22 November 2019
TW Play – 3 of 8 Insights
Reports indicate that the video games market is rocketing along to become a $300 billion industry by 2025. Industry participants, from publishers and developers through to the individual workers, are adjusting their plans accordingly. Regulators are also increasingly focussing on the industry's inventive monetisation strategies as the market players rush to take advantage of opportunities. In light of this changing environment, here are some of our predictions for the sector in 2020.
As the line between gaming and gambling becomes increasingly blurred, with the introduction of novel monetisation techniques and the proliferation of mobile gaming, there is an emerging focus on the influence of gambling-style games on children – an obvious target market for publishers. Most recently, in late 2019, the Gambling Commission released a report illustrating the impact of gambling on 11-16 year olds in Great Britain. Perhaps the most high profile example of the blurring of gaming and gambling is the much-maligned loot box, with the report finding that 44% of young people who are familiar with in-game items had paid money to open loot boxes in-game. However, a further report by the Children's Commissioner, Gaming the System, made clear that it is not just loot boxes that are potentially harmful, but a number of other gaming features, microtransactions and virtual items that also threaten "financial harm" to children who play games online.
If nothing else, these reports suggest the industry is only at the beginning of conversations around games and gambling connections and their impact on children, as well as the potential regulatory response. As more and more games shift towards free-to-play and/or introduce optional in-game purchases, in part due to the success of games like Fortnite, protection of children will continue to be at the forefront of discussions. MPs have been leading calls for a ban on loot boxes being sold in video games, with the head of the group of MPs Damian Collins commenting: "Loot boxes are particularly lucrative for games companies but come at a high cost, particularly for problem gamblers, while exposing children to potential harm." This view was supported by the Children's Commissioner who wants the government to make tighter rules to protect children who play games online. Despite this, the Gambling Commission has limited its activities to liaising with games publishers or operators informally on the basis that, under the current regulatory regime, loot boxes are not "gambling" because there is no official way to monetise what is inside them.
As the pressure for action grows, 2020 may bring about the start of a more proactive approach from regulators. In mainland China we have already seen a robust response to children's use of games, as the authorities are seeking to limit the number of new online games, restrict playing time and develop an age-restriction system. Meanwhile, countries like the UK are yet to decide on a response. Suggestions for action have included allowing players to track their history of spending, a cap on daily spending, and a call for the government to amend the Gambling Act 2005 so that loot boxes can be regulated as gambling. Self-regulation has also been proposed, rather than the industry being forced into a particular approach by government intervention. However, with in-game spending being by far the most lucrative form of game content monetisation, as long as there is a lack of regulation, we expect the industry will be slow to self-regulate so a top-down regulatory approach may be required.
In line with the general explosion in industry profitability, the global cloud gaming market specifically is set to grow from its current market value of more than $1 billion to over $8 billion by 2025. This reflects the industry's global transformation from a product-oriented business to an as-a-service model, following the obvious success of the entertainment industry undergoing a similar transformation in the past decade (with the emergence of Netflix as a global giant). Cloud gaming is identified as a major untapped revenue stream.
There are a number of factors driving the market. As the price of games, particularly high-end games, increases, this can deter price-sensitive gamers. By comparison, cloud gaming platforms provide gamers with an unmatched ability to access countless games at more cost-effective prices, with costs being spread over a wider base of consumers. Cloud gaming, essentially GPU-as-a-service, can provide unparalleled gaming performance and access to demanding games. Cloud gaming platforms can also offer gamers more innovative and flexible payment options, for example, subscription-based plans. Overall, this creates a cost effective way to discover a new and wider range of games which, over time, creates a self-fulfilling cycle powering more growth in the cloud gaming market.
