Three things the video games industry will have to change in 2018.
Going mainstream means being held to a higher standard. Get ready to be scrunitinized.
The new year will bring some important changes for games makers.
After several decades on the fringes of the industry, video games have become a mainstream form of entertainment and now attract billions of people worldwide. Valued at over $100+ billion annually video games now stands on equal footing with movies, music, and television in terms of consumer time and spend.
Up until now, game companies have remained largely insulated from many of the influences that affect firms in other entertainment markets. But given its new status the changes that are currently taking place at 30,000 feet in entertainment will affect the games industry from this point forward.
One of those is consolidation. Several large media firms are currently trying to offload underperforming assets, such as in the case of NewsCorp. Elsewhere distributors like AT&T, Amazon, and Netflix look to acquire exclusive content, thereby continuously pushing up the cost for content. Unsurprisingly, this means that many firms will look to merge or acquire in pursuit of economies of scale.
Another one important trend is the growing realization that audience preferences have changed over the years. Cable TV subscriptions are declining as is viewership, forcing the worldwide ad business to look for the new thing. As brands seek out better ways to connect audiences they are discovering that what worked before is popular no more. Interactive entertainment is uniquely positioned to help connect the dots.
This means the way that game companies have been doing business up to this point is going to change. Specifically, the games industry will experience a much higher degree of scrutiny in at least three ways: communicating better with its customers, its investors, and its partners.
The transition to a service-based model in which game companies can sell add-ons and micro-transactions is not a smooth one for everyone. Striking the right balance between customer satisfaction and aggressive monetization is proving a stumbling block for legacy publishers like Electronic Arts. Its recent difficulties following the release of Star Wars Battlefront 2, which effectively locked all of the interesting content away in randomized lootboxes available for purchase, evidenced a publicly traded firm flying too close to the sun.
Neither consumers nor investors were amused: EA’s stock price dropped 9 percent. More so, several governments spoke out against the practice and to quickly escalated the rhetoric by calling it gambling. This is not a good look for an industry that is presumably mainstream. And it is therefore also reasonable to assume that during future investor meetings EA and companies like it will face increased scrutiny with regard to their monetization strategies.
MiFID2 what now?
On January 13th new banking rules go into effect. Previously brokerage firms that handled transactions from investors in publicly traded shares also provided company research as a courtesy. Known as sell-side analysts, people like Michael Pachter from Wedbush or Doug Creutz from Cowen advise large institutional investors on the performance of companies like EA, Activision Blizzard, Take-Two Interactive, Sony, Nintendo, Microsoft, Tencent, NetEase, and so on. What pays for their services is part of the commission fees that brokerages charge when making transactions.
Starting next year the rules around compensation for research services like the one provided by sell-side analysts are changing. This is known as the new Markets in Financial Instruments Directive, or MiFID2. Instead of getting research for free, investors will have to pay for directly. What this effectively means is that brokerage firms will either have to eat the extra expense or cut analysts.
Game companies have long relied on these sell-side analysts as important liaisons in communicating to their investors. As many of them will either be reassigned or plainly out of a job, it will fall to publishers and platform themselves to provide transparency on their activities or risk having inexperienced amateurs on the Internet do it for them.
And public opinion will matter, in particular as it turns its attention towards generating ad revenue. For free-to-play games, advertising promises to become a healthy source of revenue. By some estimates, Activision Blizzard’s subsidiary King Digital could generate around $200 million in revenue next year from advertising, adding around 3% to its current bottom-line. More so, with gaming video content and esports touted as key growth drivers, advertisers will want to know that their brand is safe.
Based on its history things are looking up, however. The relentless criticism that game companies faced during the. earlier years, instilled a tendency toward self-regulation with regards to rating systems and the conversation about video games and violence. Up to this point the games industry has enjoyed a lot less scrutiny. With its new position as a mainstream form of entertainment also comes the responsibility to better communicate. Especially publicly traded firms would do well to commit themselves to more transparency.