The evolution of video games: from one-hit wonders to billion-dollar franchise entertainment

Video games evolution eSport gaming franchise entertainment

Gaming is not just for kids, anymore.

When video games first entered the public consciousness in the 1980s and 1990s, the majority of people that played were children and young adults still clutching their adolescence.

In those days, gaming was a niche industry on the fringes of mainstream entertainment.

Fast forward to today, and gaming has grown into a US$100+ billion per year giant that dwarfs films, TV, books and music. It’s not uncommon to see games with age restrictions, helping people become fitter, or even games that make people money.

A far cry from the typical stereotype of spotty kids playing games in their bedrooms, video games have evolved into the most engrossing form of entertainment with more adults ”gaming” than ever before.

What’s even more remarkable, is that it’s all happened in less than a generation.

Gaming checkpoint

According to industry-analytics reporter Newzoo, there were 2.2 billion gamers across the globe that generated around US$109 billion in-game revenues in 2017 — representing an increase of 7.8% from the year before.

The research company estimates that mobile games constitute the most lucrative gaming segment, with smartphone and tablet gaming growing 19% year-on-year to US$46.1 billion, claiming 42% of the market.

Furthermore, it estimates that given current trends, by 2020, mobile gaming will represent more than half of the total games market and generate somewhere in the region of US$70 billion per year for game developers.

Top 10 public companies gaming revenue

So, how did software designed for geeks become the coolest thing in town?

The answer lies (as always it seems nowadays) in technology, cultural preferences and an underlying insatiable thirst for interactivity, in everything we do.

What constituted the avant-garde and cutting edge 20 years ago, can now be accomplished by mobile phones (and even some pocket calculators).

The progress of technological innovation has made games more vivid, compelling and interactive to the extent that it has spawned a parallel spectator sport where people pay hard-earned money to watch professional gamers play in competitions that offer prize pools in excess of US$20 million dollars.

The increasing demand for interactivity

Perhaps, the most convincing argument for the dramatic rise in gaming is the demand for engaging entertainment.

Partly as a result of the emergence of social media, larger inter-connected networks and cross-platform games, people are no longer content to consume media in a passive manner.

The movie industry, by comparison, generates around US$50 billion per year and doesn’t instil interactivity in any way. Movies are a one-way street, whereas games are interactive and require increasing amounts of responsiveness.

In actuality, the more responsiveness demanded by the game, the more popular it tends to become.

The games industry demands that gamers download more apps and add-ons than ever before while remaining captivated by elaborate storylines upon which dynamic content is created and distributed within seconds.

Games have become immersive experiences where players control entire worlds rather than remaining linear software with a beginning and an end. As a result, video games offer a far deeper form of escapism than the cinematic industry could ever hope to capture.

In 2016, the mobile games industry outperformed PC and console gaming for the first time in history, earning in excess of US$36 billion. In fact, the consistent rise of mobile and online gaming can be seen as a huge contributing factor in the increasing popularity of games versus movies.

Gaming on smart devices, mobile phones, and browsers is quick and convenient, and accessible to a wider audience than many console games. Indeed, more women and children are accessing gaming thanks to this dynamic shift in technology, altering the stereotype of the gamer altogether.

For the first time in history, online and mobile gaming are seen as legitimate forms of entertainment next to their billion-dollar counterparts in Hollywood and Bollywood.

Australia’s claim to gaming fame

As a country, Australia is making some headway towards joining the gaming boom, keen to diversify away from its reliance on commodities.

Many gaming companies have picked Melbourne as the epicentre of their push into games, with China the clear winner for developers vying to make their games commercially viable. 

In gaming (much like commodities) success is measured not by the size of the resource (or the quality of the game), but by how much market traction it receives from buyers. If a game is not downloaded, played and monetised, it will not generate the required return for the studio to make more games.

Several Australian companies are venturing into making games or making games pay.

Animoca Brands (ASX: AB1), has published several cult-classic titles and continues to outperform expectations in terms of adoption.

