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Welcome to EY’s Tech Connect podcast, where we have candid conversation about the most pressing priorities facing tech, media and telecommunication companies and provide strategic insights on the key issues that matter to them. As industry ecosystems evolve in new directions, we use these discussions to reflect on how companies can not only take advantage of new opportunities but also tackle emerging challenges.

Christina Winquist

Hello. Welcome to the EY Tech Connect podcast. This is Christina Winquist, global go-to-market leader for Technology, Media & Entertainment, and Telecommunications at EY, and I’m here with Adrian Baschnonga, our global analyst for TMT. Today we’ll be discussing the dynamic gaming industry, some interesting research EY has performed in conjunction with Oxford Economics, and the various changing digital marketplaces. Today we’re speaking with Adrian Ang, senior director of Strategy at EY-Parthenon; Molly Tucker McCue, East Region Audit leader and global client service partner at EY US; Scott Porter, Americas Media & Entertainment Consulting Services lead; and Matthew Reynolds, research manager at Oxford Economics and an expert in IT and analytics. Thank you for joining us on EY Tech Connect. Adrian, over to you.

Adrian Baschnonga

Thanks very much, Christina, a fascinating topic we’re going to be digging into today. Really thinking about the gaming industry and all the associated issues, such as the metaverse, for example, and really what are the prospects for the set to going forward. So, maybe a bit of seed setting to start with. Leading up to the pandemic, the gaming industry saw significant growth, and actually the onset of the pandemic compounded these positive growth rates. We saw industry revenues up 20% in 2020. However, we have seen top line slipping for some major players in the last quarter, and this raises questions about the sector’s long-term prospects. With some of these caveats noted, it would be great to drill into the current state of the gaming industry, drawing on the findings of our EY study, how healthy is the gaming sector right now, and what do executives think of its growth prospects but also some of the challenges along the way? Scott, perhaps starting with you, what’s your perspective on this?

Scott Porter

Well, we’re currently at over 3 billion gamers worldwide, and we experienced tremendous growth in new gamers coming into the sector, experiencing what now has transformed into more of these immersive opportunities in game play. We are at a point now where we’re starting to see a slowing of the growth in this sector, but then it’s still very, very healthy. During the pandemic, there were obviously a lot of limitations in the forms of entertainment people were able to participate in, and so you saw this natural migration where you could actually not only play a game, but you could also be part of a community while you were locked up in your house. And now that things are starting to open back up, I think gaming is just like any other form of entertainment. They’re starting to experience the challenges now of having other alternatives for consumers to re-engage with, that’s really the main driver right now in some of the slow of the growth.

Molly Tucker McCue

Yes, Scott. I would definitely agree with that. We’ve seen a slowdown in growth, but I still think there’s a lot of opportunity and optimism in the sector, despite the other activities that people can take advantage of, whether it’s travel, concerts, et cetera. There is a little bit of pressure on consumer spending right now, and that will have an impact. But these companies are still growing faster than they were pre-pandemic, but the optimism is high. As you mentioned, Scott, gaming companies do have increased unique users. More people than ever are gaming, particularly in the female demographic, which is increasing significantly. But that doesn’t mean there aren’t concerns and challenges. There is constantly going to have to be new innovation to keep sustainable growth, and these companies are going to need to keep the attention of these diehard gamers. Innovation is expensive, from an R&D and a resource compensation perspective, so companies need to constantly come up with new concept ideas. The competition out there will be fierce to get those people in the door. We’ve also seen, from a company perspective, a fair amount of bolt-on acquisitions where companies are acquiring small development studios around the world for the development team’s potential to find the next big idea.

Porter

I think the other thing that we’re experiencing right now is we traditionally have thought about the gaming sector, in terms of PC usage and console usage, but in the last couple of years, mobile is making up a larger percentage of game play. And, in fact, out of the close to $200 billion in projected revenues this year for gaming, over $100 billion will come from mobile gaming itself. When we surveyed the industry executives about slowing growth, most disagreed. They didn’t think that this was going to be a temporary phenomenon; rather, it was a shift in some of the consumer and gaming preferences out there. I think everyone is optimistic about what the future looks like, and we should continue to see, as these companies innovate, new revenue opportunities, continuing expansion of the gaming communities. I think it’s a good story yet to come. 

Winquist

Thanks so much. So next up, mobile gaming and console/PC gaming are both potentially poised to receive a supercharged boost from the evolution of Web 3.0 and the possibilities will directly improve the customer experience. How do you guys think the Web 3.0 set the gaming industry up to improve the customer experience and enable the metaverse, and what opportunities does metaverse offer gaming companies? Do these opportunities exist outside the gaming sector? 

