Oct 01 2019
This article is part of a newly introduced series discussing how industries may adapt to disruptive technological innovations. In this article, we’ll focus on the disruption of the video games market by digitized streaming formats.
The video games market is experiencing an identity crisis. New business models are emerging within the digital gaming realm that threaten to drastically alter industry dynamics. Better, faster technology has enabled game streaming and subscription services to gain a foothold in the $66.7-billion Video Games industry (IBISWorld report NN003). As the userbase of these platforms continues to grow, such business models propose to take the industry entirely digital.
However, the retail/physical aspect of gaming is not expected to relinquish market share so easily. IBISWorld estimates the retail, distribution and development of consoles in the United States is valued at 13.1% of all income within the industry. Even as digital and streamed games rise in popularity, baseline demand for games on physical discs remains. The reliability, speed and resale value of physical games keep the classic model competitive with emerging streaming, subscription and free-to-play gaming platforms.
Retail: Incumbent, discs and legacy
The retail aspect of the video games market is formally covered under the $20.2-billion Hobby & Toy Stores industry (45112). Industry operator GameStop, which boasts a market share of 8.9%, is the leading brick-and-mortar retail channel for video games and largely represents the traditional video game business model that has dominated for the past two decades. In the traditional model of video game distribution, manufacturers supply retailers with video games that consumers use with gaming consoles. This business model is characterized by retailers like GameStop and console manufacturers like Microsoft and Sony.
Given the longevity of this business model, supply chains are efficient and clear. However, as high-speed internet has become more accessible, the possibility of streaming video games has become more feasible.
Streaming and subscription services represent the fastest-growing segment of the Video Games industry. Game subscription services loosely follow the Netflix business model, largely predicated on unlimited access to a wide and expanding selection of titles. Tech powerhouses Google and Apple , though already tangentially involved in the industry through their operation of mobile game marketplaces on Android and iOS devices, respectively, are now building out subscription services that appeal to different types of gamers. Though both stores already have thousands of games to play, the majority are monetized through “free-to-play" mechanics, forcing players to watch ads or wait to progress (or else spend money to bypass these annoyances).
Apple recently rolled out its high-profile game subscription service, Apple Arcade, to address players’ frustration with this free-to-play standard. The service offers access to a library of 100 different games for $4.99 a month, none of which have these free-to-play distractions. Google launched a similar service on the Google Play store, Play Pass, just days after Apple Arcade’s launch.
The other major offering in this space thus far is Microsoft’s Xbox Game Pass, with several pricing tiers for players on both Xbox and PC. The subscription price is similar to Google and Apple’s mobile offerings but has already experienced early success by addressing different marketplace concerns. Specifically, consumers see value in this business model because it lowers the barrier to entry to a game and eliminates the threat of buyer’s remorse.
When consumers buy a game at the standard price of $60.00, there’s always the possibility that they might not particularly like it, or that the value may fall short. The subscription model fosters exploration and encourages continued gameplay, thus generating revenues over a longer period of time relative to the revenue derived from the sale of a single game. While IBISWorld estimates retailing is the second-largest product segment within the Video Games industry, representing 17.0% of annual revenue, online gaming has been the primary propeller of industry growth in recent years.
Next Generation Consoles: Encouraging an all-digital video game supply chain
The Video Games industry is approaching a major turning point with the upcoming release of next generation gaming consoles, expected for fall 2020. The next major console offerings from Microsoft (9.8% industry market share) and Sony (4.5% industry market share) will incorporate streaming functionality, will likely both offer subscription services (confirmed by Microsoft, rumored for Sony), while also throwing a lifeline to the physical gaming format by once again including a Blu-ray disc drive.
Along with Play Pass, Google is trying to enter the console space with its streaming-only service, Stadia, that ostensibly runs out of a Google Chrome browser. The question of whether this new format will be able to seriously contend with traditional console offerings is one of the largest unknowns on the industry’s horizon.
However, even as physical discs remain a viable option for playing games, the viability of primarily retailing physical games remains to be seen. GameStop is now the only operator of note in this arena, outside of local, mom-and-pop game stores, but has been suffering substantially. The company’s business model was based on its ubiquity; a decade ago, GameStop’s only competition for game sales was other physical retail, either in the form of big box stores like Best Buy and Walmart or online resale through Amazon or eBay. Though it has tried to reinvent itself repeatedly, GameStop has never fully recovered from the advent of digital game sales; the company’s stock hit an all-time low of $3.21 a share in August.
Overall, new hardware releases (with new functionality) will likely compound these effects. Though there may always be a place for physical discs in games, the growth and influence of streaming and subscription services are likely to push the industry closer to an all-digital gaming ecosystem. Supported by continued growth in digital streaming revenue, the Video Games industry will continue its upward trajectory over the five years to 2024, with industry revenue growing an estimated annualized 8.7% to total $101.2 billion.
Looking for additional coverage on video game technology change? Check out our related Game Changers podcast series and Gaming Gambits episode to discover more on the rapidly evolving world of video games!
Edited by Kieran Newton, Lead Editor
Infographic Design by Veronica Albarella, Copy Editor & Page Designer