The industry isn’t what it used to be. The last 5 years have been tough on everyone. Trump won a second term by promising to finish the wall (but didn’t), Brexit Britain is a lawless wasteland, and Denmark is now only the 12th happiest country in the world. But in no other field have things changed as much as in the video games industry. Let’s take a look at how the world changed:
Even prior to 2019, PC sales have slowly increased, pushed by a wave of enthusiasts building their own systems and the general realisation that mobile isn’t going to be great at every workload.
Steam is still the largest game store in the world by population, but this is mostly legacy players and no real metric of success. It finally shifted its unpopular stance on the sales ratio in 2019 and again in 2020 to stem the tide of developers abandoning the store for richer pastures. But it might be their deal with Microsoft that kept them relevant; we’ll talk about below.
Exclusives are the key change to PC. The bulk of the money made on PC is now divided among publisher stores like Epic and Devolver, who have built up their market share by offering games you can’t find on other platforms – just like consoles back in the mid-2010s. With Ubisoft and EA’s stores dead in the water with near-zero growth and, worse, nobody caring, two of the big three publishers have exclusivity deals with stores.
EA only sells on Epic (and Origin, for what it’s worth), Activision would love to only sell on Blizzard, but can’t get a healthy userbase there, so shares titles with Devolver. But Ubisoft, true to form, sells on all stores – but with unique items and bonus missions on each, making it impossible to collect everything in Assassin’s Creed: First Civilisation (out November 24th 2024, preorder now to play on November 21st and get the exclusive Terran Owl bird skin!).
Microsoft screwed up the launch of the (now ageing) Xbox Stream and Xbox Flow. Firstly, when they announced the new generation of consoles in 2019, they made a pretty big deal about how lag-free the Stream’s streaming experience was. Once again failing to understand their audience, those who bought the Stream were sorely disappointed with the experience on the US’s slow internet infrastructure. Oddly, it did quite well in the Nordics where internet speeds average 150/100 in homes. But since a Nordic country has the population of a single East Coast city, the Stream quickly died in the West. It still lives on in China, but most of the money Microsoft would make from it is taken by their Chinese holding company and isn’t allowed to leave the country.
As for the Xbox Flow? Well, the disc-based system had its own problems. Much like the early Xbox 360 days, parents didn’t know the difference between each console variation and simply bought the cheaper, streaming-only one. This led to massive disappointment in the US when buyers would get the console home and find it wouldn’t run anything. When Microsoft finally killed the Stream (18 months too late), the Flow was able to regain some ground but has been on the backfoot ever since.
Where most people expected early generation success to flip-flop between Sony and Microsoft once again, Microsoft instead combined the mistakes of the previous two generations: not understanding the audience and confusing marketing, and failed to generate much hype. They made big money in the first year where PlayStation looked underwhelming and overpriced, but faltered soon after.
Sony did a smart thing with the PS5: they made a console that worked. Admittedly it was overpriced, the hardware to ensure backwards compatibility added some extra $$$, but as soon as they scraped that (again) and moved to a software-based backwards compatibility solution and lowered the price by $100, it started doing fine. As the years went on, Sony experimented more and more with streaming games, and now has a healthy library of tested and approved games that work well on slower internet speeds, but full downloads still make up the large majority of PlayStation’s annual revenue. Rather than the generational leap that Xbox took, PlayStation did it slow and steady. Boring, but safe.
Of course, Sony’s other businesses have practically closed down by this point and PlayStation is the only department making money. Poor Sony
2019 heralded a massive shift on mobile: Apple was called out for only allowing a single store on their platform. The British Competition Commission laid down a ruling that iPhones and iPads needed an alternative place to buy and download apps from. The EU quickly backed that up and, after some resistant from Apple’s lobbyists, the US did too.
Humble, the store that had long been a minor Android store on the side of their Bundle business, quickly moved into position. Devolver would create their own app store a year later. Business is thriving, at least for enthusiasts, as the big three publishers build console-style games specifically for mobile, treating it almost as a Nintendo DS in 2010. These games are stripped back but competent versions of PC and console titles, able to look great and run well on foldable form factor devices. These stores are also helped by the rise of game companion apps and there’s a little money being made in streaming console titles.
This monopoly issue quickly found its way to console too. Each console must now allow other stores to sell through them. Gamestop, once an almost dead brick-and-mortar chain, now not only allows you to buy and download new games through their PS5 and Xbox stores, but you can also sell them back to them for credit. These “codes” are then “resold” when the game ages. Whereas the primary console stores showcase the latest and greatest games up front, Gamestop shows the cheapest, making a healthy profit through deals with publishers for exclusive in-game content.
Most PC stores now have console counterparts too, sharing the exclusivity deals and bonuses. Steam, slow and reluctant to change, has made the bewildering decision NOT to launch a store on consoles. Sony continues with the tried and true developer strategy that spawned series like Uncharted, Horizon and God of War to continued acclaim.
In order to stay competitive on its own platform, Microsoft has followed a similar strategy and actually made great use of the studios that it bought in the late ’10s, building up a unique library of first and second party IPs and ensuring the prices for them remain competitive across stores. It’s “Buy Once, Play Anywhere” strategy actually pays off when it drops focus on the Xbox Store on PC and instead partners with long-time rivals Steam to give players Xbox titles on PC and Xbox at the same time.
Nintendo is Nintendo. They had an early start moving their IPs to mobile, and that now generates ~30% of their revenue. Their console business is still doing relatively well, but the successor to the Switch is just that – a successor. It’s not powerful enough to run most AAA games natively, it has to stream them from third-party stores, but the dependency on an internet connection hampers it in areas where 5G still isn’t prevalent. Gone are the days of innovation and the highs of the Wii, Nintendo has struggled once again to bring onboard third-party publishers and the mobile portability of their console is as limiting in game scope and it is freeing in movement.
