Gaming has become a huge part of everyday life. I’ve always been a gamer. I spent way too many hours during my high school days locked up at home playing RPGs on my Sony Playstation. It was only in the recent decade, however, that gaming has stepped out of the shadows of basements into the mainstream.
The appeal of video games for me was the great value proposition they offer. I could spend $20 on a used video game as a kid and get hundreds of hours of entertainment. I simply couldn’t beat that outside of a long fantasy novel and that appeal of the $$ spent/hr of entertainment stuck with me as I got older.
The video game industry has always been good at adapting to the changing nature of tastes and product cycles and the various revenue opportunities that exist and could be harnessed.
The model started with a game you could buy for a $50 to something like an MMO that added a recurring monthly fee and an ever expanding world. All these games started to tap into the addictive nature of progression based gaming as publisher began to realize that they could get more than just the initial sales price and the user base was willing to pay for it to fund additional content.
The turning point was when the old model of selling physical copies morphed into digital copies with additional DLC(downloadable content) that could be purchased.
The proliferation of mobile devices thrust the world of video games into the mainstream and publishers began to realize the benefits of mobile games.
Just like digital, there was an ease of distribution as well as additional ways to monetize the massive user base that mobile games attracted.
Companies realized that a that small portion of users were willing to spend extra money to customize a character or get an advantage in the game. They took advantage of the ability to attract that type of gamer to improve profits. Micro transactions, first used outside of mobile in limited scope, became a much bigger deal on mobile. These allowed developers and publishers to sell a variety of things like extra lives, power boosts or loot boxes containing items that users could use to customize their characters. The freemium gaming model(free game with in-game purchases) became massive on mobile as publishers wanted to capture as many people as possible in hopes of catching whales(gamers who would spend a ton of money to max out everything possible).
This model soon transitioned back onto PC and console games with an added focus on micro transactions and capturing more and more revenue from the whales that would spend extra money beyond the cost of the initial game to get everything the game had to offer.
Personally, this model doesn’t appeal to me and I never pay extra for a game and will avoid any game where you can buy an advantage but the financials don’t lie.
Video game companies have done very well in recent years and a lot of it is due to the new ways of monetizing their releases.
The truth is that there is always a need for escapism and video games provide one of the most effective ways to achieve that for the end user. The product captures the attention of users due to having a low(often free) cost of entry in relation to amount of entertainment produced leading to a high user base. That means there’s often(not always) a revenue boost for the company when a game first sells. On top of that, game designers have added a very addictive progression based flow to many games with the idea of monetizing a certain percentage of the user base in a big way leading to very high margins and repeating revenue on successful games.
That new foundation of monetizing games after released has meant that the global video game market has exploded in recent years. Almost $110B in revenue has been generated by video games in 2017 and that number is expected to grow at ~6% per year until 2020.
One of the most visible trends that has driven this is the growth in Mobile based gaming. The mobile chunk of the pie started at 39% of $101B in 2016 and is projected to be 50% of nearly $130B in 2020. Continue reading “Investing in video games”