Quick take: The games industry health check

In recent weeks and months, a growing number of people have been asking: “What is going on with the games industry?”, “Is the games industry doomed now?”, “Is it done growing?”, “If neither a new Switch or GTA 6 are getting released this year, is the games industry going to have a weak year?”, or some other typically sceptical permutation thereof.

We thought it would be useful to offer our perspective as to where the games industry stands on its journey.

It is important to take a mid-to-long-term approach to thinking about an industry’s health check. Yes, to some it is important what the global revenue will be in 2024 as opposed to 2025. However, the ‘why’ behind the numbers is arguably more important – what are the key drivers and inhibitors that will affect the global industry revenues for the years to come?

The games industry has growth ahead, but slower than it is used to

At a high level, the rate of growth has arguably peaked for the games industry – at least for the next half a decade or so. This does not mean, however, that stakeholders should start worrying about the industry. As revenue grows, as more consumers play games, and the closer they get to maxing out time they can allocate to games, the slower the industry can grow in percentage terms.

This does not mean that it is not getting significantly bigger in money terms. Due to its sheer size, and despite global games revenue predicted to grow at just CAGR 4.4% between 2023 and 2030 (approximately half of what it was between 2019 and 2023), it will still grow by over $78 billion in that period. Of course, within that period there may be years that it grows faster or slower, but the overall trajectory is still upward.

The inflation caveat

Of contextual importance when looking at revenue growth is the rate of inflation. On average, over the next decade, industry growth will be in the mid-single digits. However, if the rate of inflation is higher than that, it ultimately means that the games industry will be worse off. If the rate of inflation is under 4.4% on average between 2023-2030, then the industry overall will be better off.

2024 or 2025, does it really matter?

Another area of scepticism has been around Nintendo Switch’s anticipated (but not announced) release of Switch 2 in 2024 - this anticipation has now shifted to 2025. Towards the end of 2023, we also got confirmation that GTA VI, one of the most ‘needle-shifting’ titles when it comes to games software revenue will release in 2025. These announcements have left many pondering what kind of year 2024 will materialise into for games.

While the dates of these major launches may matter to those monitoring short-term industry trajectories, they do not significantly affect the long-term trajectory of the industry. So, what does?

Key revenue growth drivers

One key tailwind for the games industry is that the number of gamers will keep growing meaningfully for the rest of the decade. This is driven by:

-       A growing global population

-       More accessible and reliable global internet connectivity and smartphone penetrations in emerging markets

-       A growing number of gamers as a % of population, with the 45+ generation having gaming as a major mainstream activity for the first time – a result of millennials ageing but keeping gaming as a part of their entertainment portfolio.

Another important driver will come from the growth of cosmetic (non-progress related) in-game spending. As buying cosmetic digital items is becoming increasingly embedded as an important part of self-expression in the digital environment, more gamers are likely to take these up over time, as Gen-Z and Gen-Alpha age.

Key revenue growth inhibitors

A potential headwind for games software revenues will come from the rise of cloud gaming subscriptions as more games become available to play at a monthly subscription price point. On one hand, while this will make gaming more affordable (potentially attracting more consumers to regular spending in games), it also decreases consumers’ need to buy more individual games at high price points. There have been arguments made about games subscriptions propping up demand for premium games, with a portion of consumers buying a title when it leaves the subscription offering if they are still interested in playing it. Going by the lessons learned from the video and music industries, when on-demand all access streaming models come into play, the industry typically must deal with a downward revenue pressure as consumers start buying fewer individual assets (e.g., CDs in music, or DVDs in video). A key saving grace for the games industry comes from the existence of in-game purchases (something neither music nor video had) that will offset some of this pressure. One the other hand, a premium game is typically priced higher than a CD or a DVD used to be. MIDiA will be keeping a close watch on how the rise of subscriptions is affecting purchasing of full games.

More careful funding for games – good or bad?

One final frequent point of discussion is around games funding. While there are more ways to raise funding for a game than ever before, some have expressed concerns about the increasing difficulty of raising significant funds  from any one of them, compared to the games investment heyday a few years ago. While this may mean that some projects do not materialise, we do not see this as a significant issue for global games industry revenue. There are arguably already too many games being made (which all compete for the very finite 24 hours in the day), with promising titles still being able to raise significant funds. Investors becoming a little more careful about where they place their bets is arguably a long-term upside for the games industry. Fewer games being made will not lead to fewer dollars or hours being spent on games. Additionally, investors being more focused will likely limit the adoption of the “spray & pray approach” to funding games, adding greater stability and predictability to games industry revenue. Games are, of course, still a hit-driven business, but the more the flop-to-hit ratio can be optimised, the better.

All in all, the games industry is entering a beginning to mature. This is not to say that the industry is dwindling or doomed or becoming less attractive. It is simply adjusting to this new chapter of its journey. This is a chapter that focuses on the increasing importance of profitability, optimisation, and carefully thought through business models more than ever before.