How is your business powering up for the next video gaming challenge?

Authors

John Harrison

EY Global Media & Entertainment Sector Leader

Transformative leader with a passion for media and entertainment. Identifying the opportunities afforded by convergence and disruption. Executing strategies to succeed in a fast moving market.

Scott Porter

EY Americas (West) Media & Entertainment Advisory Services Leader

Passionate about empowering entrepreneurs and e-sports. Helps media and entertainment and technology companies navigate change. Global traveler. Explorer. Coach. Father.

Raghav Mani

EY Global Media & Entertainment Strategy and Operations Leader

Seasoned leader focused on the intersection of media, entertainment and technology. Passionate about the role of media in educating and serving as a change agent. Musician, record collector and DJ.

14 minute read 14 Nov 2019

Video gaming companies are optimistic about the future, but know they need to evolve for sustained growth. 

It’s been a period of jackpot growth and earnings for the video gaming industry. In the last five years, video gaming revenues have almost doubled.1 In the next two years, the industry is forecast to be the fastest growing media and entertainment (M&E) sector after subscription video on demand (SVOD) and online display advertising.2

However, video gaming companies are entering a new era — one of increased innovation and broadening popularity, yet one of rising risk, escalating content costs and new, disruptive business models. Are they prepared to deal with this new future?

EY recently surveyed nearly 240 global video gaming senior executives, spanning independent developers to the world’s largest game publishers and with revenues ranging from US$1m to well over US$1b. We wanted to gain insight into the opportunities and challenges video gaming executives are experiencing and how they can play them to their advantage.

  • Our survey methodology

    • Survey of 236 gaming executives (C-suite, Directors and above) 
    • Conducted: March — May 2019 
    • Geographies: Worldwide (North America, Asia, Europe) 
    • Companies: various segments based on revenue size (US$1m — US$1b)
Gamer computer headphones
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Chapter 1

Video gaming executives are optimistic about the future

Executives have confidence that the industry will continue to grow, spurring investment and elevating content from king to emperor.

Based on the results of our survey, the good news is that executives say they are optimistic about the future. They have confidence that the industry will continue to grow, both in revenues and in audience engagement — the latter potentially at the expense of other media and entertainment sectors.

In 2019, the global games market is forecasted to surpass US$150b in revenues, a 10% increase from 2018. Longer-term, the industry is projected to grow to nearly US$200b by 2022, representing a CAGR of approximately 9%. 

These revenues are supported by user statistics that suggest gaming has now become a mainstream activity — 86% of internet users say that they have played games on at least one device within the past month. This percentage rises to 92% among 16- to 24-year olds.3

Confidence in growth prospects has investment dollars flowing

Companies from within and outside the video gaming sector are pouring money into investment, confident in the prospects for continued strong growth.

The total funding in gaming firms over the last 18 months has exceeded the amount invested over the previous five years. Investment in video game companies was US$5.8b in 2018 and already crossed US$3.8b in the first half of 2019.4

Major technology companies are among the most significant investors in the video gaming industry.  Seeking to leverage powerful franchises and brands, huge customer bases and deep technical know-how, these global players are building out new, potentially highly disruptive gaming platforms. This includes a variety of subscription-based streaming services, and, in some cases, talent and studio infrastructure to support the development of proprietary video game content.

Meanwhile, incumbent pure-play gaming companies are investing in the next wave of game franchises along with a variety of new technologies. Among them, cloud-based gaming systems, enhanced mobile offerings and robust social media features that serve to strengthen the bonds with and among their player communities.

In addition, capital continues to flow into the build-out of ancillary capabilities, such as systems to support the sale of advertising embedded into games and add-on content monetized through in-game microtransactions, which help diversify revenues and lift profit margins.

eSports is an intriguing area for a cross-section of strategic and financial investors, including media and entertainment companies aiming to access a younger, rapidly growing audience that is exiting the legacy media ecosystem at an accelerating pace. Companies looking to play in the eSports arena are investing in everything from venues, events and teams, to merchandise, sponsorship and media rights.

However, the more immediate opportunity in eSports for video gaming companies may be to market their titles and products to be more distinctive in an increasingly crowded market.

