Tech: Why it is time to take video games seriously

This article first appeared in The Edge Malaysia Weekly, on December 7, 2020 - December 13, 2020.
Video gaming globally is now a US$240 billion industry, if all the related services and peripherals are added in. (Photo by Bloomberg)

Video gaming globally is now a US$240 billion industry, if all the related services and peripherals are added in. (Photo by Bloomberg)

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CALL of Duty: Modern Warfare, Animal Crossing: New Horizons and Grand Theft Auto V, an eclectic mix of new and evergreen games, were among the top sellers this past year as most people who were unable to go to the cinema, concerts, sports events or other outdoor activities took to interactive video gaming at home. Sales of video games jumped more than 20% in the first 10 months of this year, according to gaming industry research firm NPD Group. Spending on consoles, which is usually depressed ahead of impending new console releases, soared 23% in the January-October period as consumers around the world spent more time at home during the pandemic.

Over the past two weeks, just in time for the holiday season, Sony and Microsoft released new versions of PlayStation 5 and Xbox Series X — their first new consoles in over seven years — which are expected to dramatically boost sales of consoles as well as games in the final two months of the year. Global spending on games software is forecast to top US$175 billion (RM713.5 billion) this year while global console hardware sales are estimated to reach US$45 billion.

Video gaming globally is now a US$240 billion industry, if you add in all the related services and peripherals. That is more than what people spent worldwide on movies and music combined last year. The video games industry is now bigger than the entire global sports industry, including all the sponsorships. Indeed, it is far larger than any other form of entertainment, and it is still growing at double-digit rates year on year. The ubiquity of mobile devices has lowered the barriers to entry and made everyone a potential gamer. Over two billion people around the world play some form of a video game every day, mostly on mobile devices like smartphones or tablets. If you add in the fastest-growing segments of virtual and augmented reality, as well as e-sports, the gaming market is likely to have nearly three billion players in five years.

Readers might recall a column I wrote three years ago (“Game over for ‘addictive’ electronic games?”,  The Edge, July 2017), which touched on Beijing’s ban on mobile games played by kids as well as the boom in Asia, where gaming players competed for burgeoning profit pools in hardware, peripherals, software and services. Three years on, Asia now accounts for nearly two thirds of the global gaming industry revenues.  

To be sure, video gaming over the years has evolved from being a fringe activity for teenagers into a mainstream form of entertainment. The Covid-19-induced lockdown this year turned out to be a huge accelerant. “The video gaming industry has transformed from a physical, retail-based business by building digital distribution, free-to-play content that gets youngsters hooked on games, as well as betting on e-sports and live streaming,” says Joost van Dreunen, a professor at New York University’s Stern School of Business and the author of a new book, One Up: Creativity, Competition, and the Global Business of Video Games. The video gaming industry, he argues, has been growing strongly just as almost every other entertainment and media industry — from print media to cinema — has collapsed on top of itself. Moreover, the advent of smartphones, and mobile gaming 12 years ago, and the transition from a product model to more of a services one have allowed it to grow.

Traditionally, the industry had three main components — game publishers or big content creators like Activision Blizzard Inc, Electronic Arts Inc and Take-Two Interactive Software Inc, which also did most of the marketing; platform owners such as Nintendo Co Ltd, Sony Corp and Microsoft Corp, which make consoles and created a big installed base or a captive audience that was used by developers to sell their games; and the retailers, like speciality game store chain GameStop Corp, which traditionally sold games.

A typical console game retails for US$60 (RM245) in America. The retailer used to take US$12 while another US$8 went to distributors, leaving very little for actual content creators. That is changing with digitisation, as tech giants Apple Inc and Google take a 30% cut of games sold upfront while content creators avoid the middleman and retain a much bigger portion of total sales. Yet, despite getting more money, the developers are more beholden to a single entity that controls the rails on which the creator’s game train runs.

Take Apple’s App Store, often called the digital game store. Ninety per cent of all App Store revenues are from the cut that Apple gets from selling games. Detractors say Apple does not invest in new games or help developers in any way. While some of the 30% it collects goes towards marketing and maintaining the digital store’s infrastructure, most of it goes directly to its bottom line. Developers such as Epic Games Inc, the creator of Fortnite, have been leading a crusade against Apple to force it to either completely drop or drastically reduce the commissions it charges developers.

Not surprisingly, console players are selling games as a service for which they can collect monthly revenues. Wall Street has traditionally ascribed a much higher valuation to companies with recurring revenues. So, instead of selling software upfront, the likes of Epic Games Inc charge a monthly fee and keep upgrading the software. Console makers are investing more heavily not just in hardware but increasingly in software, subscriptions and content to help keep gamers within their ecosystem. Sony has spent billions to buy game studios to build new games. In September, Microsoft spent US$7.5 billion to buy Bethesda Softworks LLC, the firm behind the popular Doom game franchise. Amazon recently launched its own gaming subscription service, Luna.

