We all know that the gaming industry is booming, more and more people start playing video games and contribute to the industry revenues. Companies have raised $91.8bn in 2015 which is expected to increase by a compound annual growth rate of 6.6% by 2019. But where exactly is the money coming from? Are current gamers spending more, or is the market expanding?
The US has been the backbone of the gaming industry for decades and has been responsible for approximately one fifth of the industry revenue in the past couple of years, but its growth is slowly coming to a halt. An annual growth rate of 4.4% (mainly driven by smartphone) is still nothing to dismiss, but by no means does it account for the huge leap the industry is expected to take.
According to forecasts, the market share of both PC and TV/console gaming are expected to shrink a few percentage points, which isn’t exactly an indicator of industry growth. However, smartphone gaming should be able to overtake PCs for the first time in 2016, which suggests a shift in consumer behavior.
What is then the driver of this expansion?
In 2016, 58% of growth of the global market is expected to come from none other than the Asia-Pacific region. China will contribute around $24.4bn, more than twice as much as 4 years earlier ($10bn in 2012). Since PC revenues will likely continue to diminish, the source of the growth will be smartphone gaming.
It is clearly visible that smartphone gaming must be taken seriously. Some companies, such as Activision Blizzard have seen this coming and took steps to solidify their position in the smartphone scene. This was partly done by acquisition of smaller developer companies (the biggest notable example is King, developer of Candy Crush Saga, obtained in early 2015 for $5.9bn) and by focusing development effort on their cross-platform title, Hearthstone: Heroes of Warcraft. Other, largely unknown companies are also heavily investing in mobile. Tencent Holdings Ltd., a Chinese tech giant valued at $197bn (owner of the massively popular MOBA, League of Legends) has been aggressively investing in mobile in the Western hemisphere, making it the fastest growing part of its business.
We must also not forget about the silent winners. Apple is collecting a royalty fee after every single app purchase or microtransaction on the AppStore, making serious bank for the company. The revenue acquired by Apple this way is so immense that in 2015, it had surpassed that of Electronic Arts – publisher of the popular PC shooter franchise, Call of Duty and any Star Wars games.
Microsoft has also been collecting a good amount of buck through its console platform, producing an even higher increase in revenue than Sony. This is especially interesting, since it has only sold 18 million Xbox Ones in contrast to the Playstation 4’s 40 million.
Perhaps what’s even more important than plain numbers, is the fact that the gaming industry is currently undergoing some fundamental changes. Complementary sources of revenue have opened up with the increasing popularity of esports and games are becoming more of all-around entertainment franchises rather than single game titles. Hundreds of thousands of enthusiasts watch the biggest gaming events and look at sponsored content and ads. This allows gaming companies to create a market for everything from esports event tickets to team jerseys and merchandise.
What do you think the next step will be? Will mobile continue to dominate? How will the social factor of games contribute? How do you think VR and other emerging technologies will contribute to the industry? What should companies focus on to make sure they don’t fall behind?
Sources:
http://revenuesandprofits.com/how-microsoft-makes-money-understanding-microsoft-business-model/
http://vgsales.wikia.com/wiki/Video_game_industry#cite_note-bigfish-52
http://www.cnbc.com/2016/04/22/have-we-just-found-out-how-bad-xbox-sales-are.html
http://www.pocketgamer.biz/list/62773/top-50-mobile-game-developers-of-2016/entry/10/
http://www.pocketgamer.biz/list/62773/top-50-mobile-game-developers-of-2016/entry/8/
http://www.pocketgamer.biz/news/62233/activision-blizzard-to-buy-king-for-59-billion/
http://www.theesa.com/wp-content/uploads/2015/04/ESA-Essential-Facts-2015.pdf
https://newzoo.com/insights/articles/game-revenues-top-25-public-companies-14-2015/
To be fair, mobile will continue to have relatively higher rates of growths because adoption of mobile is simply higher, especially in East Asia/Oceania compared to much more expensive consoles. On top of that, mobile applications are easier to build and there are a big variety of small game developers solely focussed on mobile as gaming platform. However, I do believe that PC gaming will remain competitive as companies are beginning to realize that buyer power is increasing. In this case the community, is becoming increasingly demanding and even hostile if game developers fail on their promises, as can be seen with the recent launch of the highly hyped game No Man’s Sky, which had a terrible negative public backlash. With the emergence of new online customer touch points and the community playing a bigger role (co-development), I think more and more value will be created in the long-term, especially with the introduction of new technology like VR.
Hi Jovan,
Your point is completely valid, smartphone is indeed on a path that is not sustainable in the long run and like you said, PC gaming will continue to be relevant and it’s going to become harder and harder to tell how much money it’s making to companies because of the additional streams of revenues (think about gaming events: sponsors, event tickets, even the bufet) due to the fact that they are becoming entertainment franchises.
In my personal opinion, No Man’s Sky was overpriced even compared to a decent game, and although I was interested in it at first, it was quickly visible that it’s one of the biggest blunders of development history. Gaming companies now need to be careful about the promises they make and think about whether they can deliver, which creates a sort of transparency that is indeed going to help value creation in the long run.
