The structure of video gaming industry

The first interactive entertainment appeared in the 1950s, and games began to make money in the 1970s – when Atari released the first commercially successful video game called Pong, electronic ping-pong on slot machines. A little later, Tomohiro Nishikado developed Space Invaders, an arcade game familiar to many, where you have to shoot at the aliens that loom over the top of the screen. Finally, the well-known Pac-Man came out. Many of these video games where changed and transformed into popular casino games. Players can start playing in online casino with $3 minimum deposit in most cases. Continue reading to learn more about the structure of video gaming industry.

At some point, the share of games in the entertainment industry has equaled the cinema. For a long time, slot machines remained the main driver of industry growth, and over time games began to appear at home as well – with the release of the first consoles. But like any young market, the game industry had to survive a massive crisis in 1983.

Turnover was growing at unbelievable pace – and everyone was paying attention. This led to a situation where everyone wanted to make money on games – even the producers of Purina dog food. No one cared about the quality of the product – publishers produced low-quality cartridges one after another. On store shelves it was hard to find anything worthwhile.

By 1983, the U.S. market was overflowing with poor quality games, and at some point the bubble burst – U.S. developer revenues sagged by 97% in one year.

A huge niche was freed up, which was taken over by Japanese Nintendo – there was no industry crisis in Japan. The company established a strict policy: all games developed by third-party studios had to pass a quality check. This helped Nintendo capture 70% of the market, which under its patronage had managed to grow 20 times before the beginning of the 90s.

Drastic growth

The rapid development of computer technology in the 90s also affected the gaming industry, and new companies entered the market. First, Sega competed with Nintendo, and then Sony with its line of consoles PlayStation and Microsoft with the Xbox series joined the competition.

Many iconic franchises were born at that time: Super Mario Bros., Crash Bandicoot, Halo, Grand Theft Auto, Mortal Kombat. The game market for personal computers has not lagged: there developing strategies – Warcraft, “Heroes of Sword and Magic”, role-playing games – Fallout, there moved the console games. Many of today’s largest game studios and companies were born there: Electronic Arts, Ubisoft, Activision Blizzard, and others.

Since then a lot has happened in the industry, but to understand the structure of the current market it is not so important – it is enough to know how the industry is organized now. So next we will focus on how game companies function and what they make money on.

About the industry

Right now, the video game industry is commonly divided into four main segments by platform.

Console gaming – creating video games for stationary and portable consoles: PlayStation, Xbox, Nintendo. The main sources of revenue are physical and digital copies of games, add-ons, seasonal subscriptions and microtransactions. To attract users, console manufacturers often sell consoles at a loss early in their lifecycle, but this is compensated by royalties: companies keep a percentage – usually the standard 30% – of digital game sales on their platforms.

PC gaming – releasing games on computers. Consoles have a larger audience, but many people still prefer to use computers – especially in countries where consoles have not become popular due to low incomes in the past: Eastern Europe, Russia, China, South America. And besides, the PC comes out a lot of exclusive games that are not found on consoles.

Mobile gaming is the development of video games for smartphones and tablets. Mostly games are free on phones, so developers earn from ad impressions and aggressive content monetization – through subscriptions and donations. At the moment mobile gaming brings in the most money in the industry, because development costs are relatively small, but the audience size is huge: up to half of all mankind, including people who would never call themselves gamers, play them.

Cloud gaming is the ability to play video games on any computer or phone by transferring computational workloads from your device to a remote device. A promising industry that is growing stronger every year due to the acceleration of the Internet.

Three main models of game monetization

The industry stands on three main models of game monetization: free-to-play, pay-to-play and services.

The idea behind free-to-play is that it costs zero to purchase a video game: developers earn from advertising and microtransactions. Often microtransactions, or donations, are introduced aggressively – for example, the player can not pass the level until he buys a powerful armor for real money. But lately donation is limited to cosmetic items, whether it’s nice clothes or a skin on a weapon.

More often than not, free-to-play is used in mobile gaming and on PCs, but on PCs there are usually no ads. This model is the main driver of growth of shares of such gaming companies as Tencent, Roblox, NetEase and MTG.

Pay-to-play is the model by which PC and console game developers now operate. The user purchases the final product without having to buy anything extra. However, in recent years companies have been adding microtransactions to paid games as well, as they bring in up to 70% of all revenue – much more than the sales of copies of the games themselves.

Services are games that are distributed on a monthly subscription basis instead of a one-time purchase. To motivate players to renew their subscriptions, developers update and supplement the product with new content for several years at a time. 

In recent years, developers have turned to subscription systems less and less frequently.

But the service model has come in handy for creating subscriptions similar to Spotify and Netflix, but with games – such as Xbox Game Pass and EA Play. Instead of a one-time purchase of a product, users get access to huge libraries of all sorts of projects at a small monthly cost.

And that’s where game services come in handy again: they now help motivate renewing “big” subscriptions. Companies believe in this model, and not without reason: forecasts promise annual growth of the subscription market.

About the author: Maia Hall is an Igaming professional working at NZCasinoHex. She’s been involved in the industry for the past seven years and has gained a lot of valuable experience from working with different game providers.