Right now, in the media business, geek culture reigns supreme. A video game (GTA V) is the top grossing media title of all time. The Marvel Cinematic Universe is the world’s most successful film series. And whatever you thought of a certain recent finale, the last episode of Game of Thrones was the most watched HBO show ever.
These companies build huge worlds and invite millions of people to explore them across dozens of properties: films, video games, merchandise and more. You might assume that this trend is driven by big US companies. But there’s actually a huge UK media company operating in exactly this space: Games Workshop (available to invest in on the Freetrade app).
GW has some of the most powerful and highly monetised intellectual property (IP) in the world. It’s the largest gaming company in the UK, worth over a billion pounds, and one of the fastest growing UK stocks of the last five years
Google really needs to switch to £s for UK stocks
How did it begin?
Games Workshop was started by a trio of gaming enthusiasts, Steve Jackson, Ian Livingstone and John Peake, way back in 1975. Their initial business was handcrafting traditional board games like Backgammon and Go. They also launched a promotional games magazine called Owl and Weasel.
From the outset, there was tension arising from Ian and Steve’s interest in burgeoning game trends like RPGs and early computer games, contrasted with John’s traditionalist approach. With the company tilting further towards these progressive games, John soon departed to spend his days happily whittling chess boards out of oak trees (we assume - his story kind of ends here).
Steve and Ian replaced Owl and Weasel with a more colourful gaming and RPG magazine called White Dwarf.
They also acquired the UK distribution rights to big American franchises including Dungeons and Dragons. In the 70s, these were huge properties and Games Workshop grew quickly. They also launched shops to sell their games directly to their fans.
However, their best idea was yet to come.
The Birth of Warhammer
In 1979, Games Workshop partnered with designer Bryan Ansell to found a miniature model company called Citadel and started planning the groundwork for their own tabletop game: Warhammer, which was released four years later.
Primarily designed by Ansell and his team, the game itself was built around tabletop battles fought with model armies.
To play it, you needed to buy their models and Games Workshop’s own paint to decorate them. And even once you had your army, you could keep expanding and collecting more and more. Customers had to buy them through Games Workshop’s own store network too.
Leaning heavily on Tolkien, Warhammer was set in a fantasy world filled with elves, orcs, demons and knights. Even at that early stage, the creators invested their world with depth and a range of characters. It wasn’t just a playable game but a platform for storytelling.
They also used their White Dwarf magazine to cover the game for their fans, release product updates and tell more stories. Almost like a media company pumping attention, hype and money into the models.
In 1987, they released their second major game: Warhammer 40K. At first, it was basically ‘Warhammer… In Space’ but has been their biggest hit, both as a game and a franchise.
I’m not personally a player but this is what I’ve gleaned from the story:
“Thousands of years ago, a brutal space civil war, instigated by demonic forces, wrecked human civilisation and left its semi-divine leader nearly dead. And then things got much worse.”
A gleefully nihilistic, flamboyant game of constant war, unrelenting misery and giant guns, Warhammer 40K is a bit like a combination of HP Lovecraft, 1970s heavy metal and Monty Python, with a hundred more references thrown in the pot. A grim sci-fi world with a glimmer of British eccentricity.
The fanbase actually have their own affectionate name for the ludicrously downbeat setting, ‘grimdark’, based off the game’s tagline “In the grim darkness of the far future, there is only war.”
Like its predecessor, the game is built around paintable miniatures and has proved incredibly addictive for its fanbase.
A common refrain for Warhammer fans is “it’s like crack but less affordable”. A recent Guardian article on the company called it “heroin for middle class nerds”.
In 1991, Ian, Steve and Bryan sold off the company to their management team led by Tom Kirby for £10 million.
Ian retired, got bored and unretired. He then went on to become an important video game exec at UK studio Eidos and worked on franchises like Tomb Raider. He’s still a big deal in the gaming industry.
Steve also joined outspoken video game designer Peter Molyneux at game studio Lionheart, leaving in 2006 when the company was acquired by Microsoft.
Bryan himself founded a new model business.
But Warhammer was bigger than its creators. In fact, it grew even faster without them as the company now focused relentlessly on its own games and its network of stores.
However, the late 90s saw tougher times, as new competitors arose, like Pokemon and other collectable card games.
Back-to-back CEOs performed poorly. In the early 2000s, an official Lord of the Rings themed game was released in the wake of the movies It brought a flush of new players, but the new buzz died down almost immediately once the film trilogy concluded.