For over a decade AAA studios have been claiming that the current model was unsustainable. During the ’10s, there were a number of trends that drove up the cost:
- Better definition and graphics. Quite simply, the more detailed you want the world to be, the more time and people are required to make it.
- Games as a service (GAAS). In order to keep players paying money for a game, developers need to make them retentive. Gameplay “loops” are designed to keep players ingesting the same content over and over, levelling them up to encourage them to buy “better” in-game gear and content, even though really nothing can change otherwise they’ll break out of the loop. All this content drives continuous costs.
- Sequels. Sequels need to be bigger and better than their prequels. More content > higher costs.
- Storage space is a premium. The games industry has always had to contend with the disc limit: from cartridges to CDs, DVDs to Blu-ray, and finally to hard drive space on the Xbox One and PS4. Streaming promises to replace this limit with another: your connection speed. The race to a true “Netflix of games” is still hindered by this.
- Microtransactions. Small payments to bolster GAAS.
Over the last few years, there have been some problems with this. Firstly, higher definition TVs are still expensive. With the overall cost of technology rising year on year (look at the price of iPhones), the average lifetime of technology increasing and the flatlining of global incomes, the tech industry has seen a slump in sales year on year, with growth only really driven by the enthusiasts who want the latest and greatest. Indeed, 1080p60 still works for most people, and those devices can only render a game so well. While there will always be improvements, for the general public graphical fidelity fails to impress now, and it is unique art styles that sell better. This has been great for the indie and mid-tier developers, but AAA devs are struggling to find unique selling points now.
There are only so many hours in a day, and with so many games clamouring for every single hour of it, the games-as-a-service has essentially strangled itself. These games still exist, Assassin’s Creed: First Civilisation is an example of that, and many of them still do well, but the rush of 2019 is over and smaller studios have finally given up on making GAAS games like battle royales. With stores now pushing to become streaming services where they get a larger slice of the pie (and a tasty monthly subscription), publishers run that risk that their games are too long or short to be profitable. They make money the longer you play, but if I game is dull or too short, they lose players quickly.
Sequels drive the majority of AAA sales. The tentpole titles continue to do well, but only following the shifts in the market. Games are actually smaller now, and all the better for it. Narrative experiences are more focussed, delivering more interesting games that don’t require a lifetime commitment. Insomniac’s second Spider-Man (published 2021) game perfectly encapsulates this. It built on the story of its predecessor, expanded the game world a little, but its biggest improvement was with its side-quests, showcasing villains and Avengers in small stories that were inspired by Cyberpunk 2077’s quest structure.
Obviously, it’s impossible to tell the future, but at this point, progress seems bottlenecked by connection speeds. The USA is going to have to finally invest in its online infrastructure else it risks losing market focus to Europe. With more Europeans getting increasingly better speeds and stability, the streaming success from the Nordics is starting to spread south. With Asia following suit, it looks like the big publishers may be ready to deliver two versions of their games, with fidelity dependant on your connection speed or form factor: disc or stream.
Stores are going to want to move to streaming. It will provide a regular recurring income for them, but they need to convince customers it’s worth it. So we’ll either see some stores opt for good subscription deals over full-purchase sales to convince customers to switch. Xbox has been trying this model for years with the Xbox Game Pass on the Stream, but they have yet to make a convincing argument to customers. More competition in the market may encourage this, but maybe this is the time for Netflix to rise back up from the fray of competition in the TV space and take games head-on. Of course, this is all dependant on connection speed.
The next generation, if there is enough of a change to call it that, is going to have to capitalise on this. The PS5 is still a very capable machine though, and it’s hard to see where the tech needs to catch up on the games. The Xbox Flow is due for an overhaul, Microsoft needs to expand its storage solutions and finally add 10 Gigabit internet to their devices. If anything, it looks like the next generation will be a refinement of existing tech more than a significant upgrade. Maybe we’re looking at more of a PS4 Pro/Xbox One X style shift than a PS6 or Xbox 4?
No, hardware will not define the next generation: how games are sold will.
Games are constantly shifting. We have new genres coalescing from old ones and more reboots to boot, but it’s the move to streaming that’s causing the biggest shift. Quite simply, AAA cannot survive the streaming age on its current model. As an example, let’s look at Red Dead Redemption 2. Even a year after launch the completion rate for its single-player game was so low that if it were a stream-only game, Take-Two would make almost no money from it. RDR3 is going to have to be either an online-only Red Dead Online GAAS and particularly innovative to stand out in the market, or an extremely engaging single-player campaign to keep the cents per hour rolling in.
It will be the small, agile developers and publishers that benefit. By creating multiple smaller experiences and spreading their wings across the streaming stores, they will be in the best position to generate continuous stable revenue. It could well be possible that a single developer churning out iterative tower defence games over a couple of years could generate more revenue than a single Call of Duty game that takes two years to develop but that people tire of quickly. AAA publishers have the benefit of publishing from multiple studios, so it’s the AAA developers themselves that may have to evolve or die.
What is certain however is that business strategies have to change. The age of the $60 game is dead and it’s not coming back. Streaming is key to discoverability, and microtransactions are the key to supporting titles in the long term. AAA isn’t dead, they need to be more agile or innovative to survive. Games-as-a-service isn’t dead, but the single-player experience may return to reign supreme – assuming they are interesting enough to do so. The future of the games industry is subscription-based “Free” to Play, and that’s something players, developers and publishers are going to have to adapt to.