Many investors are embracing the $160 billion gaming market. The industry is larger than the $43 billion box office, $60 billion video streaming and $19 billion music businesses combined.
Gaming still conjures some negative connotations that stem from the industry’s origins – predominately male youths staying up late playing mindless games. Today, this couldn’t be further from the truth – nearly half of gamers are female, and more than 40% of adults older than 50 play games.
Gaming is a multinational phenomenon that connects more than 3 billion players around the world. The top five companies in the S&P 500 all generate revenue from gaming.
Investors often point to the favorable demographic trends, but advances in technology have spurred much of the industry’s growth. New technologies are emerging that I think will create new business models and investment opportunities.
Technology is often met with skepticism, and its potential is initially viewed through backward-looking calculations. When game developers first laid hands on the iPhone in 2007, they felt it had similar graphic capabilities as the Game Boy and they planned to charge $50 a game.
In 2009, when Apple introduced in-app purchases, no one predicted the creation of a $75 billion mobile gaming market that spawned from a free-to-play model. Consumers have the option to purchase upgrades via microtransactions – like adding a weapon, new level or customized character accessory – but can download and play the game at no cost.
Traditional game publishers were slow to embrace the change, which gave rise to mobile-first and free-to-play-only companies. Now, the incumbents are spending billions of dollars to catch up.
Like most industries, the internet has been transformative to gaming. The ability to save was one of the first big breakthroughs for gaming in the mid-1980s. The nostalgic Atari brought gaming from the arcade into family living rooms, but games like Pong and Ms. Pacman didn’t allow players to save their progress.
In 1986, Nintendo released The Legend of Zelda, which included an internal battery that allowed players to save their progress. It enabled players to progress through many levels and ultimately gave rise to games like the iconic Super Mario Bros.
In the 1990s, the internet revolutionized online multiplayer gaming. Multiplayer capabilities have ballooned from four players battling one another to more than 3 million players engaging simultaneously.
As multiplayer games grew in popularity, gaming became increasingly social. Preconceived notions probably recall obnoxious preteens playing Call of Duty, but more than 200 million Words with Friends players keep in touch with family and friends through the social game. Entire classrooms are moving online inside of games like Roblox. As games become more social, players are more engaged – and higher engagement leads to increased spending.
The internet also changed the distribution of games. Digital downloads have replaced CDs in a box and other physical media. Digital distribution cut out the retailer and eliminated the need for managing inventory. Removing these barriers made it easier for games to cross international borders and gave rise to small developers. And though digital media seemingly destroyed the physical resale business, it has given rise to new business models like cloud-based gaming and subscriptions.
Mobile gaming has always been digital, but it lacked the technical specifications for the highest-quality games. With cloud computing, smartphones are catching up to consoles, and several prominent games have been wildly successful crossing platforms.
The industry is still grappling with the subscription model – think of a Netflix-style platform for gaming. The incumbents are reluctant to give up their $60-per-game upfront fee, though investors love the games-as-a-service model. The transition to subscriptions was at first eschewed by the music and video industries, but now both embrace it as the largest driver of growth.
While these business models that emerged over the past two decades are still driving growth, the next wave of innovation has already arrived. With concepts like the metaverse and advances in virtual reality, the 50-year-old gaming industry could be on the cusp of its biggest advance yet. The metaverse is a digital environment where people engage with their friends, play games, exchange digital (and physical) goods with virtual currency and, in short, fully immerse themselves in a virtual world.
It sounds far-fetched, but it’s already transcending gaming. Companies have held conferences in the metaverse, businesses are advertising in the metaverse, digital malls and experiences are forming. It has enabled players to create, share and monetize their own content.
This nascent technology is rapidly gaining traction – 30 million people watched rapper Travis Scott perform a concert within Fortnite, a number that eclipses this year’s Grammys viewership.
The industry’s favorable demographic trends will continue to fuel growth, but I’m excited about the opportunities spawning from digital, free-to-play and social gaming. I believe the best technological advances are yet to come.
