Newzoo expects the 2.5 billion gamers around the world to create USD 152.1bn in revenue in 2019, up by 9.6% year on year. And it’s forecast to reach close to USD 200bn by 2022. Through Third Bridge interviews with specialists working in this sector, we have gained insights that investors can use to keep abreast of what’s important now and what to expect next.
According to a former head at Unity Analytics, mobile is “taking over”. It generates just under half of the gaming market’s revenue, with 2.4 billion people expected to play games this way in 2019. A cause for this shift is that, rather than just casual gamers, developers are targeting more “serious” players who previously didn’t consider this format. More advanced mobile technology and high-resolution titles are changing gamers’ perspectives, for instance, Battlegrounds and Fortnite. These titles are cross-platform, which has been around for a while but is gaining traction. It means that games can be accessed via PC, mobile and consoles. This is something that could change the gaming landscape in future, as publishers will have to share titles.
However, casual gaming should not be underestimated. In terms of player numbers, Candy Crush is the most popular mobile game: in 2018 it made USD 1.5bn, with players spending an average of USD 4.2m every day. It has double the players of the second-place game, Pokémon Go, while Fornite comes in third place. Casual games can also target different demographics. As one expert points out, casino games, and others like these, generate the majority of mobile gaming revenue. And women are particularly drawn to these.
Another important facet of mobile to note is free-to-play (FTP) gaming, which a former director at Electronic Arts calls the “one single big trend to watch”. This ties in with cross-platform play, where gamers download titles for free and pay for extras. Fortnite, created by Epic Games, is a prominent example. However, one limiting factor is that not all genres work with FTP, say narrative-based. It also doesn’t always offer the same quality as premium, AAA games. But this means that FTP games could be more suitable for attracting younger and more casual audiences.
In-game monetisation is a major way of creating profit that has arisen in the past decade or so. It can be found in FTP and paid-for titles, across casual and serious games. This means that not all content is released immediately, and players have to pay extra for content and customisation, for instance characters or weapons. A former C-Level Executive at Ubisoft estimates that it can make up 35-45% of revenue, potentially even up to 50%. Indeed, in the first half of FY18, Ubisoft made USD 297m from what it calls player recurring investment. Moreover, monetisation extends the profitability and playing life of games.
Previously most money would be taken directly after publication, whereas content can now be released over subsequent years. However, this must be done carefully, especially with paid-for games. The specialist from Ubisoft says that the “only threat is that a publisher would become too greedy”. Gamers catch onto what they see as cash-grabs, and companies have faced backlash before, for example EA’s Star Wars Battlefront II. Although the game cost USD 60, gamers had to pay for characters such as Darth Vader and Luke Skywalker, or spend vast amounts of time playing to unlock them. As a result of the controversy, the company apologised and removed all in-game purchases.
Cloud and streaming are nascent in the gaming world, but more than one expert pointed to this as something to watch. Previously, people would buy consoles and pick games supported by it, upgrading their hardware every 5-6 years. But cloud and streaming allow console-free gaming, and this has several advantages. Firstly, it costs less. Consoles are expensive, but for cloud and streaming people just need access to a screen. And most people already have a TV or smartphone. As it removes the huge initial outlay, it can also attract people who don’t see themselves as gamers. Although one expert points out that there is the potential for cannibalisation, as people who would have previously bought a console move into cloud gaming instead. Secondly, with consoles, a player is limited by past technology. A game’s quality depends on the console, so there is a quality lag before new technology comes out. However, this type of gaming depends on high-quality connections that can support high-resolution graphics, but the spread of 5G could be a remedy for this issue. Just as a buffering video is annoying, waiting for a game to load would push customers away.
The entry of big players into this arena could be a critical event . These include Apple Arcade, which was launched in September 2019, and Google Stadia, set to be released in November 2019. They are both cloud-based subscription services, but Apple Arcade supports offline gaming. Content will be important for services like these to succeed. A former head at Unity Technologies said this could be the same as Netflix, where a lot of customers go for the original content. Meanwhile, another expert hypothesised that streaming could be a way of providing better games, as more crunching power could lead to functionality not seen on consoles.
These changes seemingly leave consoles in a tricky spot. Although still posting strong year-on-year revenue growth, the other ways of gaming that are emerging, like cloud and mobile, could erode its dominance further. A specialist’s sentiment is that console makers will have to become more inclusive to survive. This could include releasing more cross-platform titles and exploring what could be done with cloud. As pointed out already, consoles are expensive. If people can obtain most of the functionalities available on consoles for less cost, there is little reason to invest in them. This means that console makers will have to create value by innovating and offering different services, although beyond cloud and cross-platform it is unclear what this could look like.
Although the gaming industry continues to evolve, reaching new demographics and exploring different ways of delivering games, success still comes down to making sure that the audience remains satisfied. Staying on top of the new technology and business models that are making this happen will keep investors on the right track.
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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