Introduction 

Games have always coexisted with humanity. They make an integral part of various cultures, facilitating social interaction, entertainment, and competition. With the arrival of accelerated technological growth, avenues of gaming have evolved tremendously, where games that are able to be played electronically on devices are loosely coined as video games. The video game industry is relatively new compared to sub-sectors within the entertainment industry. More so, when one mentions the entertainment industry, people would generally think of films and music due to the glitz and glamour, but the truth remains where the video games industry has long surpassed both the film and music industry combined in terms of revenue as early in 2016, with no signs of slowing down. The article aims to provide an overview on the intricacies revolving the booming video game industry.

Below is a non-exhaustive product classification of video games, which will be mentioned in later sections.

Supply chain overview

Typically, the video game industry major players consist of hardware developers, game developers and game producers. Hardware developers are companies that focus on creating hardware/platforms for games to be played on. These hardware are said to set an industrial standard for video games as in-game performance optimization must be in sync with the platform itself. Some hardware like Sony’s Playstation requires game developers to pay a development fee in order to develop games on their platforms. Next, game developers focus on creating and designing the video game itself. This encompasses a wide range of highly technical tasks such as plot writing, level building, graphic design, audio composing, debugging, and etc. Lastly, game producers deal with the business side of things, overseeing the overall development of the video game before the product reaches the end market. Their responsibilities include budgeting, marketing, licensing, making timely deliveries, or in other words, optimizing the quality assurance process. 

Monetization models

Monetization refers to the process in which the product generates revenue. Over the years, video games’ monetization has evolved dramatically despite having a common goal of maximizing returns. A clear distinction in terms of monetization is the price of the game itself, whether it is B2P (Buy to play) or F2P (Free to play). B2P is likely to be the oldest monetization approach. Back in the days where physical distribution was relatively common, players would have to pay for video games that come in cassettes, cartridges, or discs. B2P also comes in several forms, with some requiring a one-off payment and some operating on a subscription model requiring continuously monthly payments. These subscription models work best with online games which requires direct connection to access video game assets. F2P simply refers to games that are freely available to all players. Despite most B2P games that come with a refundable policy, F2P games shine in terms of their low cost of entry, allowing players to get a feel of the game before committing to it. So how do F2P games even make a profit? 

Video games tend to come with additional forms of monetization, especially for F2P games. Unlike price-based monetization, these additional forms of monetization are known as microtransactions. They are optional from the players’ perspective, but it usually enhances the gameplay experience. Firstly, we have battle passes, which on purchase, unlocks additional in game features or even accelerating progression of the player. Battle passes tend to be temporary in nature, e.g.: such as Dota 2 which releases battle passes on an annual basis which lasts approximately up to 6 months, granting additional in game features and a chance to unlock limited edition cosmetics. On expiry, these features will not return until the release of the next battle pass. Secondly, we have downloadable content (DLC). Unlike battle passes which are temporary, downloadable content are usually permanent purchases that unlock extra maps, stories, and new game modes. Thirdly, certain games have “premium currency”, which allows players to purchase in-game resources that are difficult to be obtained or even unattainable without spending cash. Lastly, perhaps the most notorious form of microtransaction: Loot boxes. Loot boxes, or occasionally known as gacha, originated from gacha-pons, are capsulated toy vending machines which are incredibly popular in Japan. Like these vending machines, loot boxes grant players a predetermined probability to obtain a random virtual item. While loot boxes can be extremely profitable as it comes in exorbitant prices, it is widely criticized for being predatory due to the resemblance with gambling, where in extreme cases, players end up spending large amounts to fuel their addiction.

There exists several out-of-game monetization methods as well. While only applicable for video games with a fairly huge fanbase, video games can reap a portion from merchandise sales, such as apparel, figurines, and etc. Video games like Castlevania and Pokemon had their own tv-series and movies to complement the growth of the franchise till today despite their initial game releases during the 20th century. Lastly, games can also turn to advertisements to generate revenue. This form of monetization has single handedly supported the growth of F2P mobile games, where the most common types of advertisements are in the form of rewarded videos, where in-game rewards are granted after the players watch a short video advertisement. This also allows the developer to further monetize their products by releasing an ad-free version of the game to players.