Adrian Ang

So Christina, on our latest gaming study, where we surveyed 200 executives across the gaming value chain, what we saw was 83% of our respondents said that the gaming industry faces the pressure to constantly innovate and create new experiences. So, when it comes to Web 3.0 and elements like the metaverse and NFTs, half of our respondents believe that the metaverse is creating openings for new business models. Most, about 97%, also believe the gaming industry is the center of the metaverse today, and a whopping 94% say that this emerging sector has played a leading role in the metaverse’s growth. Where I see gaming and the Web 3.0 intersect are in two areas. Blockchain-based games, the most popular, Axie Infinity, and I play a card-based game called Gods Unchained, and then also the metaverse, so Decentraland and Sandbox. These new concepts give creators and players the ability to own and monetize as well, which is a pretty new concept in the sector.               

Matt Reynolds

And, you know, whenever you start mentioning the phrase “metaverse,” you kind of really need to specify what that means, because if you ask my brother, who doesn’t really know anything about video games, he’ll say it means putting on a VR headset and going into a digital world, and you can become whatever you want.

Winquist

Right.

Reynolds

You can be a demon or you can be a monster. But if you really think about it, the metaverse is creating a digital identity, and, in that respect, the video game industry has been doing this for decades. I’ve had the same Xbox gamer profile tag since I was 15 years old, and if you go in there, you could see every game I’ve ever played, all of my achievements. I basically already have a digital identity. So when we asked respondents in our survey if the gaming sector is at the center of the metaverse, 98% said that they’re the ones that are building the technological framework of the metaverse for anyone else who plans to participate in the future, and 97% said the gaming industry is currently the center of the metaverse. So, the gaming sector is very, very well positioned, when we’re talking about the future of the metaverse. But they’re not the only ones who are well positioned, because when we asked that same respondent base whether or not the gaming industry was the only industry that could be profitable in the metaverse, only 57% said that. Close to half say there’s opportunity for others out there. And in our survey, we segmented our respondents based on their understanding of the metaverse. Yes, you may know what it is, but you need to know how your organization is going to operate in it. We called the metaverse pros. They just know how their business is going to operate in the metaverse, and these respondents have a complete understanding of what it is and what they’re going to do in it. They were more likely than all other respondents to say that the metaverse was going to create new, valuable partnerships with organizations within their industry and outside their industry, as well as saying that it’s going to help build a vibrant community with their customer base. Which Adrian just said. It’s a huge priority, creating customer experiences and increasing that customer satisfaction. That’s the end goal. 

Winquist

Fantastic. Thank you.

Baschnonga

I mean it’s really interesting to hear these thoughts about how the metaverse and gaming industry will coexist and reinforce each other, but there’s also this sense of a world beyond, that there’s potential that transcends any one sector. So if we think about this idea of potential and ... and how to maximize this potential of a metaverse, a shared digital environment where people can interact freely with a growing range of digital assets, then there’s this sense that the digital economy needs to keep pace with that. With this in mind, it would be really interesting to hear more about digital assets specifically and how are gaming organizations preparing themselves for an asset-driven metaverse? And alongside this, what are the challenges? What are the possible breaks? Um, are there regulatory or securities concerns playing into this? So Matt, maybe starting with you, what’s your perspective?

Reynolds

When we’re talking about the metaverse and these digital spaces, you’ve got to have an economy that’s going to be able to drive it all. In the past, different gaming systems, different platforms all kind of had their own unique currencies. But digital assets are really interesting in this respect because they provide an opening for all gaming organizations to collaborate with each other and operate in the same space on the same economy. We found that organizations in the gaming sector are preparing for this and they’re moving in on these spaces, whether it’s creating digital assets, managing them, selling or trading them. Most of our respondents are already involved in doing this. But in order for these assets to function like true assets, they need a place to exchange, and that’s where marketplace comes in. We found that over half of our survey respondents have either created their own digital asset marketplace using their own internal resources, or they’ve created their own digital asset marketplace with an outside partner. The best part about this is that when you own the marketplace, you get to collect the fees, which is one of the biggest driving forces behind creating these marketplaces. And we also found that metaverse leader group, they’re also focused on marketplaces, specifically building it with their partners. They’re not going out and getting the resources and building it internally. But the transaction fees are still a pretty big hurdle or the number two problem, according to our survey respondents. Forty-seven percent of our group said that high transaction fees is a problem. So, there are definitely still problems out there, and I know that also brings up the regulation aspect, which I think Molly has something to say on that.

Tucker McCue

If I put on my accounting auditor hat, I would say you definitely can’t forget about the regulatory environment around the digital assets. It is evolving and will continue to evolve, and we’re likely to see a fair amount of changes and ramifications from regulatory bodies such as the SEC as they evaluate how these assets should be tracked, recorded, recognized, and changes in value get recorded, and these changes could be cumbersome and restrictive from a financial reporting perspective for many companies. Sorry to bring it down.