The total funding in gaming firms over the last 18 months has exceeded the amount invested over the previous five years. Investment in video game companies was US$5.8b in 2018 and already crossed US$3.8b in the first half of 2019.

Where content was once king, it is now emperor

Much like the pivot to big budget franchises made by the major movie studios over a decade ago, the scaled gaming publishers are narrowing their focus on developing fewer, high-quality titles. They are seeking to create differentiated experiences in a crowded market flooded with free options for consumers.

As-a-service revenue models are also demanding more expansive worlds and a continuous focus on virtual goods and other add-ons to keep gamers engaged and extend their lifetime value. This is driving escalating spending for content production and marketing.

As well, video gaming companies are working to identify proven IP from other sources, including licensing well-known content from different mediums, or revitalizing their back catalogue and releasing retro games.

The battle for content in an industry flush with cash is rapidly changing game development funding. Developers find themselves in a much stronger position to negotiate financing upfront and achieve more favorable revenue sharing at the backend.

While content is now emperor, the need to stand out is more crucial than ever before. Large game publishers are ramping up their investment in marketing to maximize awareness. 

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Chapter 2

The pressure to evolve is rising

Confident as they are in continued growth, video game companies are under pressure to stay ahead of the competition.

Seventy percent of EY video gaming survey respondents agree that the next five years will be more challenging for video gaming companies than the last five years. More specifically, 67% expect overall levels of business risk to increase. This percentage rises among smaller companies who see risks increasing, and for whom managing these risks is relatively more prohibitive. 

Among the biggest risks is a slowdown in the growth of gamers in an environment where the number of gaming companies entering the industry is increasing. This is placing pressure on the industry to explore new revenue streams, as well as organic and inorganic opportunities for growth.

The need for new revenue streams

68%

of video gaming executives say that slower growth of new gamers will cause the industry to seek new ways of earning revenues.

Video gaming companies find new revenue streams by adopting monetization strategies from other sectors

The holy grail for video gaming executives is to end revenue volatility arising from the “hit-driven” nature of the industry and smooth out revenue streams. Taking lessons learned from other media sectors, video gaming companies are adopting and adapting successful monetization strategies for their own competitive advantage.

The move from single-player, offline console or PC gaming, to single- or multi-player online and mobile gaming has opened up opportunities for gaming-as-a-service (GaaS). Instead of releasing a version and then waiting years for a new and improved iteration, GaaS allows game developers to create “live”, long-term games, updated regularly with new features. This allows them to benefit from recurring revenue, additional engagement from players and, ideally, a higher lifetime value.

Services, including in-game purchases, downloadable content, season passes, and eSports already comprise more than 40% of total revenues for some gaming companies.5

Gaming-as-a-service (GaaS)

40%

of total revenues for some gaming companies come from GaaS.

Video gaming executives are doubling down on in-game advertising, in-game purchases and other new sources of revenue. US advertisers are expected to spend US$3.25b in 2019 to place ads within video games on mobile, desktop and console platforms — a 16% increase over 2018.6

Intensifying competition and costs raise the stakes

Although video gaming executives are finding new revenue models, their companies face stiff competition as the number of games and titles proliferates. Seventy-seven percent of video gaming executives agree that an influx of new games and titles are increasing competitive pressures.

To stand out in a noisy, fragmented market, video gaming executives expect they will have to invest more in marketing. The rapid growth of eSports is one avenue of opportunity where video gaming companies can differentiate themselves.

Cost of sales and marketing

45%

say the costs of sales and marketing will grow 10% or more.

Leadership teams at gaming companies also face escalating talent costs across multiple dimensions, including development, creative, digital and senior management as this competition also extends to the war for talent. To offset these costs, video gaming companies will have to invest more to train and retain the people they have or possibly pursue M&A to rapidly upscale and diversify their talent base.

As competition increases and costs escalate, margins are coming under pressure

As the costs of developing a great game experience grow, video gaming companies are challenged to protect their margins.

Gaming development

79%

say the overall costs of developing a great game experience are growing.

Over the next five years, 42% of executives surveyed anticipate overall development costs will grow by at least 10%, with 17% expecting costs to increase over 20%. At the same time, as the industry matures, and business risks increase, back office and infrastructure costs are expected to rise significantly.

