In retrospect, Alibaba Group Holding Ltd (NYSE:BABA) CEO Jack Ma should have taken the cliché advice, “Never say never.” After saying in no uncertain terms just a few years ago that Alibaba had no desire or intention to wade into the world of video gaming, last week the company confirmed to owners of Alibaba stock it was indeed getting into the business, pitting itself against other gaming outfits like Tencent Holdings Ltd (OTCMKTS:TCEHY) and NetEase Inc (ADR) (NASDAQ:NTES).
Several questions surfaced in the wake of the news, including: How big is the opportunity here? Is the opportunity yet reflected in the current Alibaba stock price?
The answers: Greater than you might think, and not yet, respectively.
Turning Up the Heat
Though the company has quietly tinkered with video games in the recent past, it officially entered the fray late last month with its acquisition of online gaming outfit EJoy. The acquisition was made in conjunction with official word from Alibaba Digital Media and Entertainment Group that it was establishing a standalone gaming division.
This is a 180-degree turnaround from Ma’s previous feelings and statements about video games. He said in 2008 that Alibaba “would rather starve to death than live on games.”
Either way, Alibaba stock holders should be celebrating the change of heart, as there’s a good deal of money to be made in the business. How much money is up for grabs largely depends on which sliver of this market you’re talking about.
Games developed for consoles like those made by Sony Corp (ADR) (NYSE:SNE) or Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) are an entirely different breed of games from those only meant to be played online with other online players. Some games lend themselves to be played as an eSport, while others are ideal for playing by yourself, including offline. Though EJoy is primarily focused on massive multiplayer games played online, previous investments made by Alibaba have included mobile games, eSports and even a console startup called Ouya (that never took off).
No matter which direction Alibaba opts to go with its gaming business, big bucks are at stake.
Big Money at Stake for Alibaba Stock
IIMedia Research Group reports that China’s online gaming industry alone is worth nearly $12 billion per year, and growing at an almost triple-digit pace this year. Industry-insight provider Newzoo says when adding console games and PC games to the mix (and bear in mind, the lines between console, PC and online games are increasingly blurred), the Chinese gaming market expands to a $27.5 billion enterprise.
Though it’s still in its infancy, eSports as an entertainment business will generate just under $700 million in revenue this year, but is expected to swell to a $1.5 billion industry by 2020. What the eSports outlook from Newzoo doesn’t factor in is all the ancillary revenue the fledgling industry indirectly drives, as would-be competitors try to play their way into a tournament.
The likely focus for Alibaba’s new gaming unit will be mirroring the development of multiplayer online gaming, akin to what Tencent and NetEase have already established. Clues pointing in that direction are the fact that former NetEase COO, Zhan Zhonghui, will be taking the lead of the new division, and that two of the leads for EJoy’s multiplayer-hosted games like Fantasy Westward Journey and World of Warcraft are also remaining in place.
There’s more down the road though. World of Warcraft is already a popular eSports game, and Alibaba has convinced overseers to include eSports as a medal-awarding competition at 2022’s Asian Games to be held in Hangzhou. The company is also petitioning to add video games as an official Olympic sport. In fact, it’s already sponsored several hundred such events and clearly sees enough there to up the ante, so to speak.
Bottom Line for Alibaba Stock
Realistically speaking, much like its Chinese and American counterparts, Alibaba may not exactly know where it’s going with video games. Nobody can accurately predict what this ever-changing business will look like even just five years from now. Alibaba simply knows there’s opportunity, and it’s better to stake its claim now rather than later by buying a presence and securing the talent it needs to make sure it can succeed no matter what the future holds.
Whatever that future looks like, Alibaba stock holders can take comfort in the fact that the company is quickly catching up on this previously ignored front.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.
