The Impending Golden Age of Interactive Entertainment
The best is yet to come for the interactive entertainment industry. This is the message I’ve been shouting from the rooftops over the past year, traveling the globe to meet with developers, CEOs, investors, and consumers of this incredible medium. Despite the media headlines, impressive numbers (over $100B generated in 2017 alone) and breakneck speed of innovation, many of us just don’t take the time to stop and marvel at just how far this industry has come. The speed of change is so brisk that business thinkers and innovators struggle to keep up, while others find themselves paralyzed by the complexity of the industry’s many moving parts.
The goal of this piece is to elaborate on why I believe we’re on the cusp of a golden age in interactive entertainment and provide some background on why the industry behaves the way it does. I’ll conclude with some thoughts about where it’s all headed and what my team and I are doing about it.
Interactive Entertainment is Big and Growing Bigger
The interactive entertainment industry has only been around for 45 years, but has already exceeded music and print, and is knocking on the door of the film industry. Growing at a clip of around 10% every year since 2010, interactive entertainment continues to capture an ever-increasing mindshare around the globe. The examples are many: Pokémon Go approaching the one billion download mark, the League of Legends 2017 World Championship reaching 60 million unique viewers, and Chinese mobile juggernaut Honor of Kings hosting over 100 million daily active users during Chinese New Year in 2018. But these instances only skim the surface of how supercharged — and mainstream — this industry has become.
The interactive entertainment industry is undergoing nothing short of a renaissance, fueled by innovations across the board. Unshackled developers are creating new game genres and new business models at an amazing clip and reaching new audiences in the process. The “early access” approach to open and iterative development continues to foster successful games. The free-to-play model has finally broken through on console with Fortnite, just as the game is experiencing explosive growth on mobile — the most unlikely of platforms, given the genre. Microsoft’s subscription-based “Game Pass” service had its first hit with Sea of Thieves. Developers are finding success selling premium games in China. And not to be left out, Nintendo has again sparked fresh optimism in the dedicated gaming hardware space with its Switch, the fastest-selling console of all time. The good news is not just limited to content: extensions such as esports, interactive streaming, and development tools (both client- and cloud-based) continue to grow into powerful businesses and resources that further bolster the industry.
And here’s the thing: I believe this is just the tip of the iceberg.
A History of Growth, Fueled by Innovation
To best understand the interactive entertainment industry, think of it as the product of two parents: technology and creative arts. Its technology DNA means it develops rapidly and is product-focused. The emergence of the internet opened the door for online multiplayer games, for instance, and the rise of always-connected and powerful smartphones sparked unprecedented global adoption (and acceptance) of games. Technology will continue to drive much of the industry’s further pursuits, including cloud computing, machine learning, XR, and blockchain.
We mustn’t forget that the industry also grew out of creative media and arts, which explains its fast-moving, dynamic, and seemingly hard-to-predict tendencies. The industry’s creative genes drive its desire to innovate, explore new methods of storytelling and creative expression, and ever-changing ways to play and pay. It was only when I began to think about the industry as a child of technology and creative media that its behavior and growth started to make sense.
After spending years doing deep research and generating unique insights, my group could no longer ignore one unavoidable truth: smaller, younger companies have a consistent history of success and making waves in interactive entertainment. Doom (premium PC gaming and online distribution), Ultima Online (massively multiplayer gaming), Counter Strike (digital PC marketplace), Minecraft (user-generated content and education tools), League of Legends (MOBA genre and esports), Clash of Clans (social smartphone gaming) and Twitch (streaming) are just a few examples of how smaller players — not large corporate initiatives — forever changed the industry. Not surprisingly, all but one of the makers behind the aforementioned products have been acquired by larger companies in an effort to stay competitive.
The frequency of small, player-led innovations is directly tied to the business environment at the time, often sparked by the advancement of underlying technologies, as well as the rise of open and unsaturated marketplaces.
Further Growth on the Horizon
The interactive entertainment industry not only continues to grow, but sales records are being broken at an even faster clip. I’ll just pull from one of many examples: between 2005 and 2010, World of Warcraft took five years to increase monthly gross revenue to $80M, whereas Honor of Kings, released in 2015, took only two years to increase its monthly gross revenue to a staggering $500M. When discussing these types of numbers with friends, the most common questions I receive are whether the industry has hit a ceiling — something I emphatically refute. Again: tip of the iceberg.
In the short term, we only have to look to supply and demand to see where all this is headed. The democratization of tools and technology — paired with open digital marketplaces — enables the creation and distribution of better, cheaper, and more diverse content. An ever-increasing number of talented people are becoming independent developers and taking advantage of these new opportunities, increasing supply. All of this is fueled by demand as more consumers — especially younger generations — engage with interactive media, and have plenty of spare time to do so. A decade ago, who would have thought that a lone programmer in Vietnam would develop and self-publish a game that would take the world by storm? Much like the game itself (Flappy Bird), this is a simple yet powerful example of this new world we’re now living in.
