to May, up 18 per cent from the same period in 2019, research group NPD estimates. Twitch, the Amazon-owned streaming service used by players to broadcast their achievements, reported 5bn hours watched in the second quarter, up 68 per cent.

Cyclicality is the Achilles heel of gaming, because software sales lean heavily on new hardware launches. In that respect, Covid-19 was fortuitously timed, as it happened at the very end of an upgrade cycle for consoles. Lockdown boredom brought back old players and introduced old games to new players.

The industry should be able to ride this wave of interest for a while, as console updates are due later this year from Microsoft and Sony — their first major launches since 2013.

None of this has escaped the notice of stock market investors. Frontier Developments, the Cambridge-based maker and publisher of blockbuster titles such as Jurassic World Evolution, has jumped about 45 per cent so far in 2020.

Team17, best known for its Worms franchise, has risen more than 40 per cent. Driving game specialist Codemasters is up around 20 per cent. Keywords Studios, a publishing services outsourcer, and multi-studio owner Sumo are up 24 per cent and 9 per cent respectively.

Those rises compare with a fall of 19 per cent in the FTSE All Share stock index. But if the benefits of the lockdown gaming craze look to be priced in for these stocks, you cannot say the same for the risks.

Work in the games industry is too often considered a privilege where long hours are a badge of honour. Games Workers Unite, an industry advocacy group, speaks of “a rush to the bottom for those who freelance or contract,” where “workers sell their craft for the lowest they can, just to be in an industry they love — and business owners are the ones who benefit.”

The crunch, a notorious industry practice, is when employees are expected to give everything to meet a looming deadline. Dan Houser, co-founder of Rockstar Games, the studio behind the best-selling Grand Theft Auto series, said in a 2018 interview that his staff was sometimes working 100-hour weeks in the push to finish Red Dead Redemption 2. Mr Houser resigned from the company in February.

Workers’ rights are increasingly difficult to balance with returns to shareholders. In years past, when software was delivered on a disc in a shrink-wrapped box, crunch periods happened relatively infrequently. Online delivery has changed that. User engagement metrics are now tracked in real time so pressure for fresh content can be unrelenting.

Scale can help. A spokesman for Keywords says that with the company working on more than 200 titles at a time, staff can expect a steady stream of work without suffering the crunch factor. Sumo says its project milestones are set on four- or six-weekly rotations and head office has systems in place to monitor each individual’s working hours.

Codemasters and Team17 declined to comment. Frontier did not respond to a request for comment.

The benefits of size come primarily through mergers and acquisitions. Keywords has bought more than 45 peers since its 2014 flotation. Sumo has acquired three studios since floating in 2018. Analysis from Goodbody Stockbrokers lists 26 takeovers so far this year in the sector.

Private developers attract much lower valuations than their publicly listed peers, so folding the former into the latter produces an immediate return. Healthy share prices partly reflect an expectation that companies’ sizeable cash piles will be put to work soon.

But in light of the pressure on workers, such bolt-on deals will always carry a risk that an acquisition’s historic performance was delivered by unsustainable practices. Unless the industry as a whole starts taking worker rights seriously, they could be buying their way into trouble.