Hi Balazs,
Thanks for your post! Although there is currently a large hype with virtual reality, I don’t believe that it will impact the industry as much as PC, Console and Smartphone gaming. The main customer category of the VR trend is currently the early adopter, who share the characteristic of being less concerned about price and more concerned with the opportunity of trying new things. Considering the high price of this new technology ($599 and up), the customer base is considerably a lot smaller than with other gaming technologies. As multiplayer games are often played amongst friends and strangers, unless the price decreases, I personally don’t think that the VR will become as popular as PC/Console/TV/Smartphone gaming.
– https://www.plycode.com/blog/three-reasons-you-should-be-an-early-adopter/
– https://www.cnet.com/news/the-real-cost-of-virtual-reality/
Hi Shannon,
I agree with your opinion that VR isn’t going to change much in the upcoming few years. The technology can still be considered in its infancy in my opinion, and like you said, the social factor of games is increasing. More and more new players join gaming just for the sake of playing with their peers. After all, we have seen that it was playing with friends and family and location-based gaming what made Pokémon Go so popular.
http://www.gamesindustry.biz/articles/2016-09-13-there-is-a-formula-to-pokemon-gos-success-but-its-not-ar
Hi Balazs, interesting post about the gaming industry. In my opinion, mobile gaming combined with VR will change the gaming industry completely, since mobile phone are chosen as basis for the VR experience. However, this does not mean that console gaming will be totally wiped out. On the contrary, since consoles are much more powerful in graphics and this keeps people buying consoles for the better experience during gaming. Furthermore, I think the combination of VR and mobile phone will be somehow connected with the console, which leads to a complete integrated gaming platform. Actually, this leads to a disappearing of the boundary between the mobile platform and the console platform.
But to conclude this guessing of the future of gaming, the gaming industry is definitely on the edge of a certain disruption.
Dear Michiel,
console and mobile converging towards each other is an interesting notion, however, I think that there is a huge obstacle that needs to be overcome. It is relatively easy to develop apps for smartphones that talk to your console, it has been done in the past (Fallout’s Pip Boy, Playstation app, etc.), but seamless intergration of a smartphone-based VR gear is still not around the corner for a couple of reasons.
The first and foremost reason is that both console manufacturers have to be on board for this to happen, which is problematic, since both have already went for a supported gear – Microsoft for the Oculus Rift, and Sony for the Project Morpheus. There is a rather big difference in quality even though the Oculus Rift is supposed to be a professional piece of gear, and no manufacturer would dare to open their platform up to cheap, smartphone-based VR just because the general public would think that it’s the console’s quality that’s lackluster. This reason is similar to what made Samsung remove the microSD slot from its phones – people would use cheap storage which impacted the phone’s performance, and would attribute the change in performance to the phone itself.
The boundaries between console and mobile are therefore hard to blur due to the consoles being closed platforms. It will always be up to the manufacturers to decide what to allow and what not to, and in my opinion, cheap VR will not be among them.
http://www.businessinsider.com/microsoft-sony-virtual-reality-2015-6?international=true&r=US&IR=T
Thanks for the post Balazs. It seems to me gaming industry is indeed booming, however I didn’t know PC was on the decline. It surprises me smartphone games are getting so popular, what do you think the reason for this is, considering all the drawbacks one has when playing on a smartphone. I personally think the gaming industry is going to focus more on the users and services like streaming and VOD. This is a relatively new concept which can generate extra revenue for the game developers and gaming organizations. If VR actually succeeds and will become a hype it should only boost the industry growth. Companies need to focus on constantly innovating their products and services.
Dear Ming,
It is indeed a surprising fact but we must not forget that this is in comparison to the entire market. Since the market is heavily expanding, the number of people playing on PC is actually not decreasing, it’s only their proportion to the entire gaming market and since mobile still has a long way to go in the Asia-Pacific region, this will likely continue in the upcoming years. This does not mean that PC is declining, and like you pointed out, streaming is becoming the next big form of entertainment for gamers.
As for your question regarding why smartphones are becoming so popular for gaming, I have the following assumptions.
– Smartphones are incredibly cheap in the Asia-Pacific region due to the fact that they are being manufactured there.
– Smartphones are bought by consumers anyway without any intention of gaming. When buying a console or a PC that’s suitable for gaming, your primary goal with the purchase is different. But when users realise how fun it is to play a few Hearthstone matches for example in the subway during commute, they start playing despite the inconvenient size of the screen and the impact it has on battery life. I believe that this is also true for the Western hemisphere, only to a lesser extent.
Hi Balazs, while I do believe that the mobile gaming industry will continue to grow as a source of revenue for gaming developers, I think PC gaming will continue to be a sustainable industry as well. As still more and more people are using smartphones each and every day, the potential target group for mobile games keeps increasing. Therefore I am not surprised that the mobile market all together is outperforming the PC. However I do believe the target audience for both platforms is very different. Mobile gamers tend to be more casual gamers. The games typically require less commitment than PC games and the games also are not as rich and immersive as PC games, generally speaking. More “intense” games are thus made for PC or console such as the Xbox or Playstation. Smartphones limit certain games in terms of screen size, button options, and various other attributes. They are therefore perfect for simpler games, however I believe that fans of more complex games will not soon switch to solely mobile gaming. Therefore my prediction is that both mobile games and games for more traditional platforms, such as PC and Xbox, will coexist. I was wondering wat your opinion is about this?