The COVID-19 Pandemic Will Accelerate the Evolution of the Video Games Industry
With stay-at-home orders in effect for most of the U.S. population, people are seeking ways to pass the time. Many have turned to video games, which, according to Verizon, saw an astounding 75% boost in usage in March.
This is the fifth time I’ve been through a meaningful recession or market crash. Typically, everyone sits on cash, cocoon, and reduce their capital expenditures. They’re not spending money on food, drinks, and entertainment outside the home. Obviously, that’s a boon for the video game industry, which brought in $120.1 billion in 2019. But the pandemic has also caused some pain, leading to production slowdowns for Nintendo and the high-profile Sony titles The Last of Us Part 2 and Iron Man VR to be delayed indefinitely.
The games industry had already been experiencing great change even before the pandemic hit. Companies are pushing toward free-to-play models, while tech giants are making strides in games played over the cloud.
Here are the key trends to look at during these evolving times.
Games as a Social Platform
All the big games now act as their own standalone social media platform. Today, people are likely playing games to interact with their friends – they can have a digital social life in the absence of a real social life and meet friends of friends and others who become gamer friends. The medium’s social value right now is at an all-time high and hopefully is driving consumption and spending.
These games also drive business for other parts of the industry. Look at the breakthrough made by Epic Games’ Fortnite, where Sony allowed PlayStation players on the same battlefield with Xbox players. People could invite friends on a mobile device to play, and then the mobile player would realize they’re at a disadvantage because they don’t have a big screen, so they’d go buy an Xbox. Then there’s this creeping phenomenon of small subscriptions, which are required to play games online with Microsoft’s, Nintendo’s, and Sony’s systems. The industry is succeeding at not just getting people on a recurring monthly payment model but also providing the opportunity for more upside from digital sales.
Within eSports, Activision is a growing leader. It set up a Call of Duty league last year, allowing organized teams of players to buy franchises for $25 million. That league sold out. Fortnite ran a tournament last year with $30 million in prizes; teenagers won most of the money. Electronic Arts got a taste of this with the free-to-play Apex Legends.
Playing in the Cloud
Even before the pandemic, the hottest growth area has been cloud-based services. Several companies, including Google and Amazon, have emerging platforms. These internet giants understand the infrastructure and the needs for streaming. Netflix has a market cap of about $180 billion. The opportunity to be the equivalent of that in games is a holy grail worth chasing. Sony and Microsoft both have big catalogs of first-party IP and third-party games. A year ago, there were reports of them making a strategic agreement, but they didn’t say what it was for. We might see Sony and Microsoft organizing their back catalogs and new releases under one umbrella to become the standard place for console gamers to go for the convenience of a monthly subscription where they can access a catalog of games, similar to Netflix.
This is an exciting development for the game industry, because Google and Amazon – and even Tencent, an internet giant – can focus on infrastructure and new technologies that might give them a royalty or a piece of the value chain, such as payments or fraud detection. But in the next five years, we may see a far bigger acquisition than we’ve ever had in the history of the game industry. When chasing something potentially worth over $100 billion, and there’s an internet giant with deep pockets to make a $20, $30, $50 billion acquisition – that might be necessary when competing with the juggernaut of Sony and Microsoft.
The Free-to-Play Model Will Expand
There’s a chance for free-to-play to become more solidly established as the leading marketing message for customer adoption. It’s the standard in mobile, but it’s gradually creeping into the PC and console side, and increasingly there will be cross-platform games with a free-to-play mode. A good example is the recently launched Call of Duty: Warzone. In these titles, gamers can spend any amount they want. Some aren’t going to spend any money; some will spend $20, while others will spend hundreds. Then there’s hardcore gamers spending thousands of dollars – these are the same people who, 10 years ago, during the original physical retail store model, were only buying about three games a year, spending maybe $200.
In the next decade, free-to-play with virtual goods economies will allow the industry to double and possibly triple in size from last year. The pandemic, in a way, is creating a petri dish for all the right things to happen to accelerate it.
Mobile Will Lead the Industry
The industry’s console and PC side is facing a challenge of how to get more money per customer. There’s isolated cases, like League of Legends and Fortnite, where they sell only cosmetic items that don’t help players perform better. That’s a great concept, but a game needs hundreds of millions of customers to perform well with that constraint. These companies need to start taking cues from mobile, which now accounts for most industry revenue. The mobile device population is huge, much larger than the console device population. Many may only be able to play on their mobile phone. All the high-revenue games in the mobile market –around 30 either debuted on mobile or were exclusive to the platform – have achieved over $1 billion in revenue.
These titles allow people to spend virtual currency to progress quickly or to get additional assets in the game, and it creates an arms race where a player can spend money to beat their buddy, and then that friend spends some money to fight back. The most competitive players want to win – this is the way to get them to spend more money. It’s like a casino; the difference is the game industry can get people to spend a lot of money on virtual items, and they can’t go to a cashier at the end of the night and turn it back into dollars. But there’s clearly a willingness because players are having a lot of fun, but more than that, they achieve social status within the games.
Legacy Companies Need to Change
Many legacy companies are still driving their car while looking in the rearview mirror. They’ve had success with a few experimental quadruple-A, free-to-play versions, which you’d think would be an encouraging new business model for them. There will be more, but it will be slow. One thing the traditional companies embraced starting about five years ago was the loot box, but it’s a shallow mechanism that’s too much like gambling, and several countries have regulated it. It’s not easy to make a game that reaches 100 million customers, so inevitably more companies will exploit the free-to-play model with a complete virtual goods economy that encourages more spending.
Compared to companies in Asia, specifically Tencent, many legacy companies haven’t done much on the mobile side, which is clearly where the market and spending has moved. Microsoft, Sony, and Nintendo all have incredible brands that they’ve not yet exploited on the mobile side. Even with huge opportunities and upside, they’ve been resistant to focusing on it, and they will be steadily punished to the extent that they continue to ignore it. Third-party publishers, specifically Take-Two Interactive, are also guilty of that.
These companies have traditional customers saying, “Don’t you dare design a game where people can pay to win.” For hardcore console and PC audiences, that idea is obnoxious. Nobody uses the “pay to win” term in the mobile market, and that’s the market that’s winning. The industry just tolerates that there’s going to be a small minority of customers who are grumpy because they must spend money if they want to win. But we’re trying to run a business here. Companies have got to get over that, and that will happen once they realize that if they listen to their traditional customers too much, they’ll get disrupted.
About Trip Hawkins
Trip Hawkins is the original Founder and CEO of Electronic Arts and was one of the first employees at Apple Inc. Hawkins was a tech CEO for 33 years across four companies and went through three IPOs in his career. He joined Apple in 1978 and helped grow the company from a hobby business with 25 office workers to 4,000 staff and the Fortune 500.
This article is adapted from the April 7 GLG teleconference “COVID-19 Potential Impact on Video Games Industry.” If you would like access to this teleconference or would like to speak with Trip Hawkins or any of our more than 700,000 experts, contact us.
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