The company was recently tasked with creating the next Masterchef blockchain-powered gaming app alongside iCandy Interactive, with the two companies quickly emerging as Aussie success stories in an industry that remains frighteningly small compared to North America, Europe or China.

Melbourne has emerged  as an attractive destination for game developers looking for a springboard into China, with the recent creation of The Arcade — a collaborative workspace that has become the spiritual home of the Australian indie games industry.

The next generation

The prospect of virtual reality and artificial intelligence is promising to send the already large sums sloshing about in the gaming industry to all-time highs over the coming years.

Making money in gaming is done several ways.

The simple traditional way was to develop a game and then to sell it on store shelves for somewhere in the region of A$60-$100 per game.

Then there’s the subscription model where the game is sold for a more reasonable US$15-$30 with the user paying a further US$15-$30 per month or per year as a subscription fee.

More recently, however, a typically modern methodology was born: the freemium model — and it has been a runaway success, especially on mobile phones which has become the leading platform for playing games and generating staggering sums of money as a result of the distribution model mobile phones make possible.

Consoles may offer the latest and greatest graphics, but they require the player to play at home with the aid of a large-screen TV. Computers make for excellent games-playing machines, but they require regular upgrades, lots of know-how and, again, to be sitting in front of a box attached to a screen.

The ubiquity of mobile phones has meant that any one of the 4.7 billion mobile phone owners can download and play a variety of games from their device within seconds. They can also attach the little gizmo that’s supposed to be making phone calls to a screen too — and play that same game in high-definition.

One in three people on the planet — that’s 2.5 billion — play free-to-play games across PC and mobile platforms. Surveys suggest that 92% of all smartphone and tablet owners play games at least once a week while 45% play daily.

Free-to-play games maintain their grip on the worldwide games market, generating US$82 billion, or 89% across mobile and PC markets.

Global games market forecast 2020

In fact, the video game industry is more successful than film and music put together.

From a regional perspective, the Asia-Pacific is by far the largest region, with China generating around US$27.5 billion, or one-quarter of all revenues each year.

Newzoo expects the global market to grow at a CAGR of more than 6.2% towards 2020 to reach US$128.5 billion. Based on its review of final 2016 financial results of more than 70 public companies, Newzoo also upped its final take on 2016 by US$1.1 billion to US$101.1 billion.

China represents over 30% of games revenue in Apple’s App Store whereas as little as six years ago, in 2012, it was only 3%.

The key trends in Gaming

The introduction of MMO (Massively Multiplayer Online) has had a huge impact on how spending patterns amongst gamers.

Internet-connected games allow players to play each other from all over the world, giving rise to huge playing communities.

This is best exhibited by the rapidly growing eSports industry, whereby professional game players congregate in organised tournaments, playing for millions of dollars in prize money to sold-out stadiums being televised on TV channels such as ESPN and online via newly-founded platforms such as Twitch.

The ASX has its very own contenders in the space with Esports Mogul (ASX: ESH) advancing exactly this market niche to a reasonably successful degree.

The company has struck several agreements, most notably in Korea and Latin America, and continues to record triple-digit growth rates in user numbers with plans to monetise its fertile mobile-focused early mover advantage in Australia.

Another factor that has catapulted mobile games into rampant profitability is in-game purchases.

By enticing gamers to download a graphically attractive game with excellent gameplay mechanics for free, it allows the game maker to throw in stacks of in-game commercial carrots including level-ups, downloadable content and microtransactions that stack up in the game developers favour over time.

This effectively widens the gaming audience and widens the revenue opportunity, while also extending the life of published video game titles beyond just annual releases.

The net effect of the “freemium” and subscription models, has been to foster sustainable communities of paying customers that become self-sustaining because of the interactivity that its users crave — a digital opioid that requires a graphical refresh but one that will ultimately survive without having to have hundreds of millions of dollars pumped into them.

From an investment perspective, this type of market direction is arguably beneficial for the video game industry as a whole but is most beneficial to the largest and most sophisticated game publishers.