Cloud gaming

The real game changer is cloud gaming. ­Microsoft released is xCloud gaming service two months ago as part of its Xbox Game Pass subscription platform. Cloud gaming lets users play a game that is streamed to their device from the firm’s remote infrastructure. Such services are typically available through paid subscriptions, similar to video streaming service Netflix, but for games rather than movies or TV shows. Microsoft and Sony are facing rival cloud gaming platforms like Amazon.com’s Twitch and Google’s Stadia. Amazon and Google alongside Microsoft are the dominant global cloud infrastructure players.

Facebook Gaming, the cloud gaming platform of the social media giant, was formally launched in October. For now, cloud gaming is mainly seeing adoption among console gamers who want to continue playing the titles they enjoy on other devices but the tech giants know they will eventually need to differentiate with engaging content and better user experience if they want to get real traction in a fiercely competitive field.

In the last gaming console cycle, Sony sold two PlayStations for every Xbox that Microsoft sold. This time around, the competition is more evenly matched — though Sony is still likely to sell more consoles, Microsoft’s ability to boost subscriptions and cloud gaming revenues gives it an edge over its Japanese rival. For its part, Sony has positioned its PS5 as an all-in-one system that gives players access to its exclusive games as well as its PlayStation Plus and PlayStation Now subscription services, which offer online gaming, free titles and cloud gaming.

Unlike Sony and Microsoft, the dominant hardware players that mostly rely on Activision Blizzard, Electronic Arts and Take-Two Interactive to make games for them the same way Dell and other PC makers rely on the Windows operating system, or smartphone makers like Samsung Electronics Co Ltd depend on Android, Nintendo, the maker of Switch consoles, makes hardware and software and has a subscription service, which makes it more profitable than its two larger rivals. By making its own software, Nintendo is able to better integrate hardware and software, providing a superior user experience the way Apple does with the iPhone.    

Nintendo’s games are also good, clean family fun. There is no blood and gore of the Xbox or PlayStation games on its platform. Moms around the world happily buy their kids Nintendo consoles but would raise their eyebrows if their offspring insist on an Xbox or Playstation with shooter games. The latest hit from Nintendo is Animal Crossing, a simulation game where you and your avatar can hang around with your animal friends. Nintendo’s operating profit for the first half of the fiscal year ended September soared 209% to US$2.8 billion compared with the same period the year before, while half-year sales jumped 73% to US$7.4 billion. Nintendo’s stock has surged 96% over the past two years.

Advertising in video games

The next big thing for video games is advertising. Unlike movies, TV and other forms of entertainment that have relied on advertising to complement other revenues, video games until recently have shunned advertising. That is changing because the video gaming industry and advertisers need each other. One of the hardest things for advertisers to have is the ability to reach young people, both Gen-Zs and millennials. You won’t find teenagers using traditional media or, increasingly, even social media. They don’t consume content the way they once did. So, advertisers who want to meaningfully engage with young people want to use video games to reach them.

If you followed the fiercely contested US presidential election, you would probably know how close the results were in a handful of “swing states” and how the higher turnout of younger voters tilted the votes in favour of president-elect Joe Biden. Several game developers struck deals with the Biden campaign to advertise throughout their platforms and various targeted Congressional campaigns on YouTube channels. Republicans were late in wooing game developers but they too used video game ads, which helped spur a record-high voter turnout.

As advertising proliferates throughout the gaming ecosystem, it will help boost the fast-growing e-sports, another segment of the gaming industry that accelerated during the lockdowns. Newzoo, the gaming industry consultancy, forecasts that global e-sports revenues will grow to US$1.6 billion by 2023 — as professional sports teams branch out into gaming as an alternative to real-world competitions. E-sports provides a captive audience as well as marketing partnership and sponsorship opportunities.

But cloud platforms allow players to offer more than just gaming or e-sports. Games now serve as platforms for live concerts, film trailers and brand sponsorships. In April, Lady Gaga, herself an avid video gamer, used Twitch to organise a Covid-19 concert that was streamed live to tens of millions of homes around the world. She is just one in a long line of entertainers who have embraced the video game platform not just to play games but to reach out to new audiences who cannot be easily reached through traditional music platforms. From the video arcades of the 1980s with single-player games to smartphone-based cloud platforms to MMORPGs — massively multiplayer online role-playing games, with a greater focus on interactivity — gaming has come a long way. It is time for all of us to take video gaming more seriously.

 

Assif Shameen is a technology writer based in North America

 

 

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