Four Trends Defining the Future of Gaming

Hi everyone. Last week we compiled a bunch of industry predictions from around the web, and this week — especially since it was a light news week — we decided to focus on predictions and trends again. There’s no shortage of topics to write about, but here are four trends to keep in mind as we enter 2021.

#1: Led by Game Pass, Subscriptions Slowly Grow in Prominence

A lot has been said about gaming subscriptions over the past couple years — both good and bad — and we should expect the conversation to pick back up again. Even though most companies with gaming subscriptions have so far failed to scale them or made strategic blunders, it’s not game over for subscriptions as a whole. In fact, I (Aaron, here) expect to see leading subscriptions become both more prominent and respected for their increasing value propositions.

Let’s start with why the narrative is often negative. Obviously individuals consume games differently than other types of subscription-oriented entertainment — gamers stick with specific games for longer, it’s extremely tough to release a steady stream of AAA hits, publisher subscriptions are overly narrow, and on mobile it’s hard to compete with free-to-play. There are abundant examples of subscriptions that failed to change the status quo:

Apple Arcade faced an uphill battle since day 1, but it should’ve executed better. For example, overly focusing on indies meant the service failed to support tentpole franchises that could attract larger audiences.
Subscriptions like EA Play and Ubisoft+ have a place, but subscriptions around specific publishers will forever be niche.
Cloud gaming subscriptions like Stadia have underperformed by most every metric. Slapping old school business models onto this new way of playing games is less interesting than using cloud gaming to unlock new types of gameplay. Plus, the content options remain weak.

All that said, there are bright spots:

Xbox Game Pass — which hit 15 million subs in September (probably more like 20 million now) — is increasingly impressive. Even though Xbox will sell far fewer consoles than PlayStation, Game Pass is the closest comparison to the Netflix of gaming. The company is heavily investing in new studios, all of whose games will release on Game Pass across Xbox and PC. Even though it takes years to scale up AAA content, Game Pass will capture a far higher ROI on content spend as more people join. Plus, including EA Play as part of Game Pass is a smart move. We can’t overly compare this service to video streaming, but there is a similar game of aggregation at play. Game Pass’s willingness to go cross-platform and cross-publisher means it has the best shot at meaningful scale. And even though the company currently offers heavy discounts, once content has scaled up it will pretty easily be able to raise prices.
Nintendo has a major opportunity to release a subscription service that provides access to its entire back catalogue. Nintendo is typically slow to things like this, but it’s certainly possible over the next couple years. It’s not as exciting as Game Pass — since it likely wouldn’t include new games — but it can still become a valuable addition to Nintendo’s business.
It will be interesting to see what PlayStation does over time. PlayStation Plus and PlayStation Now are decent starts, and the company’s focus on high-end exclusives vs wide-ranging options (like HBO vs Netflix) probably means it will continue to differentiate from Xbox’s strategy. There is more than one way to win.
Lastly, subscriptions can also become more prevalent in-game features. Just like Fortnite is positioning the $11.99/mo Fortnite Crew subscription as a battle pass upsell, I expect other major games to test similar options. Plus, as companies begin to see the positive financial benefits — substantial high margin recurring revenues — it will become a larger priority.

All in all, gaming subscriptions aren’t dead; in fact, they’re just getting started. However, as we move forward, I expect the industry to wisen up, the gap between the winners and losers to dramatically widen, and the biggest winners to become aggregators. Game Pass is the best positioned, but we’ll see how the tides turn as the market evolves.

#2: IDFA - It Won’t Be An Apocalypse

Much proverbial ink has been spilled about Apple's decision to deprecate their device identifier. The technicalities of it are well-covered by analysts such as Eric Seufert (on his site Mobile Dev Memo) among others. There is great coverage on the implications to the advertising ecosystem: how Apple and Facebook wage their cold war in digital advertising; how the technical implementation of the new privacy-first standards is likely to happen; and how Apple’s push for personal privacy deserves to be seen both as a consumer-first effort to go beyond modern privacy regulation (such as GDPR and CCPA) and as a calculated move to assert dominance in the mobile ad ecosystem.

However, most developers and publishers are still perplexed about how will this affect their business specifically, and more importantly, how should they act. Instead of diving into the technicalities, let’s take a step back and put it in the larger context. Mobile games as an industry continues to grow, and the fact that our device identifiers are zeroed for analytics purposes is unlikely to change that. People will continue to enjoy playing games in 2021, and game developers will adapt their approaches to game development and marketing to fit the new privacy-first paradigm.

Notably, it is in the interests of both Apple and Google that engagement and spending in their respective walled gardens continues. Publishers’ marketing money is agnostic to the platform it is spent on, and developers don’t really care where they get their return on ad spend (ROAS) from, as long as growth is profitable. In fact, the fundamental marketing metrics are not jeopardized by enhanced privacy - this is a mere loss of some granularity.

