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Bain & Company predicted that the game industry’s global revenue could grow by more than 50% over the next five years to $300 billion.
In a new research report, the global consultancy said the industry growth is accelerating thanks to heavy engagement of younger gamers (ages 13 to 17) who spend about 40% more in video game environments than with any other form of media.
To me, it’s interesting to see a big firm like Bain pay attention to games, as it hasn’t done as much research on the sector in the past. (James is going to be one of the scores of speakers at our GamesBeat Summit Next 2022 event on October 25-26 in San Francisco; you can use Dean50 for a 50% off discount.)
This prediction looks at gaming’s own internal growth factors, and it isn’t necessarily being slowed by weak macroeconomic trends. In fact, it’s growing faster than any other kind of entertainment, said Andre James, global head of Bain’s Media and Entertainment practice, in an interview with GamesBeat.
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In fact, those other forms of entertainment will lose time to gaming. While gaming’s growth rate sounds high, it’s about 9% or 10% a year, which isn’t blazing fast but sounds good as other industries contract. But James notes it is very good growth for an industry that is already around $195 billion in size. To put that in perspective, the global TV market is around $259 billion.
“That bullishness on the market is really driven by underlying dynamics,” James said.
Consumer demand for games is growing, technology is advancing quickly, and monetization models are taking off. And this is before you count the potential of gaming’s foothold in virtual worlds — collectively called the metaverse — which is far ahead of other metaverse apps.
“If I’m looking at a sector over the next five years, the gaming industry has some really attractive fundamentals that even in macroeconomic slowdowns,” James said.
Investors have caught on and so they have poured more than $240 billion into game investments since 2019. Those investors include the likes of Netflix, Saudi Arabia, Embracer Group, Griffin Gaming Partners, Makers Fund, Galaxy Interactive, Tencent, Microsoft, Sony, Transcend Fund, Bitkraft, NetEase, Epic Games and more.
It is interesting that Bain is predicting that kind of inexorable growth for gaming even though we have come off some very unpredictable years. Gaming boomed in the pandemic as people sought to escape social isolation, sending growth numbers above 30% in 2020. That settled down and revenues grew around 10% in 2021, and now the industry is contracting as gaming feels pressure from inflation, supply chain shortages (now easing up), a global economic downturn, the war in Ukraine, a crypto winter, and a crash in the prices of non-fungible tokens (NFTs).
“Obviously, with COVID-19 there were a lot of curve balls for lots of different industries, including gaming,” James said. “We’re still working through some of that. It’s a little bit more back to normal. There are countervailing forces, like supply chains starting to work their way through. The turbulence was real and will probably still have some impact. But when I go back to those underlying dynamics of technology, consumer behavior, monetization — we do think those are undeniable truths that ultimately will fuel the growth of the business in a healthy way over the next five-plus years.”
Three trends changing gaming
According to Bain, the gaming industry has obtained more than $240 billion in investments just since 2019. Compared with slightly older gamers (18 to 34 years), younger gamers are more comfortable in virtual environments, and just over half of the ones surveyed by Bain say they prefer hanging out with friends in a game, rather than in person.
“It is very undeniable that younger demographics are spending significantly more time on gaming than any other type [of entertainment]. And while all of us get busy, as we get older, we do think a good portion of that behavior will carry forward,” James said. “You’re just growing up with gaming.”
Bain says three industry trends are contributing to these changes:
Technological advances: Increased processing power and reduced latency are enabling developers to create larger virtual worlds that run on any device, Bain said. Advancements in game engines are becoming a key development platform for other entertainment experiences, and improvements in 3-D graphics may transfer to applications beyond just the gaming industry.
“You can get more things to more people in a more powerful way. So technology we do think is really enabling a lot of that growth,” James said.
Games can access greater 5G connectivity, enabling developers to create larger virtual worlds that run on
any device. Genshin Impact from miHoYo is one of the most recent games to take advantage of this development.
Virtual and augmented reality are beginning to deliver experiences that live up to the hype and at more competitive prices. One indicator: More Meta Quest 2 headsets have been sold than Xbox Series X and S combined, Bain said.
Advancements in game engines (principally Epic Games’ Unreal and Unity) are making it easier to develop higher-fidelity games, inviting more developers into the mix. They’re also becoming a key development platform for other entertainment experiences, and improvements in 3-D graphics may transfer to applications in other industries such as healthcare and construction, potentially opening new revenue streams.
Metaverse-style experiences: Consumers are hungry for more immersive virtual environments, giving technology and media companies an opportunity to hold players’ engagement across various experiences, Bain said. Live virtual events, e-sports, and socializing are already part of the mix. Other media experiences and commerce will follow.
These virtual worlds have certain characteristics that make them well-suited to become platforms for new experiences. They’re immersive, but overlap with the physical world. For example, a person may share an identity across different games or across the virtual and real-world environments. They’re persistent; when a user logs off, they continue to exist. They typically allow some level of customization for users, and they often have an e-commerce element that’s important for monetizing that customization.
