The Games Industry: Poised to Cross the Inefficiency Chasm into a Golden Era

The games industry looks to cross the inefficiency chasm and enter the golden era. However, to fully realize this potential, the industry must first reimagine its business by addressing technological and organizational inefficiencies.

Historical Perspective: The games industry has historically employed bespoke methods in game design, game tech, and operations due to its greenfield nature and the need to develop custom game engines, game design mechanics, and backend game services. Development teams applied snowflake methodologies to build custom code that created game functions and features that were different from game to game and studio to studio within the same publisher, which led to significant inefficiencies.

Growth and Inefficiency: Since its inception, the games industry has experienced unprecedented growth, and revenue hid the sins of inefficiency exacerbated during the hypergrowth period from 2012 through the pandemic. This period saw a YoY CAGR average of almost 12%, reaching $192B in revenue, with over 36% of the world or 2.9 billion people playing games by the end of 2021¹.

Pandemic Impact: The pandemic profoundly affected the games industry, creating a content binge that drove 2020 revenue to $179B from $144B the previous year, a CAGR of over 24%. However, it also exposed the industry's vulnerabilities. Larger teams that had not previously worked together faced more complex scopes and limited access to development tools. This perfect storm caused game launch delays or cancellations, creating an inability to grow revenue in 2021. Significant R&D investments supporting the Metaverse, which never materialized into anything meaningful, further resulted in profitability compression. The global macroeconomic environment began to change in Q2 of 2021 with inflation rising to 4.2%². The Fed increased interest rates in mid-2022³, and revenues declined across numerous industries, further exacerbating the situation and leading to widespread layoffs. This period also initiated an order-of-magnitude increase in M&A activity within the games industry, consolidating the major and large indie players within games⁴. 2022 also led to the first-ever decline in industry revenue of -5%.

Resilience: However, the industry showed resilience, and by the end of 2023, games revenue rebounded with a CAGR of 0.5% and revenue of approximately $184B, with the global gamer audience growing to 3.31 billion or 40% of the worldwide population¹ with projected to reach $205.7 billion by 2028⁵.

Regional Revenue Insights:

• Brazil: Total video games and esports revenue in Brazil was $1.7 billion in 2023, expected to reach $3.7 billion by 2028, increasing at a 16.3% CAGR⁵.
• North America: Total video games and esports revenue reached $68.5 billion in 2023, forecast to grow to $88.7 billion by 2028, at a 5.3% CAGR⁵.
• Asia Pacific: Total revenue was $109.6 billion in 2023, expected to grow to $181.8 billion by 2028, at a 10.7% CAGR⁵.

The Reimagination: Historically, revenues from video gaming have been dominated by subscriptions and purchases of games. But advertising is gaining prominence. Of the two main revenue sources, app-based social/casual gaming revenue (US$82.9 billion) was narrowly ahead of in-app games advertising revenue (US$72.4 billion). By 2028, the latter will rise at a 15.4% CAGR globally to US$147.9 billion in 2028, while the former will grow at just a 5.15% CAGR, to US$106.6 billion. By 2028, social/casual gaming will account for more than three-quarters of the overall global video games and esports market⁵.

Advertising Revenue:

• In-App Games Advertising: In-app games advertising revenue was $72.4 billion in 2023, expected to grow at a 15.4% CAGR, reaching $147.9 billion by 2028⁵.
• Integrated Video Games Advertising: Integrated video games advertising, which includes static ads within games, generated $4.2 billion in 2023. It is projected to grow at a 1.9% CAGR, reaching $4.6 billion by 2028⁵.

Moving Forward: As the gaming sector grows, investments in new products, new technologies, and new business models will increase, and as the games industry looks to cross the chasm of reimagining its business operations to become more efficient. The industry will look to leverage technologies that accelerate the process, like game engines, cloud services, repeatable frameworks, LiveOps services, customer engagement & monetization models, and trust and safety services, which can enable uniformity and reduce TTM windows. Solving the inefficiency chasm represents a significant opportunity for the industry. This will be a meaningful transformation requiring strategic insights and support in implementing these technologies and optimizing business operations to drive sustainable growth and innovation.

• The rise of cloud gaming: Cloud gaming revenue is expected to increase significantly, driven by advancements in 5G technology and increasing consumer demand for seamless gaming experiences⁵.
• Subscription Services: The growth of subscription-based gaming services is shifting consumer spending patterns, affecting traditional game purchase models. Subscription revenue is projected to continue growing as more consumers prefer this model⁵.
• Regional Market Dynamics: Asia Pacific remains a critical region for growth, with significant investments in mobile and cloud gaming infrastructure. The region is expected to lead the market in both revenue and player engagement⁵.

Nintendo is likely to release the next generation of its popular Switch console in 2025. To appeal to younger demographics, companies are focusing on more compelling collaborative, social gameplay. And in February 2024, Disney and Epic announced a deal to work together to create an ecosystem that would envelop Fortnite and the worlds of Pixar, Marvel, and Star Wars⁵.

7 Reasons Why Video Gaming Will Continue To Be The Dominant Entertainment Medium⁶:

1. Television Peaked Years Ago and its Time is Being Redistributed to Games
2. Gaming is Replicating the TV Package with Sophisticated Monetization Models
3. Gaming Has Unprecedented Content Leverage
4. Social Signals Effects and Reinforcement
5. Tightest Feedback Loops + Culture
6. Consistent Growth Through New Devices, Categories, Technologies, Content
7. IP

Sources

1. Newzoo
2. US Bureau of Labor Statistics
3. Federal Reserve Economic Data
4. DDM Games Investment Review InvestGame
5. PwC Global Entertainment & Media Outlook 2024
6. Matthew Ball