In many ways, the video gaming industry has never looked more promising: smartphones and tablets have massively expanded the addressable market; wearables (including virtual and augmented reality devices) are enabling new interaction models and experiences; and user generated content allows studios to add depth and re-playability at little-to-no cost. In 2013, the industry generated more than $65 billion in revenue – representing a nearly 30% increase in only 5 years and totaling 82% more than the global box office and 3.2 times the size of the recorded music industry. Despite this, brand-name studios – including some of the most celebrated and commercially successful ones – continue to hemorrhage or shut down entirely.
Mobile is only a part of the reason why. Over the past decade, the video game industry has been fundamentally upended:
studios have had to contend with exponential increases in ‘tablestake’ investment costs. In the early 1990s, game development required only a handful of programmers, designers and artists. However, the sophistication of modern gaming engines and ever-rising graphical standards have driven this figure into the hundreds. Some blockbusters, such as Call of Duty and Assassin’s Creed IV, have even exceeded 1,000 (with each team member having a total annual cost of roughly $100,000). Once-modest marketing expenditures have also grown to rival those of major motion pictures. All in, 2013’s Grand Theft Auto V is believed to cost nearly $265M – placing payback sales volume at roughly 10M units (25x average sale volumes). Though GTAV is an outlier, few studios can still afford to develop 2-3 ‘average’ blockbuster titles per year – and a single failure can be ruinous. Furthermore, these titles still need to compete against the likes of Assassin’s Creed and Grand Theft Auto for finite consumer spend.
The normal recourse for this cost creep is raising prices, which remain largely unchanged from the early 90s. In fact, prices have actually eroded by 38% over the past twenty years after accounting for inflation. As a result, today’s studios feel pressure on both the top and bottom lines. Increased sales per game have helped, but they’re insufficient in and of themselves. With this in mind, it shouldn’t be shocking that there has been such dramatic reduction in the number of market participants. But the gaming industry has not just more financial precarious, it has also become more complex.
motion pictures, video games have evolved from a product to a recurring service:
The success of WoW and other EaaS games (not all of which are MMORPGs) explains many of the aforementioned trends:
- By increasing the amount of time the average player plays per game purchase, total industry unit sales are likely to drop
- The focus on developing and establishing blockbusters (which require far more depth than an average 15 hour game) drives studios to reduce the number of games they produce and increases development costs per game
- To meet lofty payback targets, publishers amp up initial marketing costs
- To sustain user engagement, marketing and promotion expenses (tournaments, advertising, developer programs etc.) long after a game’s initial release
There simply aren’t many studios with the skillset, IP and balance sheet to compete in this new market. As a result, we’ve seen a dramatic thinning of the “middle layer” of studios. The largest studios (such as EA, Bungie, Rockstar) will continue to survive, as will niche developers and lean mobile shops. However, we’re likely to see mid-market players continue to exit (which will drive further reductions in industry output).
For all its promise, non-mobile game developers face a harsher reality than ever before. Though consolidation will drive back office synergies and some increased talent utilization, it will not resolve the aforementioned issues. Premier developers, such as Activision or Rockstar, would no doubt love to increase prices. Yet, this would inevitably initiate price-based competition in an industry already moving to free-to-play models in order to maximize the total userbase.
To survive, studios need to acknowledge the reality that content creation, curation and consumption is being democratized. For many executives in the media & entertainment industry, this concept is anathema; they believe that their veteran experience and instinct can pick ‘winning’ game concepts and turn them into blockbusters. Even if and when this is true, the final game will fall short of its potential if it remains tightly controlled. To quote Gabe Newell, Co-Founder and Managing Director of Valve: “Games are essentially going to be nodes in a connected economy where the vast majority of digital goods & services are user created vs. created by companies… Our users have already outstripped us spectacularly… They’re an order of magnitude more productive.” How can a studio fight back spiraling development, marketing and support costs? It doesn’t. It outsources them to users.