As noted above, our research finds younger players (13 to 17 years old) very comfortable in virtual worlds, and more likely than older players to believe they’ll spend more time there in the future. Developers should note that cross-play is also important to many of these players, who are 30% more likely to value “interoperability between devices,” compared with older players, Bain said.
James noted that everybody’s definition of the metaverse is different, and so it isn’t easy to figure out how large a slice gaming will have in the metaverse. But with companies like Roblox and Epic Games, it’s clear that game companies have a leading role in the metaverse.
“I think games will lead us into the metaverse, though by no means will it be the only driver,” James said. “No one else has built massive global virtual worlds as an early incarnation of the metaverse.”
New monetization models: More than a decade ago, hardcore gamers were skeptical of free-to-play games as attempts to over-monetize them. But the gaming market grew by 10-fold thanks to the low-entry barriers of free-to-play on mobile.
Now it is 78% of game revenue, and the free-to-play model itself has advanced with ad-operated becoming more accepted on mobile, and in-app purchases becoming more differentiated. The economics of free-to-play are likely to further explode as virtual-world games become a foundation for the numerous other monetizable experiences. More games are also using blockchain technology to enable ownership of characters and accessories.
The economics of free-to-play are likely to further explode as virtual-world games become a foundation for the numerous other monetizable experiences (for example, live virtual events, commerce) and more players join the metaverse.
Subscription models are emerging, following other forms of media that have shifted from paid bundles to individual subscription services. However, this model has received a lukewarm response from gamers, due to the different way games are consumed compared with other media — fewer titles engaged more deeply, Bain said.
Investing in talent:
Asked what every gaming CEO should be thinking about, James said, “Talent.”
The supply of top talent isn’t keeping pace with demand, an imbalance that is set to worsen as gaming studios lose developers to big technology firms. Bain is encouraging game developers and publishers to prioritize certain areas for success as gaming becomes a foundation for both media, and nonmedia, experiences.
“Though gamers have historically trended younger, our data suggests fewer gamers are aging out,” said James. “This shift in behavior brings challenges, as well as opportunities, for game developers and publishers who are faced with increasing consumer demands within virtual and nonvirtual environments. Our research shows that there are three trends that are changing the industry, as well as four areas gaming studios should prioritize to ensure success.”
Most video game company executives surveyed by Bain cited talent as their No. 1 priority; yet, tech and video game companies are losing developers to big tech firms, whereas big tech companies pay about 20% more. Simply paying talent won’t be enough. Companies will need to develop more thoughtful talent strategies around recruitment, onboarding and training, to attract and retain the right talent.
“Making these experiences and creating these games is an incredibly complex process. And you really need the right team and core creative team, technical team, bringing it all together,” James said. “I do think getting the right talent is the biggest constraint in growth. The competition for that talent doesn’t just exist within gaming, but extends into tech and broader media.”
One critical aspect of talent strategy is to ensure that the smartest and most ambitious people remain engaged. For some, just working on a large franchise and moving it forward will be enough to satisfy their need for meaningful work. Others may lose interest in a project that endures too long and will focus on the next big thing. Understanding the differences and how to meet these demands will become more important as companies seek to hold onto their most essential employees.
Aside from talent, other constraints on gaming will be regulation and data privacy initiatives. Not to mention the fact that many big tech companies take a 30% free from game developers on their distribution platforms.
Bain noted it its earlier tech report that the U.S. and China are detangling due to world geopolitics such as the war in Ukraine, where China is perceived as siding with Russia and the U.S. is beginning to withhold technology.
The gaming market hasn’t seen that kind of frostiness between the U.S. and China, but the big presence of game companies in both Ukraine and Russia has certainly disrupted the business, not to mention wrecked the lives of so many people. I suspect geopolitics will play a bigger role in gaming in the future.
I also think that it’s clear that geopolitics will make it hard to achieve a truly global game business, and that might slow growth. It could also give some areas that are behind a chance to catch up with other regions. Geopolitics is a sword that cuts many ways.
More games are also using blockchain technology to enable ownership of characters and accessories. But the use of blockchain technology in games is still new and predominantly the reserve of crypto fans. To successfully grow beyond a fringe part of the gaming market, developers will need to focus first on the player experience rather than the marketplace, Bain said.
In the long run, these different monetization models will increasingly live in harmony. While some premium games will still charge for the initial purchase, free-to-play will be the dominant model, complemented by in-game purchases and subscriptions, Bain said.
“It’s true that blockchain has not really resonated with gamers,” James said. “With time, business models will evolve and there will be developers who can really engage all gamers.”
Younger gamers [ages 13 to 17], however, seem like they’re more willing to engage in experimentation such as immersive metaverse experiences, he said. Some of those will come with blockchain attached.
“I think blockchain and what it enables inside gaming can enhance the gaming experience,” James said. “It is in its early days. A lot of what we saw on some of the blockchain games was more about people who are trying to corner the market on NFTs. They were not true gamers. The technology will definitely embed itself into more games, but it’s an evolutionary trend over time. It will transcend some of the short-term volatility that we see in cryptos and NFTs.”