Looking slightly further into the future, it’s easy to imagine how even better tools, wider proliferation of game-ready devices, increasingly pervasive cloud-based technologies, faster connectivity, deeper social elements, emerging markets, and more diversity in both thought and cultural backgrounds will lead to further growth and innovation.
Incredibly, the industry has a powerful driving factor that only requires one thing to unlock: time. As the world’s game-savvy population gets older, and those individuals move into more influential positions in the workplace and replace the older CEOs and politicians who have little or no experience with games, we’ll be living in future where interactive entertainment will no longer be thought of as simply niche or nerd culture. Rather, like television in the 1990s, interactive entertainment will become ubiquitous.
For some consumers, interactive entertainment will also be considered “work,” as an ever-growing number of people participate in in-game economies and lifestyles, while some will even rely on virtual worlds and relationships to derive meaning in life. If you believe as I do that, due to automation and other efficiencies, future generations will work fewer hours and thus have more time for entertainment, then the future of interactive entertainment looks very bright indeed.
Investment Opportunities Exist, But Many Struggle to Capture Them
Interactive entertainment has grown at an incredible pace, despite minimal contributions from traditional venture money. Why is it that, amongst the thousands of private equity and venture capital funds that exist around the globe, only a handful actively invest in this medium?
Above all, investors struggle to develop a strong thesis about interactive entertainment. Especially when looking at investing in early-stage companies, many investors believe the business moves a little too fast, evolves a little too quickly, and behaves too erratically to quantify and predict. These are smart people who are willing to take risks when they can assess them, but typically avoid investing when their ability to evaluate investments is clouded in uncertainty. Put simply, they fear the unknown and struggle to do much about it.
Some investors have taken a proactive approach to understanding the industry, while others simply lament how impenetrable the business tends to be, making it hard to separate the good start-ups and founders from the bad. The industry’s somewhat insular nature can also explain why some remarkable trends and business ideas aren’t discussed publicly out of fear of upsetting the industry’s incredibly impassioned (and at times activist) consumer base. Finally, there’s a long history of investors struggling to provide meaningful advice or value add post-investment, which again not only requires a deep understanding and personal network, but also a willingness to continually learn and appreciate the industry and its quirks.
Why We’ve Created Makers Fund
I believe in the long-term importance, success, and opportunities in interactive entertainment, which is why my team has formed a new equity fund called Makers Fund. It’s an effort that we believe will change the way we all think about investing in this medium. We see incredible opportunities to help spur further growth and innovation, by enabling smaller teams to do big things, by providing capital, access to our global network, and strategic guidance — especially in Asia, which many founders typically avoid for fear of risk and uncertainty. Our tact is very much our team: Makers Fund is a group of passionate gamers, with backgrounds in venture capital, consulting, finance, and actual boots-on-the-ground game development.
Our confidence is borne out of what we’ve witnessed in the past decade, including the incredibly resilient and adaptable nature of entrepreneurs who have flourished despite a severe lack of traditional capital resources. Crowdfunding, early access, multi-platform development, friends and family rounds are among the avenues founders have taken to jumpstart their companies and big ideas. We believe these are strong indicators of a healthy and vibrant industry that frequently acts on its creative (and passionate) DNA to create, innovate, grow, and delight consumers around the globe.
To date Makers Fund has invested in eleven companies across North America and Europe. This is an exciting time for our team and partners, in large part because we believe Makers Fund will incite positive change in this industry we care so deeply about. While the size of the fund is healthy, we alone cannot supercharge the industry’s growth trajectory. Rather, if the fund proves successful, we hope it inspires other investment institutions and corporate strategics — both within and outside of the industry — to fully engage and effectively navigate this dynamic, fast-moving business.
In an effort to help bridge the knowledge gap, my team will release a series of analyses and insights over the coming months, including best practices, investment return profiles, and trends worth paying attention to in this space. You can see the first of such articles here .
In closing, I believe we’re on the cusp of a golden age of interactive entertainment. As tools become more accessible; as creators become more diverse and skillful; as digital marketplaces continue to open and expand; as monetization methods continue to evolve; as ancillaries like esports and streaming continue to capture a wider audience; and as gaming-ready hardware makes its way into the hands of nearly every teenager and adult on the planet, the world of entertainment as we know it will evolve into something so ubiquitous as to become almost unrecognizable. Together, let’s continue to learn from and enable those who will take us there.
About the Author
Born in Hong Kong, Jay Chi is a lifelong gamer who built the games practice at a top international consulting firm. Over the past sixteen years working in technology and interactive entertainment, he has advised over one hundred game companies across the world, including strategic, product, and operations.