Opportunities and catalyst

Streaming

Unless you have been living under a rock, surely you have heard of the term “streaming”. In the context of video games, it refers to the process where “streamers” broadcast their gaming live on video platforms, usually on Twitch, where viewers have the option to make “donations” to the streamers. There are several reasons why streaming has and will continue to act as a growth factor for video games. Video content has always been the most preferred form of content, as it accounts for up to 80% of internet traffic in 2019. Furthermore, video game streaming has extremely low barriers of entry. All it requires is a basic video recording software, a microphone and a webcam. Recently, Alexandria Ocasio-Cortez, an American congresswoman even had a live stream playing the video game, Among Us to promote the importance of voting in elections. While achieving significant viewership from streams might seem daunting for the average streamer, advantages of low barriers of entry is that it would eventually attract lasting talents. While there exists demo versions of games which allows players to check out a game, the downloading process still takes time whereas one can simply head to watch video game streams, with some streamers even having the opportunity to access unreleased content, as a form of indirect advertising by video game producers. Like any form of skillset, players stand a chance to discover obscure techniques and improve their own gameplay by watching streams. Furthermore, gaming can be a rather exhausting process depending on the game where watching streams are viewed as engaging with video games but are relatively undemanding. Streaming platforms also act as a community for like-minded players to discuss the game. While not interested in the game itself, some viewers stay for the personality of their favourite streamer, or simply to support them. In short, video games are likely to remain relevant as streaming continues to spur demand for immersive entertainment.

Esports

Electronic sports, or simply esports, refers to competitive video gaming. Esports can be traced back to South Korea as early as 1998, which coincided with the release of Starcraft. Today, Esports have come a long way before gaining mainstream traction as it was not regarded as an actual sport due to the lack of physical exertion despite similarities where both require teamwork, communication, practice, and physical coordination. Regardless of one’s stance on whether Esports should be viewed as a type of sports, the trend revolving esports did speak for itself, achieving a consistent double-digit annual revenue growth. It was not long before traditional sports channels like ESPN began airing esports as traditional sports viewership heads toward a decline. In 2019, Netflix even addressed that Fortnite is likely to pose a bigger competition compared to HBO. Plus, a large prize pool in Esports also highlights the underlying opportunities for both commercial licensing and sponsorship advertising. Back in 2011, Dota 2’s very first major competition known as The International had a prize pool of 1.6 million dollars. In 2019, it had managed to generate up to 34 million dollars. To put in context, the 2019 Wimbledon’s Open prize pool for both men and women totaled up to 49 million dollars. While nowhere close to major sports prize pools, esports prize pools are expected to outperform in terms of growth. Gone were the days where video games were treated as a hobby, today, gaming has evolved into a potential career for highly skilled players. Johan Sundstein, currently the captain of OG (Dota 2) has reaped a total winnings of 7 million dollars which does not include his salary as of October 2020. Complementary to that, we are seeing an emergence of educational institutions offering esports scholarship to students who can compete in esports professionally, providing opportunities to those wanting to compete in a professional scene. 

Covid-19

While covid-19 is viewed as an unfavourable factor for most economic sectors, it is undeniably a pleasant surprise to a certain extent for the video game industry. On preliminary judgements, covid-19 has caused delays to console releases like Xbox Series X and the PlayStation 5 and anticipated game titles like Halo: Infinite and Cyberpunk 2077. While physical events like esports competitions and game conventions are affected as well, these events can be held virtually to offset the loss of sales, unlike traditional sports which are held off since it would pose huge infection threats to the players. However, covid-19 has helped solidify video game’s positional lead within the entertainment industry as consumers seek for alternative forms of entertainment during lockdowns. Games like Animal Crossing and Fall Guys which had their release dates coinciding with the impose of lockdown saw huge success in terms of initial debut. Even older titles like Among Us and Plague Inc experienced major resurgence due to separate reasons, one for its relevance to the pandemic and another as spillover effects from popular streamers. With the end of pandemic being nowhere in sight, the hike of video game sales will possibly translate into a permanent effect for the industry as gaming gets adopted as mainstream entertainment.

