The Business Model of the Gaming Industry
Recently, I did a case competition about video games. That raised my interest on the industry and growing trends. Currently, the gaming industry is poised to generate 152 billion in 2019, with U.S overtaking China as the world’s largest market by revenues at 36.9 billion, and APAC being the largest region by revenues. As one of the fastest growing industries with a CAGR of 9% between 2018 and 20221, the entire industry has received 9.6B in investments over the last 1 and a half years. Most gamers don’t really think about gaming from a business perspective, but it is becoming such a prominent and dominant entertainment industry that it is attracting more and more professionals.
We must first break down the value chain for gaming. Games are developed from game engines, which are usually licensed by game engine developers. These game developers then rely on publishers to transform games into a purchasable form. Games are then distributed through two main channels- retail/physical and digital/online. Distributors, called storefronts, are responsible for selling a variety games to the consume across three main platforms: PC, mobile and console. Interestingly, some gaming formats, like console gaming, have their own subscription-based game distribution services that work independent of retail and digital distribution stores. Examples are Xbox Pass and PlayStation Now.
Interestingly, this value chain is not exclusive. Gaming format owners like Xbox provide game hardware like the physical consoles, but also own distribution of games. This is an extremely profitable model, generating 10B in 2018. As more and more people own smartphones, mobile is shown to become the most profitable game platform, almost generating 50% of global games market. Virtual and augmented reality are also some rising formats in gaming- VR headset producers like Oculus, HTC and even Sony are market leaders specializing in VR gaming headsets- In 2018, VR market grew 30% to reach a revenue of 3.6 billion.
A threat that attempts to eliminate format-based gaming is cloud gaming. Cloud gaming is a service that allows the provider to process games in inhouse servers and hardware and stream it to your device. The main idea was one could play high quality computer games on a smartphone by linking only a controller without buying hardware. Currently, though this technology is only in alpha stage, every big tech giant like Microsoft, Google, Amazon, Sony but also smaller third parties have announced their own cloud gaming services. Cloud gaming implies that dedicated hardware like consoles are no longer necessary to have a high-quality experience- PCs can still be enjoyed with its uses outside of gaming and unique keyboard and mouse controls. Cloud gaming is projected to be an 8B industry by 2025, growing 800% from current value in 2019.
The industry for games is quite unique. In the past, big title games, known as “Triple A” games, were released by large publishers at high prices and caused the market to be top-heavy. Examples are Call of Duty, Halo and Grand Theft Auto. However, a recent trend has shifted more towards Indie developers, as well as free-to-play games with microtransactions. Microtransactions are in-game purchases that players can buy, such as cosmetic items or in-game currency. From an economic perspective, the market is currently too saturated with games that have little points of differentiation- creatively unique games with a long-life cycle, meaning players continuously return to the game, are possible with microtransactions that are continuously being released. A key example of a game like this is Fortnite, a cross-platform battle royale which made 2.4B revenue in 2018, more than any other game that year .
Some supporting industries for gaming are esports and streaming. According to PWC in Figure 2, Esports is one of the fastest growing entertainment and media industries. Like games such as chess and board games, competitive video game athletes are not physically, but mentally adept. And just like how basketball and soccer fans play the sports themselves, most that watch esports are gamers- making top level competition much more exciting.
Globally, Esports is streamed on Twitch. Acquired by Amazon in 2014 for 970m, Twitch is now estimated to be worth 3.5 billion. Twitch began as a platform for casual game streaming but has developed in a global platform for esports viewership, and an advertising platform. Of Twitch’s popular games, Fortnite and League of Legends remain some of the highest viewership games.
So, what does this all mean for the gaming industry? Taking a step back and looking at the bigger picture, the industry is complex, rapidly changing and growing, due to consumer preferences and technological growth. The future is uncertain- maybe in 10 years, people will be living and gaming in virtual worlds, who knows?