The video gaming sector has been hit especially hard with cyber-related issues, from the theft of data and virtual goods, to credential stuffing, swatting, distributed denial-of-service and counterfeit virtual goods.

In an environment where maintaining trust is business critical, video gaming executives expect the costs of enhancing cybersecurity and regulatory compliance will grow. Forty-three percent of executives surveyed expect cybersecurity costs to grow by 10% or more. Sixty-five percent of executives believe that compliance with new privacy laws will be a challenge, with 32% anticipating costs of regulatory compliance growing by 10% or more.

Executives also believe they will have to substantially invest in technology infrastructure to support these cybersecurity investments, along with funding the move to new cloud-based and streaming platforms. Forty-one percent anticipate a 10% or more increase in the amount they’ll have to spend on technology infrastructure. 

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Chapter 3

Cloud-based streaming and eSports are the next disruptors

As competition heats up, cloud-based streaming and eSports are set to become the next game-changing opportunities for video gaming executives.

Cloud-based streaming is moving from the fringe to the mainstream

Publishers, console players, technology companies and what seems like every other player vying for space in the video gaming market, are experimenting with cloud-based streaming technologies that will transform how video games are sold, distributed and played.

In our survey, video gaming executives say that a move to the cloud will profoundly change the gaming experience. The development of cloud gaming, especially when combined with the rollout of technologies such as 5G, represents more than an opportunity for the industry — it’s a strategic imperative. Sixty-eight percent of video gaming executives say that cloud-based or streaming games will be the dominant form of games in five years — 63% say they will be at a competitive disadvantage in five years if they don’t provide cloud-based games.

Triple-A games are no exception. They too will evolve toward a streaming, cloud and mobile future. In fact, 69% of survey respondents agree that video game players will be able to play fully functioning Triple-A games on a smart phone within a few years; more than 70% agree that gaming companies will distribute most Triple-A games wirelessly through the cloud between five and 10 years.

As a result, video gaming executives anticipate that investments in cloud-based or streaming platforms will grow — more than 45% expecting such investments to increase by more than 10%.

The future of Triple-A gaming

69%

agree that fully functioning Triple-A games will be available on smartphones within a few years.

eSports will play a bigger role in the video gaming industry

Perhaps because it is still early stage, industry executives are divided over whether eSports will become an important source of new revenue for video gaming companies. Twenty-three percent anticipate eSports will contribute nothing at all towards industry revenues in the next five years, 34% anticipate it will contribute up to 10%, while 43% see it adding more than 10% to industry revenues.

However, there is strong agreement on the potential for eSports to improve the brand awareness of gaming companies and attract incremental players to the ecosystem. As new gaming titles and market entrants proliferate, video gaming companies have an opportunity to use eSports as a platform for their titles to stand-out in a competitive market.

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Chapter 4

Five ways video gaming companies can level up for growth

Facing a future of slower growth, rising costs and disruptive challenges, there are ways video gaming companies can up their game.

Companies in the video gaming industry are confident that they can achieve growth in the next five years. However, growth may be slower than over the last 10 years and will come at a time when companies face rising costs and disruptive challenges from within and outside the industry.

For companies considering their strategic options, here are five ways they can up their game to escalate and sustain future growth.

1. Increase gamer's average revenue per user (ARPU) and share of wallet

There is a growing opportunity for video gaming companies to increase the spend they receive from gamers. While video gamers' ARPUs are multiples lower than pay-TV, they are growing at a significantly faster rate as gamers spend more time (and money) on their gaming platforms.

Although these companies have successfully sold in-game content for years, by more clearly understanding the personas and buying behaviors of their customers, they can seize the potential to tailor goods and value-added services. 

2.  Fund organic and inorganic growth

Video gaming executives expect deal activity will increase as companies look to M&A to acquire valuable IP, ease their talent shortage, access new capabilities and enter new markets. While the industry has ample financial resources and sources of external capital are plentiful, it is also critical for gaming companies to improve their working capital and fortify their balance sheets to unlock additional cash for growth investment.

