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SINGAPORE: If you thought a computer mouse was just a molded plastic handheld pointing device attached to a computer to move a cursor around a display unit, then you’re probably not an avid fan of computer games.
Serious gamers take their gaming mouse choice very seriously.
These devices are judiciously selected by gamers for their responsiveness, weight and feel, ergonomic design, and the types of games they are used to.
Using the right mouse could mean the difference between taking home a killing streak and coming home empty-handed.
It’s not just the right mouse that can give professional gaming a competitive edge. Gaming keyboards and specialty headsets can also help take the entire gaming experience to a new level.
But these peripherals are not cheap. Together they can add up to hundreds of dollars, and that doesn’t even include the cost of the computer or the games themselves.
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A MASSIVE INDUSTRY
It’s no wonder that the gaming keyboard and mouse market together was worth nearly $ 1.4 billion in 2020.
It is also forecast to grow by around 8.3% annually to reach $ 2.2 billion in 2026, underscoring the potential growth of the computer games industry.
This was worth US $ 151.5 billion in 2019 and is expected to reach US $ 257 billion by 2025.
Esports athletes at the Razer SEA Games Esports Bootcamp. (Photo: SGEA)
What is most remarkable is that the global computer games industry is larger than the film and music industries combined.
In 2018, the global box office industry was worth $ 41.7 billion, while global music revenue reached $ 19.1 billion in 2018.
Consequently, there could be many options for companies that can design the right devices in this multi-billion dollar gaming market.
Key players in the lucrative peripheral market include Singapore-based Razer, Corsair Gaming of the United States, A4TECH of Taiwan, and Swiss-American peripheral maker Logitech. But unlike many of its peers, Razer, which is listed in Hong Kong, also has its fingers in other cakes.
MARGIN COMPRESSION
However, Razer’s core business is still manufacturing hardware accessories and developing software for the global gaming and esports markets.
Their electronic gadgets are often highly rated by product reviewers for their good value for money.
In 2019, Razer’s Peripherals and Systems segment, which makes laptops, keyboards, mice and audio equipment for games, accounted for 87% of its total annual revenue of $ 820 million.
This segment has grown at a compound rate of 22 percent annually for Razer, from $ 319 million in 2015 to $ 713 million in 2019, according to data from Refinitiv Eikon.
Callum, 12, poses with his new Razer keyboard. (Photo: Min-Liang Tan / Facebook)
However, the company’s gross profit only increased from US $ 100.3 million to US $ 143.9 million, which is equivalent to a compound growth rate of 9% per year.
This would imply that margins have been reduced. In 2015, the gross profit margin for laptops, mice, keyboards, and mouse pads was 31.4%. By 2019, it had contracted to 20.2%.
The margin compression is due in part to the change in Razer’s product mix. You make significantly less profit for every dollar of laptop sales compared to your mice, keyboards, and audio equipment.
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In 2019, the margin was 26 percent for peripherals. It was only 10 percent for laptops.
But sales of those lower-margin laptops have grown from 2 percent of revenue in 2014 to a third of total turnover in 2019.
SOFTWARE FOR RESCUE
The slow erosion of the margin could be a problem for Razer, if not for its fast-growing software and services platform that attracted around 80 million registered users in 2019.
Eight out of 10 of those users are under the age of 35. This segment, which includes game software and payment services, has grown faster than peripherals.
In the last four years, revenue has increased sevenfold, from US $ 37 million to US $ 269 million.
Screenshot of the Razer online games store.
This part of Razer’s business includes its Razer Fintech which provides virtual credits and payment related services.
It’s understandable why Razer would have liked to build on its success in financial services through one of Singapore’s virtual banking licenses. It could have opened a new commercial channel for the company.
Unfortunately, his application was not successful.
WHERE NEXT?
That said, Razer hasn’t been deterred.
It intends to roll out Razer Youth Bank in other countries in the region where the digital banking application processes are expected to start soon.
It’s also looking to Europe, the Middle East, and Latin America, where regulators support innovations to better serve unbanked and underserved segments of the economy.
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Razer has also joined forces with Tencent to collaborate on hardware, software and services for the general e-sport and gaming user base.
They will work to produce more game content that makes better use of Razer’s existing range of peripherals and accessories.
The first person to get their hands on the Razer phone and CEO Tan Min-Liang’s autograph was in line before 8 a.m. at the event.
This segment could be beneficial when cloud games become more popular, in which a person plays a game remotely from a cloud instead of traditional games, in which the game is run locally on the game console. or the user’s personal device.
As with other game producers, Razer is optimistic about cloud gaming and believes it could be a “fourth vertical” for the company.
Currently, cloud games or games as a service are still in their infancy mainly due to the delay between a user’s inputs and when it actually happens in the game.
While existing cable speeds can meet downstream requirements for the home, cloud gaming also needs high upstream performance.
In fast-paced video games, this latency could detract from the player’s enjoyment. But 5G could change all that.
According to Deloitte, cloud gaming could take a bigger share of the game delivery market with 5G unleashing demand by providing speed as good as cable or fiber. It found that four in 10 young people said that 5G would change the way they use virtual and augmented reality.
That “fourth vertical” could be Razer’s path to ultimate profitability, which has eluded the company since it was formed.
However, it is not urgent that Razer be profitable, given that it has more than 500 million dollars in cash.
But Razer is neither a startup nor a company waiting to be listed, which would provide a payday for its early investors.
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It is already a listed company accountable to shareholders who will judge its performance based on traditional metrics such as return on equity, return on equity, and price / earnings ratio, all of which are based on its ability to generate consistent financial returns.
A profitable, debt-free Razer could be a formidable player in a fast-growing industry that shows little sign of slowing down.
It’s true that some tech companies have deprioritized earnings in search of growth. But growth and profitability are not mutually exclusive. It is possible to achieve both.
What’s more, not all companies can continue to ask shareholders for more cash to fund unprofitable growth.
David Kuo is the co-founder of The Smart Investor and previously the CEO of Motley Fool Singapore.
