The (de)concentration of the video games industry
How the landscape of the gaming industry is quickly evolving
The gaming industry has rapidly evolved into one of the biggest entertainment industries in the world. From an estimated yearly size of ~$10B only 15 years ago, the industry has become a ~$190B business in 2021. However, its growth prospect hasn’t run out of fuel, as it is projected to have a 12~14% compounded annual growth rate for the remainder of the decade. Despite these remarkable prospects, it is still considered as a relatively young industry. As such, it has had a lot of strategics back and forth during its life, and as you may guess from the article’s title, we are experiencing an era of unprecedented strategic moves in the scene.
Our objective today is to first, have a quick look at the two opposite forces that are changing the landscape of the video games industry, to then go more in depth into three key drivers that can help us explain why we are currently seeing such a phenomenon.
The concentration force
The big and traditional sort of video games developers and publishers have the purpose of capturing this upcoming growth. Fueled by this ambition, we have seen an accelerated set of aggressive M&A moves at a scale and rhythm never seen before. For reference:
- Microsoft has just announced the acquisition of publisher Activision Blizzard for $70B, its biggest acquisition ever
- Tencent closed over 100 M&A deals only in 2021.
- Take-Two is purchasing mobile developer Zynga for $12.7B
There are plenty of other examples coming from competitors such as Sony, Embracer Group or Electronic Arts. Does this mean that the industry is heading towards a more concentrated scenario?
The deconcentration force
It does look like it is, especially if you take a look at how much the distribution and size of the different publishers and developers has changed during the lasts years. However, assessing the degree of concentration coming into the future is a harder task to deal with. Despite the aforementioned trend, it is also true that enormous players such as Amazon, Meta, Apple, Netflix or Google, companies that were non-traditionally related to the gaming scene, have already started developing their own games and are introducing video games in their offering portfolio or have announced plans to enter the scene.
With such big companies putting their eyes on the gaming industry, it is considerably harder to assess how the industry will look in the upcoming years. So, let’s shift to the core of this article: understanding three key factors that can help us explain why we are seeing such moves.
The rise of the subscription-based model
The traditional (simplified) way of making money with video games was either selling consoles, selling boxed games or through arcades. This model is not completely outdated, but has clearly lost its reign to newer, more accessible and versatile monetization strategies: freemium, free to play, downloadable add-on content, micropayments, loot boxes, in-game advertising, etc.
As in the TV series and films industries, the subscription-based monetization model is also making a strong entry in the industry. Of course, this model has its own advantages and risks compared to the other monetization strategies, but its popularity is undoubtedly on the rise. The current strongest bidder on this model is Microsoft with its Xbox Game Pass, launched in 2017, but companies such as Google, Apple, Sony, Electronic Arts or Ubisoft have their take on this model, each one of them with their specifics and their own view of what they include in the service.
However, to hit a successful subscription-based model, you need a strong, varied calendar of releases. The models that are gaining traction with consumers release a mix of high budget, high expectations games (categorized as Triple-A titles) that appeal to broad audiences, mixed with smaller but more varied titles that appeal to different consumer niches. To accomplish such a calendar, you either need a strong portfolio of internal development studios or a great number of partnerships with third party developers.
Although having partnerships with third parties is possible, it usually needs a strong willingness to collaborate and the relationship has to be managed over extended periods of time. Acquiring these studios is not always a feasible option, but when you have both the financial resources to acquire them and the capability to integrate them inside your ecosystem, doing so reduces the embedded risks in these third-party agreements. Setting completely new studios is risky, as the production, art, programming, testing, and organizational capabilities required to run quality studios is more difficult than most of us anticipate. As a reference[2] , when Alphabet announced they were entering the gaming scene with its cloud-based Stadia solution in 2019, they also announced that they were setting up internal development studios. By early 2021, they had to close them because they couldn’t handle the development difficulties.
Does this mean that there are no third-party agreements under these models? Absolutely not.
For example, Apple’s or Alphabet’s models are based on third-party agreements. But what is clear is that the recent acceleration of acquisitions in the industry has been affected by the nature of this business model.
Ultimately, the subscription-based model is all about making games more accessible to a wider pool of consumers. Traditional video games are expensive: a single new release can cost you as much as €80. However, current prices for these subscriptions range from €10 to €15. Despite offering new releases in the service means that you are losing potential sales, it means that many more potential consumers are going to see what those games have to offer. The initial cannibalization brings more potential consumers to get engaged with the games, thus they also explore the additional paid content the game offers. And as any successful trend, it actually works out. Hardcore gamers will still buy the products as a mean of building their collections, while you still capture incremental revenue from those more casual or non-that-engaged consumers that may not be willing to pay that price upfront but end up spending money in the different microtransaction options that developers can integrate in their games.
Cloud Gaming
Video games along their history have been stranded with some barriers: consoles, devices, mobiles, storefronts, etc. By nature, it is a problem for cultural preservation, but it is also a problem for the business potential of video games. When developing a game, the studios have to thoroughly decide on which platform and storefront they are launching it, as resources are limited and burning cash without generating revenues is not a sustainable business strategy.
Cloud Gaming, despite not eliminating the complexity of developing a video game, has two major power plays that directly tackle the limitations of device and player accessibility: first, the independence from local computing power; and second, the transferability of content across devices:
- The first power play means that as long as you have a reliable internet connection, you can play games through the Cloud on any modern device independently of their computing power: smartphones, tablets, TVs and even older consoles or PCs that are technically outdated. As long as the device can stream content from the internet, it can be used to play games via Cloud.
