PLAYING THE LONG GAME ON A WIDER FIELD

By CHRIS McGOWAN

Following the post-COVID slowdown of 2022-23, the video game industry is cautiously pressing forward, as games that were further along in the production pipeline are center stage while big-name games with longer productions cycles are still playing catch-up, which bodes well for gaming’s diversified future, if not its present.

The video games market generated about $184 billion globally in 2023, a small growth of 0.6% over the previous year, according to data firm Newzoo. Mobile games were forecast to generate $90.4 billion in 2023, a 1.6% decline year-over-year but still about half of the market. The console segment was expected to reach $53.2 billion, a 1.9% increase. PC was the biggest growth vehicle due to projected sales of $40.4 billion, a 3.9% increase. Newzoo projects that the total global games market will pick up the pace and reach $205.4 billion by 2026, with a world player population of 3.79 billion.

The consoles PlayStation 5, Nintendo Switch and Xbox Series X/S sold 22.5 million units, 16.4 million units and 7.6 million units across the globe in 2023, according to Ampere Analysis, as quoted by Financial Times. The PS5 had a banner year, its player sales up 65% while Switch and Xbox were down 18% and 15%, respectively.

Hogwarts Legacy, Call of Duty: Modern Warfare III, Madden NFL 24, Marvel’s Spider-Man 2, Legend of Zelda: Tears of the Kingdom, Diablo IV, Call of Duty: Modern Warfare II, Mortal Kombat 1, Star Wars Jedi: Survivor, EA Sports FC 24, Starfield, Super Mario Bros. Wonder, Resident Evil 4, MLB The Show 24 and Dead Island 2 were the 15 bestselling video games in the U.S. in 2023, according to research company Circana, formerly known as NPD. Another hot title is NBA 2K24, which launched in September 2023.

“Companies over-invested in 2021 as work-from-home drove revenues higher, and the buzz words of the week were Metaverse, VR and esports. However, the buzz words never materialized in a big way, and people went back to work, so growth stalled. With no meaningful growth, overstaffing gave way to layoffs. We’re probably close to ‘right sized’ now and should see a return to growth,” comments Michael Pachter, Managing Director of Equity Research for Wedbush Securities.

“2023 was a brutal year in game development. While every year has its cycle of layoffs and studio closures, 2023 [was] quite different,” says David Johnson, Founder, CEO and Creative Director of Undertone FX, which specializes in real-time visual effects and has worked on Mortal Kombat 1, Diablo 4, Starfield and Star Wars: Jedi Survivor, among other titles. “There have been massive layoffs at a lot of major studios. My speculation is that this is partially a late-stage COVID backlash. Teams had to ramp up quite a bit during COVID because of the time lost due to going remote. Those games have now shipped, and the studios no longer need that size of teams, so a lot of scaling back has occurred – and continues. Funding for projects has gotten much thinner this last year.”

DISNEY/EPIC

One very positive video game development in 2024 was Disney and Fortnite maker Epic Games announcing that they are teaming up to build what’s being described as an “expansive and open games and entertainment universe,” according to the Walt Disney Company. Disney is investing $1.5 billion in an equity stake in Epic.

“In addition to being a world-class games experience and interoperating with Fortnite, the new persistent universe will offer a multitude of opportunities for consumers to play, watch, shop and engage with content, characters, and stories from Disney, Pixar, Marvel, Star Wars, Avatar and more. This will all be powered by Unreal Engine,” according to the Disney site.

“This marks Disney’s biggest entry ever into the world of games and offers significant opportunities for growth and expansion,” Disney CEO Bob Iger said in a statement. “We can’t wait for fans to experience the Disney stories and worlds they love in groundbreaking new ways.”

MOBILE

Mobile gaming is still the biggest single piece of the video game pie. Pachter explains, “It’s growing at a low single-digit rate and poised to grow at a high single digit rate in the next several years.

The biggest developments are Apple’s and Google’s legal and regulatory losses, with courts and regulators requiring competition. That will ultimately result in a reduction of store fees from the current 30% to something lower, which is a direct transfer of profit to developers and will lead to much more investment in both game development and user acquisition.”

FTP

Pachter notes, “FTP is still 85% of all gaming revenue and growing. The big opportunity here is to monetize the non-payers by advertising to them, and we are seeing meaningful growth there. That’s also good for developers.” Free-to-play is also the standard model now for mobile games, which is a massive market. Candy Crush Saga alone made $472 million in 2023,” Johnson says.

BATTLE ROYALE

The hottest gaming genre for several years now has been the “Battle Royale” genre, starting with PUBG: Battlegrounds. “Then, several other studios followed the formula. Fortnite, Apex Legends, Call of Duty Warzone and others have been massive hits,” Johnson notes.

GAME PASS

“The biggest innovation is games as a platform – Roblox and Game Pass, with Netflix emulating their success,” Pachter observes. “It’s unclear if the subscription model [Game Pass], pay-as-you-go [Roblox] or ‘free’ with another service [Netflix] will win, or if all three can thrive. It’s early days, but really interesting.”

“Microsoft’s Game Pass has changed the economics of game development, but I think it’s still unclear how this bet is going to pay off for them in the end,” Johnson says. “With Game Pass, users no longer buy games outright; they just have a $15/month subscription and can play any game they like within the Game Pass library. It’s been an incredible deal for users.”