Top 10 public companies gaming revenue 2016

Large games developers are dominating the industry, buying up smaller names including their most successful ideas at the first hint of viral success.

Learning from Pokémon Go

The Pokémon Go phenomenon is perhaps the most recent example of how well-positioned software companies can make the biggest bucks in video games.

Pokémon is an established franchise in which a new game was developed by Niantic (ex-Google labs). The game was in development for two years and the company received in excess of US$30 million of private funding from Google, Nintendo and The Pokémon Company.

Upon its release in July 2016, it was downloaded more than 100 million times, with users posting an average playing time of over 30 minutes a day — and making a meaningful dent in other mass user applications such as Facebook and Snapchat.

What Pokémon Go demonstrated is that to create commercially viable franchises that become self-sustainable and capable of being repeatedly monetised, intellectual property is key. Technical expertise and a large starting budget are also imperative.

Once the community is established, it grows via player engagement and can be monetised over the long term and not just during the course of a blockbuster weekend.

Mobile games Pokemon Go Candy Crush Clash of Clans

Games start out as free, but ultimately the ongoing success of communities such as Minecraft, Candy Crush and Clash of Clans prove the engagement and monetisation can extend for years, not just weeks.

The dawn of eSports as a spectator sport

According to industry research hub SuperData, eSports will become a US$1 billion business this year. Popular titles like League of Legends and Overwatch helped eSports attract a sizable audience of 258 million unique viewers.

The firm says eSports generated around US$756 million in 2017 which equates to a current year-on-year growth rate of around 32% — quite possibly, the quickest growing gaming niche currently out there.

When it comes to spectating how professional gamers play video games, the leading streaming platform Twitch, generated around US$1.7 billion last year with YouTube second with revenues of US$690 million.

Funnily enough, YouTube was said to have double the audience of Twitch and yet it generated just less than half of what Twitch did (quite possibly because Twitch attracts a more concentrated gaming audience that’s willing to pay more for gaming content).

To put the commercial magnitude of eSports into stark perspective, the winner of Wimbledon, the most illustrious tournament in tennis, carries a prize pool or US$40 million with the men’s and women’s winner receiving something in the region of US$3 million in prize money.

Patrick Reed, the most recent winner of the most highly acclaimed golfing tournament, the Masters Tournament in Augusta, reportedly scooped US$2 million.

In comparison, the largest prize pool in eSports history was the eSports DOTA 2 championship tournament, which took place at the KeyArena Center in Seattle, Washington in 2016.

eSports DOTA 2 tournament 2017 International 5
The fifth annual Dota 2 International tournament.

The event was hosted by games developer Valve with the winning team scooping US$9.1 million from a total prize pool of US$20 million.

The winning team, Wings Gaming, received the US$9.1 million as a team with each of the five players hauling in US$1.8 million each.

The prize money pool has climbed year after year to the extent that last year’s International 7 event offered a total prize pool of US$24.6 million and netting the eventual winners (Team Liquid) US$10.8 million in prize money.

What’s possibly even more staggering is that such prize pools are expected to grow over the coming years because gaming is still an industry at the early stages of maturity with plenty more spare capacity in which to develop.

Australian hopefuls looking to reach such heroic commercial feats include eSports team ‘ORDER’, who’ve recently partnered up with Esports Mogul and its tournament platform ‘Mogul Arena’.

Gaming for the present

The incredible evolution of games from niche hobby that used to attract pre-pubescent males to all-encompassing sources of universal entertainment attracting men and women of all ages, could be explained by the fact games are shedding their gaming roots and moving into fully interactive and immersive experiences that do not feel like games at all.

Far from it. Games and online experiences can often feel more immersive than real life for many gamers. Without delving into the social implications of this trend, the commercial opportunity has been well-defined.

Games have taken on a new meaning and have therefore attracted audiences in their billions, with billions of dollars in disposable income to be deployed in the decades to come.

Game on.

George is an award-winning market analyst who has authored articles and editorial opinion pieces for multiple publications around the world. He has written about a wide variety of topics including financial markets, stocks, trading, politics and economics.