Reinventing the Value Creation in the Gaming Industry: Who’s Ruling it Now?

The gaming world consists not only of gamers and game developers. It involves all sorts of participants that interact with each other along the value chain of game creation and promotion. In this article, we’ll describe how each of them gets involved, how they work together, and what brings them profits. But most importantly, we’ll shed the light on the great shift in distribution channels and see how it affected the revenue streams of the industry and drew in new participants.

Software producers: from freelance developers chilling in Thailand to 10.000 employees giants like Blizzard Entertainment

“Software producer” is a vague cumulative notion. It includes a wide range of actors each of whom is in charge of their own piece of the action in the process of creating and releasing the game to final customers.

Who are these actors and what are their roles?

First of all, someone has to come up with the idea of the game plot, create its software and test it. This is usually performed by a Game Developer. In addition to that, the development process and funding in some cases can also be managed by a Game Producer.

Then this ready-to-use product needs to be “packaged” — with all the copyrights in place, well planned promotional campaigns, and other activities that help reach either the end customers or other contractors along the value chain. This part can be performed either by the Developer himself or by a Game Publisher, who’d usually have an established brand and a network of contacts topped by a richer experience in launching games than the Developer himself. The only question here is how they’d split development & promotional costs and sales revenues.

Then, once the game is not only functioning well on a technical level but is also well-prepared to enter the market, it should somehow reach the final customer. The Game Publisher can achieve that either through his own website or through external Distributors. In older days, these would likely be brick-and-mortar stores. Today, as the Internet offers more time- and cost-efficient distribution channels, such stores are largely edged out by online marketplaces like Apple’s AppStore or Steam. In fact, 47% of Game Developers sell their games on Steam, where 25 new games are released every day.

But how do all these participants interact with each other and split profits?

Let’s face it, creating a game requires lots and lots of work — and thus a hefty sum of money and people, too. That’s why in many cases it’s easier to vertically integrate some stages of the value chain — say, development and production — and perform them on behalf of one Game Publisher company. Moreover, some big publishers like Activision, Ubisoft and EA go beyond those two stages and even have their digital storefronts and distribution platforms thus tackling even the Distribution stage on their own. No surprise that the top 25 vertically integrated companies — many of which also expand to the hardware level — account for 77% of the total global games market: they control all these massive chunks of activities without having to give cuts to any side contractors.

However, while companies with over 500 employees represent 19% of the industry, an increasing amount of small studios also become successful. In fact, the same 19% of gaming companies have just 1 employee and 15% have 2 to 5 employees. And interestingly, both types of companies are leveraging the same opportunities that derived from the reinvention of the distribution channels with the advent of the Internet.

How does the evolution of distribution channels reshape the whole gaming landscape and its revenue streams, drawing in new participants?

With the spreading of the Internet, much of the activity previously performed by distributors and retailers tends to be replaced by external digital marketplaces like Steam, hardware manufacturers themselves — e.g. Apple’s AppStore — or even Social Media platforms like Facebook that keep offering new services to their users, now also gaming. This has triggered the emergence of a whole new business model based on a continuous and direct relationship with the user — free to play (F2P). And this type of games is gaining popularity really fast: 80% of the total digital games revenue in 2018 were earned by F2P games.

With this model, revenue streams are shifting. Now software developers generate profits mostly from the commercialization of ingame virtual goods — a huge market that FiPME aims to make even more efficient — and advertising. With this, new participants are entering the market and engaging in new sorts of transactions. The most important of these participants include new types of distributors that sell not only games software but also downloadable ingame content — just like FiPME — and corporations from all sorts of sectors. But now, it’s worth taking a closer look at the latter ones, and here’s why.

How do corporations from other sectors generate more than 25% of the gaming industry’s profits?

At the moment, 51% of the whole industry’s revenues come from Mobile gaming. And 53% of mobile games profits come from ingame ads. This makes external companies, most of which don’t even have to do with gaming, one of the biggest contributors to the sector’s valuation — which would have been absurd before the disruption of the distribution channels.

The thing is, all sorts of companies are constantly looking for better ways to reach their target audiences and gain more exposure. The gaming world is a great path to achieve that. It gives access to a 2.2 billion crowd with easily tracked backgrounds and locations — which is crucial when it comes to targeted ads — and lets companies reach their potential clients when those are fully focused on the “advertising channel”.

Companies’ engagement goes well beyond simply putting an ad banner in F2P mobile apps, though. They can opt for product placement in popular games that reach hundreds of millions of gamers — more than most TV channels. Funnily enough, this opportunity is so attractive it is sometimes used not only by the companies — for instance, the video game Burnout Paradise was full of Obama’s 2008 campaign billboards, not Coca-Cola cans. Companies can also sponsor eSports events and teams or Twitch streamers — Mastercard already does so with League of Legends tournaments. Some companies can even release their own branded games. For instance, the United States-based restaurant chain Chipotle launched its own app, The Scarecrow. This game promoted the company’s values and connected it with customers while also being fun enough to reach 250,000 downloads in just four days!

Furthermore, some wise corporations — mostly those in the tech sector — notice the crazy growth that the industry has been showcasing throughout the past years and simply don’t want to miss out. Such corporations buy successful gaming companies, like Amazon did with Twitch, as well as invest heavily in their own game-related products. Again, Amazon launched its Amazon Game Studios back in 2012 and started several other gaming initiatives since then, with many other giants following his example. Such initiatives also substantially rack up the industry’s performance.

The new forces of the gaming landscape

These are the key stages of the game creation value chain and at the moment, here’s where most of the industry’s profits are generated. However, the gaming industry is no longer just about the gamer and game producers: new participants start to kick in.

Research papers on gaming even introduce a new type of participant as an alternative to a conventional gamer: gaming enthusiast. This is a person who’s not necessarily playing games but is still involved into the space by watching streamings, attending esports events, betting on esports teams, monitoring the industry’s news, collecting gaming memorabilia, etc. This person is also willing to spend his/her money on this hobby just like active gamers are. The question is, who will this money go to?

In this regard, it’s also interesting to consider the actors who have lately emerged on the periphery of gaming and are eagerly moving straight to its epicenter to cater to the needs of the freshly minted game enthusiasts. Such participants are massively popping up in the Esports sphere which draws in not only gaming producers and external sponsors & advertisers but also streaming platforms, streamers, offline and online tournaments organizers, governments, universities, and all sorts of international gaming societies. And while these participants are not yet accountable for a big chunk of the sphere’s profits, they might well contribute to the future of the industry and thus are worth our attention. We’ve already written about some of them in our previous article on Esports so feel free to check it out here and stay tuned for more posts!