Johnson adds, “Microsoft is paying the developers a commission fee for their game to be part of the Game Pass library. There are then metrics to see how much a game is downloaded and played. [Just as] Netflix and Spotify have disrupted their respective industries, Game Pass is disrupting games. The numbers aren’t entirely public, so it’s hard to know what benefit/detriment this is yielding for developers.”

Microsoft’s library will be further strengthened in the long term by the firm’s acquisition of Activision Blizzard.

REMOTE WORK

Remote work and distributed development have more or less become standard in video game development, “to varying degrees depending on the studio,” Johnson says. “Almost all major studios now have an outsourcing manager to handle vendors. The entire game industry went fully remote over COVID. And while a few studios have been moving back to in-office development, many have embraced it and are now fully remote.”

CLOUD

The impact of the Cloud on gaming “is hard to assess,” Pachter says. “The only company with enough content to thrive is Microsoft, and even their position is difficult because of the meddling of regulators.” Johnson notes, “Cloud gaming has been a promising and exciting area of development in games for quite a long time now, but it seems we’re not there yet. OnLive was the first big attempt to go mass market with it that failed. Google Stadia looked like a promising attempt, but it too was shuttered about a year ago.”

Johnson adds, “I’m quite skeptical about the viability of Cloud gaming for the near future for a number of technical reasons. Reliably getting latency to hold firm under 16ms might open up some possibilities, but we’re nowhere near that right now. How the internet itself is architected might have to change to open up Cloud gaming as a viability. Packets, routing and redundancy make for a fairly solid method of data transmission, but they are at odds with the speeds necessary it to work well.”

AI/ML

Some emerging technologies are having a big effect on the making of video games. Johnson comments, “AI is already moving the needle. One of the first areas of development I think we’ll see is Chat GPT-like dialog generated on the fly for NPC characters in games. Where a writer no longer has to pre-write every single word that everyone in the world can say. Their job might become more about putting bumpers on the domains the NPCs are constrained to. You don’t want a fantasy blacksmith talking about our latest elections.”

Continues Johnson, “Certainly AI and machine learning are making an impact in games already. There’s an amazing indie project in development called Bitmagic that allows the player to type prompts into the video game itself and modify the game in ways the developer never built in. I worry for concept artists, as I suspect that’s one of the first areas of displacement that has already started.

“Style transfer is another AI/machine learning tech that I think may have a huge impact on video games. Imagine if we are no longer rendering detailed scenes and characters. Instead, we are rendering blocky approximations and the characters’ ‘deep fake’ and the environments style transfer to look like filmed footage,” Johnson says.

“The FX in video games are one area that the real-time constraints really hold us back from making film-quality imagery. The kind of stuff that takes a simulation farm,” Johnson states. “I am hopeful that ML models will allow us to generate coarser simulations, and machine learning will take it the rest of the way at reasonable frame rates.”

“Companies over-invested in 2021 as work-from-home drove revenues higher, and the buzz words of the week were Metaverse, VR and esports. However, the buzz words never materialized in a big way, and people went back to work, so growth stalled. With no meaningful growth, overstaffing gave way to layoffs. We’re probably close to ‘right sized’ now and should see a return to growth.”

—Michael Pachter, Managing Director of Equity Research, Wedbush Securities

DRIVE READS

“A tech [advance] that I don’t think many of us saw coming was what super-fast drive reads like the PS5 and Xbox Series X have and what that can allow,” Johnson explains. “Some of the new Unreal 5 tech is reliant on that, and the amount of detail one can get in a UE5 scene today is pretty amazing. It’s freeing us from having to be entirely loaded into RAM, which is a game-changer. The ‘On the Fly’ level swapping in the latest Ratchet and Clank game was a brilliant usage of that tech, and it well showed something that would have been impossible a generation ago.”

VR/AR/XR GAMES

Johnson is excited about the long-term prospects of XR, which gained momentum from the launch of Apple Vision Pro, a mixed-reality headset that already offers more than 250 games. “I’m hearing very positive feedback,” he comments. “I can imagine a future in five or 10 generations down the line where XR will be as commonplace on one’s glasses that it becomes a seamless and transparent part of our lives. There are some really cool gaming possibilities with XR, once you move it from your phone – like Pokémon GO. Cool, but not immersive – to your eyes, where you can have [a game scenario of ] monsters bursting from the walls in your house. It’s definitely a space to keep your eye on.”

“Apple Vision Pro has already impacted XR overall by validating the market. The bigger question is how much of an impact. We’ll know based on the new providers coming to market within the next year,” notes Tuong Nguyen, Director Analyst at research firm Gartner.

AI and the Cloud should give a huge boost to the quality of VR games and VR, in general. Nguyen explains, “AI enables multiple aspects of VR experiences. For example, AI applications such as computer vision to track eye movements for foveated rendering. Other applications such as text-to-speech, text-to-text [and] sentiment analysis can be applied to interfacing with the VR experience. GenAI can be used to automate the creation of CG content [of procedurally generated objects] that would be impossible or impractical to do manually. The Cloud offloads the rendering, compute and storage of content [thus] enabling richer experiences than would be possible on [just a] device.”

THE HORIZON

Looking at the near future of video games, Johnson says, “I’d keep an eye on Nvidia and Epic. They have been at the cutting edge of game technology. [And] keep an eye out for ML-based middleware. I think this is a very exciting time to be in video games. I think we’re in for a lot of advancement in the next decade or two. Being on the cutting-edge of visuals and still having a long way to go means there’s a lot of opportunity to innovate and personally be a part of advancing the industry.”