It’s interesting to see the presence of hundreds of companies in the blockchain gaming space — a number which many say is ridiculous — from the perspective that Bain has of the larger Web3 market.
In an earlier tech report for 2022, Bain found there were more than 4,000 firms in the blockchain space that raised more than $80 billion through June 2022. That investment level has dropped thanks to the market volatility, but bigger and bigger companies are getting involved and game companies should be aware of that. If your rule is to follow the money, then these figures are illuminating.
Meeting rising expectations from investors and consumers
To make the most of the above trends, Bain encourages game developers and publishers to pay close attention to four areas that will differentiate future winners within the industry. These areas include:
Scaling to billions: Large, virtual-world games are expensive to build, starting around $80 million to $300 million. They are heading toward a price tag of $1 billion by 2027. To recoup operational costs, game companies can scale by investing in platform technology, or through partnerships. Deal activity in the gaming sector is on the rise, with gaming software and financial investments being the fastest-growing segments. Companies will need to expand their M&A skills. If you don’t play this game, your competitors will outstrip you.
Good franchise management: Don’t launch New Coke when you’ve got Classic Coke. It’s more important than ever to develop meaningful and compelling intellectual property (IP). Most gaming companies need to gain experience in strategically managing a franchise across genres, technologies, and regions. Good franchise management puts the fan at the center of decisions.
Franchise management increases engagement. As games get bigger, more expensive, and longer lived, it’s more important than ever manage the franchise over decades. Historically, franchise management has focused on extending a game’s life span through expansions, sequels or, more recently, recurrent content drops in live service games, Bain said.
Big games like League of Legends, Pokémon, and Witcher have shown the potential of going beyond the game into TV, movies, and other media. The global reach and attractive demographics of the gamer audience make it especially attractive to Hollywood and marketers more broadly.
But most gaming companies need to gain experience in strategically managing a franchise across genres, technologies, and regions. Good franchise management puts the fan at the center of decisions, Bain said. When deciding what to do next, the most important criterion is, “what will engage fans more?” rather than which product is ready to launch or which IP is most developed. Investment decisions will balance how much to spend on the game itself and how much to spend on the franchise beyond it, Bain said. I would note that Sony has received a lot of criticism for doing remakes too often.
New partnerships will be essential, and although deals will share common contours, each one requires its own diligence and management. Investing now in effective franchise-management capabilities can help game companies prepare for the global media deals in their future, Bain said.
Enhancing customer engagement: You have to get them coming back, or you may wind up like Decentraland with 38 daily active users, I say.
Bain said that, as the uses of the metaverse expand and reach scale, players will need to be taken on journeys beyond just the game. Customers will expect the ability to move seamlessly between gameplay, socializing, and commerce, in physical and virtual worlds. Companies need to establish a proactive approach to building community.
Customer experience takes players beyond the game. Bain said video game companies will need to go beyond just the game and related media.
Identity, wallet, and memory of lived experiences will all need to move seamlessly with the consumer across devices and platforms. Every touch point has to recognize the consumer and enable a total seamless experience (e.g., one registration, one avatar).
The individual customer journey will also need to be highly personalized. With myriad possible media and nonmedia experiences, companies have to curate a journey that engages consumers based on what they love. This journey only begins at consumer interactions with the company. With the rise of out-of-game communities like Discord and Reddit, user-created content on TikTok and Twitch, and gaming influencers such as Valkyrae and Asmongold (66% of US teens follow influencers), companies need to establish a proactive approach to building community.
“This is the moment for game companies to bet big and advance to the next level,” said Anders
Christofferson, partner within Bain’s Media and Entertainment practice, in a statement. “Developers and publishers will need to sharpen their focus if they want to continue to thrive in an environment that’s becoming a greater part of our daily lives.”
One of the important points is that it won’t be a winner-takes-all model, Bain said. There’s room for success across the spectrum, from high-resolution immersive games (such as Red Dead Redemption 2 and Horizon Forbidden West) to low-cost, indie, and pixel-art games (like Stardew Valley and Among Us). The ubiquity of mobile phones means that even free-to-play casual games will draw huge numbers and add significant revenue to the markets.
However, large, virtual world games, played by fewer but more engaged gamers over multiple platforms, are likely to contribute more to the industry’s profits, given the monetization opportunities through
microtransactions within games, and through other media experiences, virtual events, and commerce.
And compared with slightly older gamers (18 to 34 years), younger gamers expect to spend more time in virtual worlds, more time with augmented and virtual reality games, and more time watching e-sports. They’re more comfortable in virtual environments, and just over half of them prefer hanging out with friends in a game rather than in person, Bain said.
Though gamers have historically trended younger, our data suggests fewer gamers are aging out. This change will likely be supported as gaming becomes the foundation for other media and nonmedia experiences. So the demographic trend only gets stronger over time.
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