The panic this loss of granularity induces is understandable, but even in the post-IDFA world, mobile direct response will be the prime channel for marketing apps due to the remarkably low friction from impression to install. The supply and demand of impressions and installs isn’t going anywhere, and developers thinking that it’s not possible to market games profitably without highly granular data are playing the short-term game.

Assuming that the industry as a whole will not shrink due to these changes, there will be relative winners and relative losers. Even just in mobile direct response, most successful advertisers already run several types of campaigns: some optimize for the install, some for an in-app event, some for in-app purchase value. The games that can sustain a healthy mix of marketing strategies to build a sustainable user base will prevail. As doing this needs both well-converting ad creative and solid in-game performance metrics, I believe that those games also happen to be the best in the market.

All in all, no matter the ulterior motive of Apple, the winners of the privacy push are the consumers. Publishers will need to pay attention to measurement in the changing environment, working on assumptions and simple yet effective models, instead of seemingly precise ROAS numbers. But consumer behavior will not drastically change, and there will be no IDFA apocalypse. In other words, it’s back to basics: great games, resilient marketing, no gimmicks. (written by Miikka Ahonen)

#3: Cross-Border Collaborations and Launches Accelerate

I (Owen, here) think cross-border collaborations and the distribution of games (in dollar terms, not number of games) between China and the world will grow significantly in 2021.

One important topic in China’s video game industry over the past few years has been the implementation of the ISBN and its vast implications. For the uninitiated, the ISBN is the formal government license games need to get in order to be approved for sale on app stores. Domestically a lot of smaller studios weren’t able to survive the winter, foreign games got locked out of the market, and even Tencent felt the negative ripple effects. Needless to say, the ISBN regulation shook industry players both domestically and globally, especially when Apple’s App Store took down around 48,000 games without the ISBN at the very end of 2020.

Over the past few years, Chinese studios had to change rapidly. One of the second-order effects of the ISBN on Chinese studios is that it forced them to focus their efforts on higher quality productions and global markets (often both simultaneously). After all, there is now lower incentive to produce low quality knockoffs with poor retention given the extra resources needed for the ISBN. And it is now easier and quicker to launch globally, while waiting for ISBN approval within China.

The result? Currently ~20% of the US’s top 100 grossing titles are from China. I think Chinese studios with their new found confidence in the global markets will continue this trend in 2021, and by end of the year probably ~30% of the US’s top 100 grossing will be Chinese. There will be games that innovate (like Genshin Impact, Archero), PC-to-mobile ports (like PUBG, Call of Duty: Mobile), and high-quality copycats (you know who you are). There will also be more collaborations on IP, development, and distribution. Two key examples are Diablo Immortal (developed by NetEase/Blizzard) and Call of Duty: Mobile (developed by Tencent, publishing regions split between Tencent, Garena, and Activision).

As for international companies looking to distribute games in China, it became clear that they needed to get serious about applying for the ISBN back in June when Apple first removed 15,000 games from its App Store. The previous default was to publish on Apple’s App Store while giving up Android. Assuming that it takes a minimum of 1 year to apply for a foreign ISBN (which is the consensus view), we’ll see quite a few international top grossing titles receive their ISBNs soon and start competing in China. For example, Roblox, Candy Crush, Dead Cells, Legend of Tomb Raider, Marvel Super War, Seekers Notes, Elders Scrolls just got their ISBNs in Dec 2020 and will be ready to rock 2021. (written by Owen Soh, China Market Entry Consultant)

#4: The Rise of Player-Owned Economies

The most interesting innovations often exist at the cross-section of industries, and as the video game industry matures the more susceptible it becomes to new forces. I (Aaron, here again) think one of those new forces will be the emergence of collectibles and player-owned economies.

What do I mean by that? Well, outside of the gaming industry the rise of collectibles is fairly obvious. Pokemon card collecting (and their prices!) blew up in 2020, which signals more of this type of thing to come. Perhaps more interesting, companies like Rally Road and Otis are making it easy to buy fractional ownership of collectible cars, art, books, trading cards, wine, games, and more — and are rapidly growing as a result. I also expect 2021 to be a milestone year for non-fungible tokens (NFTs) in the crypto realm. NFTs are a fancy way of saying “scarce, tradeable digital goods,” and not only are we seeing cutting edge teams creating the infrastructure to better build, distribute, buy, and sell NFTs, but we’re seen some early adoption with digital art, digital land, and even in-game assets (in games like Axie Infinity).

