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Welcome to Thoughts on the Market. I'm Matt Cost from Morgan Stanley's U.S. internet team. Today, how new tools are reshaping the video game industry. It's Wednesday, May 27, at 10am in New York. We've all done it. At some point, you think you'll open your phone for just a few minutes, but end up in a game, a match, or a virtual world for much longer than you planned. Now that window of attention is at the heart of one of the biggest battles in Entertainment. Americans overflow. 15 years old, spend about 22 minutes per day playing games. That's more than they spend socializing, playing sports or reading. And the next big shift in gaming may stem from who gets to create games and how they do it. We expect consumers to spend more than $275 billion on video games in 2026, and the industry is reinvesting over 50 billion of that into game development and operations. But AI could cut that by nearly half today. Making a major game is expensive, slow and labor intensive. A typical AAA title, the gaming equivalent of a studio blockbuster, can cost hundreds of millions of dollars and take four years to build. More than 90% of that cost is people. So that's developers, designers, artists, writers, and many more. But AI could change that math. New tools could increase productivity multiple times over, helping smaller teams do more in less time. Even after accounting for AI, compute and asset generation exp, we think that cost savings could exceed 40%. That's over $100 million per game project across the industry. That could generate savings of roughly $22 billion. But that money won't just go straight to profits. Increased competition may erode those savings, and studios might put more money into marketing in response. So AI could still meaningfully shift value across the gaming ecosystem. The positives are clear. AI can speed up coding, asset creation, testing and many other processes that are manual today. That'll let studios spend less time on repetitive work and more time on higher value creative tasks. But it's tough for newcomers to level up. AI does open the door for new players, but we think the industry looks more insulated from near term disruption than the market fears. Especially for companies with strong IP and advantages in live operations, data and distribution. AI can help generate worlds, characters and digital assets, but great gameplay is harder. Gameplay is the feel, the challenge, the feedback and the fun. Models still struggle to measure that, let alone deliver it consistently. Live operations are another moat for established gaming companies. Many successful games don't end at launch. Teams run them for years through updates, events and passionate communities that skill is hard to copy, and often it determines whether a game becomes a lasting franchise or fades quickly, so gradual integration of AI looks more likely than overnight replacement. Finally, the largest opportunity may still be on the horizon. Beyond lowering the cost of making today's games, AI could unlock entirely new types of interactive experiences that didn't exist until now, and the game industry has been through this process before, when new technologies like smartphones changed games forever. But ultimately, the prize is still the same, building something that people can't stop playing. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.
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