Video Gaming: The Next 1B Players
A lower barrier to entry signals continued U.S. consumer adoption.
Today, people can join the gaming ecosystem via PC or console at a lower financial cost than they could in the past. Therefore, we believe video gaming adoption will continue to accelerate.
Even though U.S. consumers are seeing only modest growth in income, they are choosing to spend more of their discretionary income on entertainment (10% increase between 2016–2017). Meanwhile, the cost barrier to entry in video gaming is decreasing, creating a fantastic scenario for continued adoption of video gaming.
In this piece, we will lay out a few of the current options for PS4, Xbox One, and Gaming PCs (pre-built, build-it-yourself, and laptops) for the U.S. consumer. We will then look at recent trends in micro-economic data.
Continued Global Adoption
The global adoption of video gaming as a common pass-time is on the rise with over 2.3 billion people playing video games and over 380 million people watching esports.
The consumer is choosing to spend more of their discretionary income on digital entertainment while there is simultaneously a lower cost barrier to entry in video gaming (especially in PC & Console).
This trend shows no sign of stopping and we believe this will result in continued consumer adoption and accelerating monetization within the global video gaming industry.
Social Integration
Video gaming, as a medium of entertainment, has now crossed into the next stage of being more socially acceptable across a variety of age groups. In 1995, only 100 million people played video games and now 2.3 billion (~30%) of the world’s 7.7 billion people play video games.
This not only includes today’s teenagers and millennials but also the “Atari generation” (43% of mobile gamers are parents), who continue to play games even as adults. Additionally, it’s not only men that play video games, as women comprise 45% of video gamers in the United States and 30% of esports viewers in North America.
People have adopted video gaming (and its viewership component) for a variety of reasons but we are specifically looking at how video gaming is meaningfully cheaper today for consumers to enter into than it has been in the past.
This lower cost barrier is especially important as we consider the remaining 70% of the world who haven’t adopted video gaming (yet).
Below, we specifically look at the hardware entry costs in the United States, which inherently focuses us on gaming PCs and consoles while leaving out mobile. In this piece, we intentionally leave out mobile because 2.1 billion people (2016) have a smartphone and they are not buying smartphones only to play video games but to be a part of the larger social fabric in this digitally connected age.
Fun Facts: Gaming in the U.S.
Here are a few quick stats on the video game consumer in the United States (Source: ESA):
64% of US households own at least one device they use to play video games.
The average gamer is 34 years old, and gamers age 18 or older represent more than 70% of the video game-playing population.
Adult women represent a greater portion of the video game-playing population (33%) than boys under age 18 (17%).
More than 50% of the most frequent gamers in a household play multiplayer video games with others at least 1x per week.
9 out of 10 parents are present when their children acquire a video game.
The average age of the most frequent video game purchaser in a household is 36.
What does it typically cost? PC & Console
When thinking through the different hardware options, you have two primary options today: PC or Console. In 2019, there are a number of ways to look at the costs associated with PC gaming, while console gaming largely revolves around Playstation (Sony) and Xbox (Microsoft). Yes, there is the Nintendo Switch, but that game system is in third place by a wide margin (Playstation 4 has sold 75 million units, Xbox One has sold between 30–50 million, and Nintendo Switch has sold only 17 million).
We believe GamingScan summarizes the differences well:
“PC offers better visuals, a greater number of indie titles, and more affordable games while being substantially more expensive to buy than consoles. It can also be plagued by compatibility and hardware issues. Consoles, on the other hand, are cheaper to buy and can last for an entire console generation, and are much easier to troubleshoot, but games tend to be more expensive.”
We put together the below chart to showcase what is the minimum cost barrier to entry in each category across Xbox (3 options), PS4 (3 options), and PC (Pre-Built, DIY, Laptop).
(Note: we are focused on the minimum cost to enter each category and we selected price points given the options we would personally consider buying (as gamers). You can mix & match any combination of factors (which are almost infinite), yet we believe this generally reflects the consumer’s choices at various price points. For example, in the PS4 rows you’ll see headsets for $20, $30, and $80. There are definitely headsets that cost more than $80 but if you’re a new gamer you do not need to spend more than $80 to get a great headset.)
Takeaway: in the past, the affordability of owning a quality gaming PC compared to console was so much more expensive that it wasn’t even comparable. Today, that gap is quickly closing (thanks to lower manufacturing & hardware costs) while consumers are simultaneously increasing their discretionary spend on entertainment (more on this below).
U.S. Consumer: Discretionary Spending
Income vs. Entertainment Spending
US Real Income (which is already adjusted for inflation) has increased from $55,520 in 2010 to $61,372 in December 2017, yet this only amounts to a 1.44% CAGR (compound annual growth rate). Interestingly, entertainment spending has seen a meaningful uptick in recent years. In 2017, average consumer spending on entertainment increased by 10% y/y from 2016 to 2017.
We found the below chart from the Bureau of Labor Statistics interesting as it shows that average income decreased 1.5% ($74k to $73k) in the same time interval where entertainment spending increased by 10%. It’s interesting that even when people make less money, they still choose to spend their discretionary income towards the entertainment category.
Note: “entertainment spending”, according to the Bureau of Labor Statistics, breaks down into four parts: 1) fees and admissions; 2) audio and visual equipment and services; 3) pets, toys, hobbies, and playground equipment; and 4) other entertainment supplies, equipment, and services.
As I mentioned above: even though consumers are seeing only modest growth in income, they are choosing to spend more of their discretionary income on entertainment. Meanwhile, the cost barrier to entry in video gaming is decreasing, creating a fantastic scenario for continued adoption of video gaming.
US Consumer Spending on Video Gaming
While prices to enter video gaming are coming down, the industry is certainly not slowing its growth or plateauing. Consumers in the United States spent at least $10 billion more on content in 2017 than they did in 2012 (a 54% increase in just 5 years) and spent $7 billion on hardware and accessories in 2017 alone.
In the United States, video game spend continues to thrive and content (i.e. the actual game & monetization of that I.P.) is receiving the lion share of this growth.
On an individual basis, it is interesting that we have not seen the same percentage growth in U.S. real median income (1.44% CAGR from 2010–2017) that would necessarily indicated such a strong growth in video gaming (7.62% CAGR from 2010–2017).
Therefore, as we see moderate wage increases, higher discretionary income going towards entertainment, decreasing costs to enter video gaming, and strong adoption of video gaming amongst consumers, this all showcases a bright future for the video gaming vertical.
Not Stopping Anytime Soon
The “price to play” in video gaming is becoming more affordable. Additionally, the price gap between console & PC is closing, meaning the consumer now has more options that they can afford. We believe this trend will continue, especially as production cost of hardware declines and the rise of cloud gaming ensues. Once cloud gaming becomes more ubiquitous, gamers won’t need to update their hardware as regularly in order to fully experience any game.
Financing (Xbox payments) & subscriptions (cloud-based gaming or “Game Pass”) are furthering the financial accessibility of gaming to consumers that previously may not have been able to afford it.
From 100 million players in 1995 to 2.3 billion today (14.38% CAGR), we expect the next 1 billion gamers to steadily join the community.
All in all, people are spending more money on entertainment while gaming hardware is getting cheaper.
We see no reason for this trend to slow down in the foreseeable future.
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