So what does this really have to do with games? Four ponders:

Player-owned economies. It makes sense why gamers would want to actually own and be in control of their in-game assets (like cards, skins, etc.). For example, imagine if you could trade or sell your Hearthstone cards as you please? Or what if you owned one of 1,000 special Iron Man skins in Fortnite and then could use it in other games? It would certainly trade for a premium. Imagine if RuneScape had always supported a real marketplace? This all lets gamers potentially create real world value from their time spent in-game (and not resort to the black market to sell things like in-game gold).
Interoperability. It’s still unclear exactly how interoperability emerges, but it’s a logical extension of player-owned economies. Remember CryptoKitties? That entirely flamed out, but the idea that you can use your digital cat (and its various cat accessories) across different games and digital experiences was a breakthrough. It’s inevitable this idea emerges in a big way again… just a question of when and how.
New game designs unlocked. The rise of collectibles (or player-owned economies) won’t impact every game, and even then collectibles don’t always necessitate NFTs. That said, this trend will grow in influence, and when it does it’ll unlock new types of game design (around new incentive models). The standard monetization tactics that are maturing today won’t be the only way to win in the future.
Brands jump in. One ripple effect of scaling in-game collectibles means that the brands which are most known for real world collectibles will turn digital. For example, a couple months ago Honor of Kings and Burberry announced a partnership, and last year Louis Vuitton collaborated with League of Legends. Expect more of this, and expect it to multiply in prominence once player-owned economies and interoperability begin to emerge.

Here’s an important caveat: this is a long-term prediction, and I know many are skeptical. The industry won’t be disrupted in 2021, although I’m sure we’ll see fascinating progress among the fringes. However, even if we don’t know the exact path or timing of this trend, much of it does feel inevitable since it clearly benefits gamers. That means it’s worth keeping an eye on, because once the tides start turning you won’t want to be the last entrepreneur, executive, developer, or investor to adjust.

🎮 In Other News…

IronSource acquires ad measurement firm Soomla. Link
Playtika IPOd, raising $1.88B and now sits at a $13B market cap. Link
Lucasfilm re-establishes Lucasfilm Games as home for all its gaming titles. Link
Related, Lucasfilm and Ubisoft partner on Star Wars game (EA will still continue to work on Star Wars titles). Link
Steam saw 21% more games sold in 2020, 120 million MAUs, and hours played jumped 51%. Link
GameStop holiday sales down 3.1% in 2020. Link
Streamer TheGrefg breaks Twitch peak concurrent viewership records. Link
Puzzle Quest dev Infinity Plus Two acquired by 505 Games parent Digital Bros. Link
Kuato raises £4.5m, expands to VR. Link
Take-Two withdraws bid for Codemasters following EA offer of $1.2B. Link
9 out of the top 20 best selling titles in 2020 were console exclusives. Link
Rival Peak, a fascinating cloud gaming experiment, continues to ramp up its engagement (46.7k concurrents). Link
CD PROJEKT’s co-founder offers a personal explanation of what the days leading up to the Cyberpunk 2077 launch looked like. Link
IMVU launches VCoin transferable digital currency (the SEC’s approval here is notable). Link
Over 2 Billion Gaming Tweets in 2020! Link

🖥 Content Worth Consuming

2021 Predictions #1 Puzzle Games Becomes the Top Grossing Genre on Mobile. (Deconstructor of Fun) “What follows is an overview of the performance of puzzle games over the last year, a retrospective of last year’s predictions for 2020 and some new predictions for the coming year of 2021. So settle down with a cup of hot cocoa, don your favorite hazmat suit and let's begin!” Link

2021 Predictions #2 Will the Hypercasual Party Ever Stop??? (Deconstructor of Fun) “One of the most popular things during the past three years has been predicting the end of Hypercasual business model. And don’t get us wrong, we at Deconstructor of Fun have written multiple posts detailing why the end is near only to be proven wrong by a massive margin. So why are right this time around? Well, that will be up to you to decide. But one thing is for sure, we are giving credit where credit is due. And the Hypercasual publishers definitely deserve theirs after doubling the market size through unrivaled pace, innovation, and optimization.” Link

Global Video Game Deals Report 2020. (InvestGame) “We are happy to share with you our new Annual InvestGame Report. As usual, it shows data on the closed gaming deals in Private Investment, Public Offerings, and M&A activities of the year, and dissects the 2020 deals in 3 major sections: Gaming, Platform & Tech, and Esports & Other.” Link

Genvid targets "a huge opportunity for game developers" with Rival Peak. “The company was founded to build tools that would allow developers to create sophisticated experiences that explored similar ideas. As Navok describes it, Genvid's ambition was to become "the Unity of interactive streaming -- a completely neutral back-end that enables a game developer to stream to Twitch, to YouTube, to Facebook, to Huya in China, to their own platform, and have very rich interactivity that can scale into the millions directly back into the game engine." Link

Thanks for reading, and see you next week! As always, if you have feedback let us know here.