The last CEO, Tom Kirby, was particularly reviled by fans for focusing on expensive collectables and greedy pricing over refreshing the game rules and driving accessibility.
It’s difficult to definitively put the blame on a particular CEO. However, when Kirby was replaced by veteran Kevin Rountree in 2013, the company’s fortunes turned around pretty fast.
Since 2014, as an investment, Games Workshop really started to take off, rising more than 7x in the last five years.
A slightly ominous warning of “uncertainties” in October 2018 saw the stock slide, but as of May 22nd, it’s now rallied to an all-time high.
Numbers from their annual report for the year ending June 2018:
- Revenue £219m
- Operating profit doubled to £74.5m (about £10m from royalties)
- £1.85 earnings per share with £1.45 dividend per share
- Dividend cover of 1.26
In terms of valuation, despite the recent share price growth and reaching £1.5b in market cap, their PE ratio hovers around 16-18. There aren’t that many truly comparable companies to judge that ratio against, but Games Workshop’s own has been higher in the past, being closer to 22-24 in 2014.
If you ask an analyst why Games Workshop is doing well, they’ll point to GW’s multiplying revenues, high margins (around 30%) and dividend record.
Meanwhile, the fans put the new success down to the company just listening to them and delivering what they’ve been asking for for years.
They’re both right.
Analysts are right that Games Workshop has a unique way of exploiting their intellectual property.
Unlike most media companies, the core of their company (the models and paints) is a high margin business with a regular stream of cash. Let’s compare it to, say, turning your IP into a movie. You have to:
- Finance the movie with a huge budget
- Lock up that money for a long time
- Market and distribute it across the world, with everyone taking a cut
- Defeat pirates!
- And maybe, at the end of all of that, still lose money
Just leaving this here
Selling physical models is a way more flexible business and Games Workshop control their own manufacturing and distribution. Cash comes in all the time and if one range does well or badly, it’s much easier to respond to demand. That’s very helpful in a world driven by fickle customer taste.
Then with the strong foundation of the main game, Games Workshop pulls in extra revenue and peripheral fans with books, games and more.
The only major part of the business they licence out is video games, which happily for them is also the area with the most potential risk. It’s a clever business model, where GW captures almost all of the value.
Fans are right too.
The company’s commercial success really does look like the result of just re-engaging their fanbase.
Since Rountree’s ascent, Warhammer has refocused on the game itself, updating the fantasy version into a new and popular series. They’ve also reduced the pricing for intro sets, making the game more accessible (though still expensive).
Finally, they’ve raised the bar on their partnerships with better quality games, including a Warhammer version of the popular Total War series.
Warhammer: Total War (War Edition): That warbeast - absolute unit
However, Games Workshop is also a volatile company, which has had a lot of ups and downs, and it still carries important risks. It looks in better shape now to withstand those challenges than in the 90s, but there’s plenty of uncertainty.
- Fickle fans
To keep growing, Games Workshop can’t just keep enthusing their mega-fans, they need to grow that base and invite new users in. It’s an expensive, complex game and a big commitment for new players.
While their hardcore fans will likely keep buying the models for a long time, recruiting and keeping new players is much harder, especially in a super competitive environment. And speaking of competition…
- There’s more competition than ever
Tabletop and board gaming has grown much more creative and popular.
Instead of being eclipsed by video games, the move to online multiplayer has given these games a more significant role, offering a social gaming experience. Now there are dozens of board game companies producing challenging new games for an adult audience.
Older games like Dungeons and Dragons and Settlers of Catan have also had a fresh run of popularity.
And, of course, Cones of Dunshire
There’s much more direct competition for GW now than any other time in the last and most of that competition has a much lower buy-in cost for players.
What next for Games Workshop?
Games Workshop have a unique, rich universe in a world where great intellectual property is more valuable than ever. And they combine that creativity with a hard-nosed, purchase-driven business model. However, it’s also an expensive and still fairly niche product - there’s an uncertainty over how much it can keep growing its borders and they are, after all, already a billion-pound company.
That said, in the grim darkness of the internet, there is only fandom. A niche universe can quickly become a sensation and Games Workshop could well keep on conquering.
Freetrade does not provide investment advice and individual investors should make their own decisions or seek independent advice. The value of investments can go up as well as down and you may receive back less than your original investment. Tax laws are subject to change and may vary in how they apply depending on the circumstances.
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