Business Breakdowns: Gaming Consoles Part 1 — The Thesis

Date: January 15, 2025<br> Host: Matt Reustle<br> Guest: Siya Kamali (Founder & Fund Manager at Skycatcher)

Episode Overview

This episode kicks off a multipart series dissecting the business and investment theses behind the video game console market. Host Matt Reustle is joined by Siya Kamali, whose firm Skycatcher focuses on the Internet “frontier” and places a strong bet that video game consoles are entering a paradigm shift—from hardware sales to an app-store-driven model. This first installment paints a broad overview: the market’s size, key players, recent shifts, and why consoles may be at a long-overdue inflection point in both business model and profitability.

Key Discussion Points & Insights

1. Current State of the Console Market

• Market Size & Players

  • Global market is approx. $50 billion annually (software and subscriptions) [05:34]
  • Dominated by three main players: Nintendo (Switch), Sony (PlayStation), Microsoft (Xbox)
  • PlayStation leads in global spend (about 50%), Nintendo has a powerful family demographic and first-party dominance, Microsoft is strong in US/EU [05:34]

• Growth & Shift in Users

  • Active user base has doubled in 10 years, reaching ~330 million monthly users [06:50]
  • Revenues have doubled over the same period; steady growth despite mobile overshadowing

“Market’s kind of doubled in the last 10 years. ... In terms of revenue, similar, you've seen revenues for that industry double.” — Siya Kamali [06:51]

2. Mobile Versus Console Dynamics

• Mobile Surge & Its Effects
  • Mobile gaming is roughly half of the $220B total gaming market, boomed post-2010, but consoles have shown resilience, maintaining steady growth [08:30]
  • Core gamers (console/PC) have higher engagement and spend than mobile gamers

"Where the spin power is in terms of time for money, there's much better value in console gaming." — Siya Kamali [09:24]

3. Evolution of Business Model: Physical to Digital/App Store

• The App Store Analogy
  • Consoles have shifted from physical disc sales to a majority digital, app store-style, high-margin model—mirroring Apple’s App Store [10:43]
  • In 2015, <10% of console sales were digital; now it's 70% PlayStation, 60% Nintendo [12:03]

"Once you download the game, obviously this becomes the content library. And the content library means that, okay, I'm stuck in PlayStation ecosystem or I'm stuck in Switch or... Xbox." — Siya Kamali [11:17]

• Impact on Margins
  • Selling digitally (and taking a 30% cut) massively increases software margins versus hardware and brick-and-mortar distribution [31:45]

4. Why Now? Timing the Inflection Point

• Recent Catalysts

  • COVID-19 accelerated digital adoption and engagement
  • Major live-service games (Fortnite, PUBG) cemented consoles as platforms, not just hardware
  • Upcoming hardware (Switch 2) and blockbuster titles (GTA 6 for PlayStation) seen as major catalysts [13:55, 16:53]

• Lifetime Value (LTV) Explosion

  • PlayStation LTV: currently ~$600, projected to triple [14:14]
  • Nintendo LTV: current $300, could rise to $1,400+ with iterative (no-hard-reset) hardware cycles [14:16, 28:43]

“We estimate the lifetime value of a PlayStation customer is around $600. And we think that's kind of triple from here.” — Siya Kamali [13:55]

“For Nintendo... it's around $300, but we think it's going to 5x from here to over $1,400.” — Siya Kamali [14:10]

5. Key Revenue Streams: App Store Fees, Subscriptions, In-Game Monetization

• App Store Fee

  • Consoles take a 30% cut from all digital sales (1st and 3rd party) [19:40]

• Subscription Revenue

  • Nintendo & PlayStation subscription models enable online play + access to a rotating game catalog
  • Huge upside in converting more console owners to subscribers (50% of PlayStation users currently subscribe) [19:40]

• In-Game Purchases

  • Nintendo has been conservative but is opening up; PlayStation already leverages this with live services [25:44]
  • Nascent but growing area: in-game advertising within console titles [27:10]

6. Third-Party Versus First-Party Content

• Nintendo: ~70% of spend is first-party (Mario, Zelda), but Switch 2 expected to attract more third party [23:11]
• Sony: ~70% third-party spend, stronger third-party ecosystem; involved in industry consolidation

"Sony and PlayStation, they've always been the king at single player games. And now they're really putting more of the resources, especially for their own IP, on live service games." — Siya Kamali [13:55]

7. Competitive Landscape: Console vs. PC and Mobile

• PC Market: ~$40B, Steam dominates (130M active users). Overlap: many PC gamers use controllers [38:34]
  • No subscription for online play gives PC slight edge for some gamers [39:30]
• Mobile: No existential threat; experiences are complementary, not substitutes [36:46]
• Unique PC Strength: Fosters innovative, often lower-budget titles; many migrate to consoles after initial success [40:50]

8. Esports and Social/Generational Shifts

• Esports: More marketing/media function than direct profit, but Olympic recognition could be a game-changer [44:03]
• Gen Z Dynamics: Influx of younger players, more gender-balanced, socialize online, fueling microtransactions and sustained spend [46:33]

"There's this massive sector growth in what is known as Gen Z...they are the most important incremental spender in the decade ahead." — Siya Kamali [46:36]

9. Emerging Markets Opportunity

• Growing Markets: India, China represent massive upside; console penetration still in early innings. PlayStation building presence in India [49:09]

10. Valuation & Investor Angle

• Nintendo: Highly profitable, currently trades at 13–14x EBITDA, could re-rate like Netflix as margins grow and model matures [52:43]
• Sony: Trades at 8x EBITDA, should command higher multiple with margin expansion and stable recurring software revenues [52:43]

"Margin expansion stories are well received by the market." — Siya Kamali [54:48]

Notable Quotes

• “The idea that the console market is dead is greatly exaggerated.” — Matt Reustle [08:02]
• “One of the best business models of all time has been the App Store business model.” — Siya Kamali [11:49]
• "There's a dopamine hit when you get something that you really like. But it also can create pretty bad behaviors..." — Siya Kamali [27:11]
• “Historically...the PlayStation's operating profit was very volatile. ...But since PS4 to today, you've had a new norm where the PlayStation ecosystem has been churning out a couple billion dollars in profit annually.” — Siya Kamali [34:26]

Important Timestamps & Segments

• 05:34 — Market Size and Competitive Landscape
• 10:43 — The Shift: Physical to Digital, App Store Model
• 13:55 / 14:10 — Lifetime Value, Drivers of Growth for Sony & Nintendo
• 19:40 — Revenue Streams: App Store Fees, Subscriptions
• 23:11 — First-Party vs. Third-Party Approaches
• 25:44 — In-Game Monetization: Current Status & Future
• 36:46 — PC vs. Console: Competition & Overlap
• 46:33 — Gen Z Demographics & Microtransaction Adoption
• 49:09 — Emerging Markets Potential
• 52:43 — Valuation and Investor Takeaways

Episode Tone & Style

The discussion is analytical and data-driven, but approachable—rich in analogies (e.g., Apple App Store, Netflix) and peppered with the guest’s candid perspective as both investor and lifelong gamer. The conversation is bullish, openly stating the episode is laid out as an investment thesis with a focus on growth opportunities for Sony and Nintendo over coming cycles.

Next in Series

Episodes 2 and 3 will deep-dive into Sony and Nintendo individually, exploring their business models, financials, and competitive positions.