- The second one means that you can eliminate most of the existing content barriers. Assuming there are no contractual limitations, a previously developed game for a specific device can be offered in more platforms and devices thanks to Cloud Gaming. Of course, in most cases development efforts are still necessary to port the games from their original state to the Cloud, but as Cloud Gaming is heading towards device independence, you are freeing them from their original barriers and granting access to them to billions of potential consumers.
So, the key strength of Cloud Gaming is that it has the means to put the lowest barriers of entry ever seen in the industry. As seen with the subscription-based model, one of the most important current success drivers is to ensure the accessibility of content to the biggest pool of consumers possible. Cloud Gaming has the potential to unlock this device-agnostic accessibility, so working in tandem with the subscription model might result in the combination that will define the future of gaming. With such potential, it is no surprise seeing cloud gaming services coming from players such as Microsoft (xCloud), Sony (PlayStation Now), Nvidia (GeForce Now), Amazon (Luna) or Alphabet (Stadia).
The role of IBM Cloud
Have you ever guessed how the current model of IBM Cloud services started? It did so after the acquisition of Softlayer in 2013, when it combined this company and IBM SmartCloud into the single, global platform that we know as IBM Cloud. The interesting part of such acquisition is that Softlayer started its business offering cloud hosting services to gaming companies and startups.
So, if our current key growth factor had an “origin” in gaming, is IBM Cloud currently playing a role at all in the industry? Although it is not present to the extent of offering a global cloud gaming platform, it has expanded the original Softlayer’s offering:
- Cloud Gaming with Skygrid[5] : IBM Cloud is powering an Indonesian cloud-gaming subscription-based platform, including both running the games on our own Bare Metal Servers and the technical infrastructure to support online gaming.
- Game Server Hosting: powering the technical infrastructure needed to support massive, online games with thousands of simultaneous players, Softlayer’s original offering.
- Video Game Development: offering Virtual Private Clouds to host workloads, the IBM Digital App Builder to speed up development cycles, or Watson Studio, to train and develop more powerful and versatile AIs embedded into the game.
The metaverse
Of course, the world’s favorite recent buzzword is also a major force that is shaping the video games industry’s landscape. The reason for metaverses being so relevant in the gaming scene is because creating a virtual world that can fulfill the ambition of having interactive, alive spaces is not that different to developing a video game:
- Most metaverses, by the definition that is getting more and more popular, run on game engines. These metaverses are 3D Spaces in the need of relevant interaction with its virtual world and the rest of the people participating in them, which is basically what, in very simplified terms, a game engine allows you to develop.
- To build a metaverse, you need a team that can assemble that space, which requires production, programming, art or testing capabilities among other skills. By no surprise, these are almost the same set of roles required to develop a video game.
- Finally, you need to be able to bear an online infrastructure that can sustain the interactions of thousands (if not millions) of simultaneous people with the virtual world and with the other participants in them. Which is basically the challenge that the most popular online game developers are used to dealing with.
Seeing how close the development of a video game is to the creation of a metaverse platform gives us a very important hint into why so many non-traditional players are launching themselves in the development of video games. Even though developing video games is a risky task, as we’ve seen with Alphabet’s entry in the industry, it may be even riskier to directly aim to create a full-fledged metaverse idea from the ground up. Chances are that, if facing this task for the first time, the team in charge will miss in the production of their metaverse space, extending development time and costs or even dooming the potential success of the platform.
To prepare for such endeavors, we already have clear examples coming from these new players in the industry. For example, Amazon has recently published two MMO games (Massive Multiplayer Online) that have topped up to 1.3M concurrent players. That alone creates an enormous challenge regarding the development process and capabilities we previously mentioned, but the learning doesn’t stop there. What Amazon is doing with these games is gaining experience in understanding the customer lifecycle in a virtual space, which are the touchpoints with a virtual world, what factors drive more engagement and spending etc. In essence, have a better understanding of what is required to makes these environments accessible to consumers but also sustainable at a business level
Of course, gamers are not the same consumers as the broad audiences that metaverses aspire to reach. However, understanding the dynamics, pain points or user journeys in these virtual spaces will for sure give Amazon an edge in understanding more key drivers to build a successful, accessible metaverse if they decide to launch themselves in this space.
It’s all about accessibility
Are these three trends related in some way? Indeed. And it’s all about accessibility. Barriers of entry, as already hinted, are the biggest threat to the growth in the gaming industry. Let’s ask ourselves some questions framed from the metaverse side:
- Would you rather enter a new metaverse paying €80 upfront or €15 on a subscription-based model? Although if you are engaged in the platform in the long run, you will eventually pay more if based on a metaverse-subscription model, I can fairly assume most of us will see as a better option not paying upfront the access to this metaverse.
- Are you willing to purchase a brand-new PC that has enough raw power and the AR/VR headset to have the complete, “metaversic” experience? If few of us are considering the purchase of an AR/VR device, I highly doubt that more people are considering purchasing such a PC in a tech era dominated by mobile devices.
We can set these questions in different perspectives and consider different factors, but what will be relevant in all of them is the importance of making all these experiences, either traditional games, cloud gaming or metaverses, accessible to the relevant potential consumers. As we have seen, both the subscription-based business model and cloud gaming are pursuing consumer accessibility, while metaverses need to be accessible if they aspire to be the platforms that will capture the future of social interactions.
Despite this being not the sole reason, what will drive success in the gaming industry for both traditional and nontraditional players is understanding and developing the capabilities to have an offering that is accessible to the biggest pool of consumers. And by no doubts, the pursuit of this capacity is one of the key drivers that explain the strategic shift that we are seeing in this massive field of entertainment.
Thank you for your time
Victor Cantera