Threats and pitfalls

Piracy

Considering video games are a form of media entertainment, it is a victim of piracy. While not extremely common, some video games are regionally locked, where players of excluded regions have no legal means of obtaining said game due to censorship or licensing issues. Furthermore, the shift of physical distribution to electronic distribution has made pirated copies readily available. Back then, physical purchases would require a one-off usage CD key before getting installed. While a study done by the European Commission that claims that piracy actually boost game sales indirectly, arguing that those who pirate games tend to have a high unwillingness to pay, hence the loss of sales tend to be overestimated. From an economical point of view, consumers can obtain virtually similar goods and services at a lower price with minimal consequences. Hence, several actions can be taken by developers and producers to disincentivize digital piracy. Between F2P games and B2P games, F2P games possess a huge advantage over B2P games in which players have no incentive to pirate these games. The developers can simply focus on enhancing microtransactions to encourage players to spend without concerns of piracy. In other words, consumers want their games worth each and every ounce of penny they are paying, which is why developers and producers should just focus on optimizing game development and production. On the other side of things, legal and enforcement bodies can also reduce piracy by tightening regulation such as the Digital Millennium Copyright Act (DMCA).

Cheating

Similar to physical sports, video games have to deal with cheating as well. While cheating can enhance the gameplay experience for single player games, it severely ruins the enjoyment of multiplayer games, which tend to be a prominent target of cheating due to psychological factors. Most cheating software relies on manipulation of stored values and forging network packets. To avoid this, game developers are tasked to develop anti cheating software that is built-in to the game. Tools like statistical analysis can help detect anomalies on player performance to justify a sudden improvement in skill level. Of course, the player base itself plays a crucial role in reporting suspected cheaters for further inspection. While several professional esports players or teams have been caught red-handed such as match-fixing by Arrow Gaming of Dota 2, most cases have been treated seriously, usually imposed with a permanent ban from the professional esports scene to further discourage similar behaviour.

Privacy and security risks

Let us take a moment to be honest to ourselves: Most of us do not read the exact details even after agreeing to any form of terms and conditions. Ironically, this has caused severe backlash such as boycotting and forced re-releases when a game poses underlying privacy and security risks. With regards to personal information, most data are relatively secured and well encrypted, thanks to the General Data Protection Regulation (GDPR). Some concerns exist for the usage of alternative data such as personality, preferences, in-game decision making, text mining although most of these are collected for targeted ads. For the case of security issues, gamers are easily targeted by cybercrimes. Games are often used as a gateway to gain access to financial information, not to mention the plethora of phishing-based attacks which opens up via in-game purchases. Regarding the aforementioned anti-cheating software, unfortunately, these software often have kernel access to a person’s device. Without getting overly technical, kernel access simply means that the software is able to obtain direct access to raw data stored in one’s device. These security failures are often undetected initially, however once discovered, the public opinion towards the game can deteriorate rapidly, causing significant negative changes in both review scores and player count, which could be seen for Genshin Impact during the initial release whereby it was reported that its kernel anti-cheating software would continue to run even after the game was closed. Fortunately, the developers swiftly addressed the issue by modifying the software to run only when the game was running.

Conclusion 

To sum it up, the video game industry has grown exponentially in the recent years to spearhead the entertainment industry. Over time, developers and producers should adopt ever-changing monetization models to adapt to an increasing genre of video games. Besides, the growth of the video game industry is justified and expected to persist due to the existence of the current catalysts. As with any industry, there are always factors which threaten the industrial robustness, which can be nullified through holistic policies, both from the supply side and external parties.


Researcher: Cheong Jian Yan

Reviewer: Millen Lau

Editor: Hui Zhen Tay

Download the article here: Overview-of-the-video-games-industry.pdf