Ang

Well, Molly, I think in addition to that, we saw that there was a recent $650 million hack to Axie Infinity. The NFT market itself is going through a reset right now, and it’s going to come back and bounce back a lot harder. I think there’s also going to be some normalization as well going forward, to be successful. I think there’s a couple of factors that companies need to consider. The first is around education. There’s this general lack of understanding, which fuels the skepticism around some of these ideas. Right? There is this misconception that when you think about NFTs, it’s just artwork. But there’s greater utility, and that leads me to my second point: There needs to be greater utility as well when it comes to NFTs and how owners are going to be able to leverage and utilize that. The third thing I think is more around NFT projects. There needs to be better community engagement. As projects come up, it’s that engagement with community showing the level of visibility, transparency, that really makes a project successful. The other thing is interoperability. So, when you think about how these NFTs are going to be leveraged, in cold storage or in your wallet, and how that’s transferred into a different environment, whether it’s a Decentraland or a blockchain-based game. And the last thing is greater confidence in controls and security protocols, many of which can be addressed with better education and foundational training, of which then owners can themselves mitigate.

Winquist

Absolutely. Lots and lots of changes. That’s really helpful. Where should future investments be directed, and what capabilities should decision-makers invest in? How do organizations prepare for what comes next?

Tucker McCue

Companies are going to have to be focused on how they spend, because innovation is key to the sustained growth in this sector. But it’s expensive, and companies need to figure out where and how they want to invest for R&D, with the highest potential, and the other key investment will be in resources. There still is a huge war in talent in this space for developers and engineers, and compensation costs are only going to continue to rise to recruit and retain top developers on a global basis. But that leads to a lot of opportunities, which I think Adrian was going to touch on. 

Ang

When you think about additional opportunities in this space that are going to leverage certain elements of Web 3.0. The two that come top of mind for me is, education and the medical fields. When you talk about education, we’re living in a day and age where the demographic, youths, are receiving learning through different digital channels, and so, this is sort of the natural next step. Duke recently issued NFT diplomas, and also EY is developing our own set of solutions. We are developing a metaversity to train our professionals and in the future as a place to host our clients. When we think about the medical fields, we’re already seeing surgeons leverage technologies like AR, VR, AI, to collaborate across different regions. Right? They’re not in the same room. They’re in different locations, but they’re collectively collaborating and observing different images, as well as looking at ways to perform minimally invasive surgeries as well for augmenting patient outcomes.

Porter

Adrian, you bring up some good points about the potential uses of this technology in the future. And the way I’ve described it is we’re in the early stages of this evolution, or revolution, in technology and how it’s going to change the way that we do business. And so, a lot of companies and executives in those companies are asking where do they make these investments. What should they prepare for? There’s a lot of uncertainty out there. We don’t know at this point what is going to have the most traction, what is going to be successful. But many of the executives in our survey had responded that they know they need to get involved early. They don’t want to wait, be latecomers to the game. They know that by getting involved they are going to have to build certain skill sets within their organizations. They’re not all going to be successful. They anticipate that they’re going to fail but they will learn from those failures and then continue to evolve. That’s the one thing that a lot of people are looking at. Where will this ultimately take us, and are we prepared for the changes that we’re going to face, both in the market and also in our internal organizations and the capabilities? So it’s a daunting task for some. Others are excited about it, but we just have to wait and see. I think that is the approach that most are taking as they’re looking at what the future holds here.

Reynolds

Scott, I think you really nailed it with that, just saying are we prepared internally? Oxford Economics conducts dozens of surveys every year with many people, and last year we ... during, 2021, we conducted some research with NTT, and we found that a third of organizations in that survey said they can’t invest in digital technologies because they don’t have the skills to do it. Earlier this year we conducted another survey with SAP called Closing the Green Gap. It’s a sustainability survey but we had a lot of questions about talent, and we found that a lot of respondents are investing in skills but they might not be investing in the culture. Saying that whether or not a diverse workforce is critical to the success of initiatives. Only three out of four respondents say that, and that’s pretty good, but it’s not quite enough. Because we also found that over half of our respondents say their employees are burnt out, and these are also things you need to think of when you’re implementing return-to-office policies that perhaps some employees aren’t quite behind, or if you're trying to implement a new diversity initiative that maybe are rushing a bit and you haven’t put enough thought into. So, getting that talent, it’s going to be really important for any tech initiatives.

Tucker McCue

Absolutely.

Baschnonga

That’s, yes. Really interesting to ... to hear your perspectives on this, Scott, Molly, Adrian and Matt, and I think one thing to say as we’re near the end of the podcast is how much ground we’ve covered today, in just a few minutes. So I think there’s so much to consider here on the back of the study. I mean, clearly the prospects of the gaming sector are very positive fundamentals. Levels of innovation are white-hot. But there are some growing pains attached. One real takeaway from today’s conversation is around how organizations need to embrace some of the uncertainty and recognize that there is an element of volatility to how the gaming sector will play out and how some of these big concepts such as metaverse will evolve. And clearly there’s a challenge for all really to innovate the business model, but also look after and nurture the operating model and ensure that you’ve got the right investments in the right place at the right time and you have access to these talent pools. So, a really fascinating discussion. Christina, over to you to close.

Winquist

Well, thanks everybody for joining us today. Really appreciate it, and thanks to everyone else for joining us on EY’s Tech Connect podcast. 

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