From the perspective of funding game development there is also a need for more analytical rigor across the industry to support capital allocation decisions and evaluate ROI. 

M&A activity

67%

say the number of mergers and acquisitions will increase within the video gaming industry

3. Enhance operational efficiencies

Executives surveyed agree that back office and infrastructure costs will rise. In response, video gaming executives should use automation to streamline their operations.

Although developers are extensively using robot process automation (RPA) and artificial intelligence (AI) to test games and automate some elements of the development process, video gaming companies have been slower to adopt these technologies in their back office and customer care functions. Now would be the time to ramp up the use of these and other automated technologies.

4. Keep the trust in games

Although two-thirds of surveyed executives agree that business risk is increasing across the board in the video gaming industry, increasing instances of in-game fraud and more serious cyber-attacks make cybersecurity among the most pressing priorities. Blockchain is emerging as a leading solution to drive trust throughout the video gaming ecosystem.

Some key opportunities include using blockchain technologies to secure gamers’ online digital identity, safeguarding the authenticity, value and ownership of virtual goods, and creating transparency for rights and royalties throughout the video gaming value chain. 

Blockchain

64%

of respondents agree blockchain will be an important part of the video game industry’s future

5.  Win the war for talent      

Video gaming companies are constantly seeking creative and technical talent, which remains a scarce resource throughout the industry. So much so that video gaming executives ranked it as the largest driver of M&A activity.

In addition to the inorganic route, companies need to understand current employee engagement and what is driving it, so they can implement meaningful strategies to attract and retain the best talent. 

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Chapter 5

Video game companies have game-changing opportunities to fast-track growth

Leading video gaming companies can take advantage of the opportunities ahead to out-match their competition.

The video gaming industry has enjoyed more than a decade of high growth and exceptional margins. Yet, more than two-thirds of senior industry executives believe that the next five years will be tougher than the previous five years.

Despite facing several challenges, from the slowing growth of new players, intensifying competition, escalating costs, and the introduction of new and disruptive business models, video gaming executives remain confident they can prevail, even in times of slower growth.

By seizing the opportunities ahead (cloud-based streaming, the rapid growth of eSports, the introduction of 5G and the use of blockchain to maintain player trust), leading video gaming companies can take advantage of the disruption to out-match their competition over the next five years.

  • Show article references#Hide article references

    1. “Newzoo: Games market expected to hit $180.1 billion in revenues in 2021,” Venturebeat, 30 April 2018, via Factiva; “Newzoo: US will overtake China as No. 1 gaming market in 2019,” Venturebeat, 18 June 2019, via Factiva.
    2. “Video Games Cloud busting: Content still king in gaming,” Credit Suisse, 25 September 2019, via ThomsonOne.
    3. “Gaming Goes Mainstream, but Play Varies by Gender and Age,” eMarketer, 14 April 2019.
    4. “Game investments continue at record pace in first alf of 2019,” Games Industry, 11 July 2019, via Factiva.
    5. “EA and Activision's $79bn games-as-a-service growth,” Games Industry, 19 October 2018, via Factiva.
    6. “Gaming Goes Mainstream, but Play Varies by Gender and Age,” eMarketer, 14 April 2019.

Summary

Video gaming companies are entering a new era of increased innovation and broadening popularity, but also of slower growth, rising risk, escalating content costs and new, disruptive business models. In a recent survey of nearly 240 global video gaming executives, EY explores the challenges video gaming executives are experiencing, as well as the game-changing opportunities they can play to their advantage. 

About this article

Authors

John Harrison

EY Global Media & Entertainment Sector Leader

Transformative leader with a passion for media and entertainment. Identifying the opportunities afforded by convergence and disruption. Executing strategies to succeed in a fast moving market.

Scott Porter

EY Americas (West) Media & Entertainment Advisory Services Leader

Passionate about empowering entrepreneurs and e-sports. Helps media and entertainment and technology companies navigate change. Global traveler. Explorer. Coach. Father.

Raghav Mani

EY Global Media & Entertainment Strategy and Operations Leader

Seasoned leader focused on the intersection of media, entertainment and technology. Passionate about the role of media in educating and serving as a change agent. Musician, record collector and DJ.