The historical barriers to hosted cloud offerings (latency and bandwidth limitations and poor network connections) are being overcome both by advances in the connectivity landscape, where the maturing of cloud technologies and development of 5G are reducing network issues, and by the increasing synergy between the gaming and telco industries. Telecommunications providers are recognising the potential for generating additional revenue through collaborations with cloud gaming platforms. Cloud gaming, with its high latency requirements, is an obvious use case for 5G and combines with telco's core business model: selling more data. For example, Ooredoo, a Qatar-based telco, formed a partnership with PlayGiga in March 2019 to deliver high-quality games via streaming services without the need for any gaming equipment. These kinds of alliances can give publishers and telcos a competitive edge of market rivals.
In 2020, we think the cloud gaming industry will continue to drive new opportunities and entrants into the market. There is still some way to go in terms of infrastructure development before the full potential of cloud gaming can be realised, and even at an estimated $8 billion by 2025, this is only an anticipated 3% of value of the total gaming market. While this means progress may be slow in the short term, we expect further announcements in this space as some of the global giants race to become the frontrunner in the cloud gaming space.
IDC predicts that the virtual and augmented reality market will expand from just over $9 billion last year to $215 billion by 2021, which would make VR one of the fastest-growing industries on the planet. However, while industry analysts do expect that the VR market will continue to grow at a fast pace, slow consumer uptake remains a recognised hurdle. This is due to traditional barriers-to-entry in the VR industry, including price, space requirements and technical constraints. However, we do see a number of factors spurring growth in 2020.
Headsets are undergoing a period of intensive research and re-development. To date, they have tended to be clunky, expensive and beset with tethering requirements which has fostered a reluctance for consumers to invest in VR gaming. However, as some of the industry's big names move more permanently into the VR space (Google, Samsung, Facebook and PlayStation) there is an increasing drive to make headsets more cost effective and accessible to the casual gamer. More specifically, publishers are focusing on ease of use and portability and pivoting to the creation of stand-alone headsets that allow gamers to use them in an agnostic fashion without any installation, device requirements or extensive wiring needs. Products like the Oculus Go and the Quest headsets are already allowing untethered access and greater accessibility for users, including an ability to experience VR direct from mobile devices (where there is no need to connect to a VR-ready computer).
Culturally, the VR market is also fostering changes in the target demographic, introducing users to a mixed old school/new age gaming experience in the form of VR arcade gaming and other more public spectacle options. These are becoming more commonplace and allow gamers to experience VR without purchasing any equipment of their own. They are also targeted and more available to non-gamers, opening up an additional revenue stream. This social form of VR gaming is growing, with recent predictions finding that group experiences allowing users to try VR will become more popular. There are examples of a VR theatre in Bristol and many other event spaces opening up across the UK that now host immersive theatre events, as well as a proliferation in VR arcades offering unique and bespoke experiences (including state-of-the-art free roam environments) that can cater to different parties and events.
VR gaming is also starting to move into new sectors beyond the typical gaming market, for example education, with experiences that can foster remote learning. Education institutions appreciate that interactive VR games can be an effective way for students to absorb material in a classroom environment in an entertaining and informative manner. Companies like zSpace are creating Virtual Instruction Programs powered by equipment and VR classroom apps. This provides affordable opportunities to engage students with an endless array of content. The possibilities are limitless, subject only to the imaginations of content creators.
Overall, while the VR sector still faces a great many challenges, we expect that innovation in VR will be a strong focus for developers and publishers and continue throughout 2020. This may not involve huge leaps forward in the VR space, but incremental developments and improvements that foster increased user uptake which will push the sector forward.
Following a series of high profile events across the globe, UK games workers are seeking greater recognition of their employment rights. Over the last year or two, a number of events – including Games Studios' sudden collapse and the resultant furore over layoffs in California, the Games Developers Conference 2018 roundtable Union Now?, movements such as Games Workers Unite! (whose London chapter participated in the Independent Workers' Union of Great Britain strike on October 30 2018) – all indicate that change is afoot in the games industry.
It is a long-established problem in the games industry that overtime and long hours are an inevitable part of any developer's job as release dates draw near, a period known as 'crunch'. However, the UK has a relatively unique and rapidly changing working environment, which means that games businesses need to be mindful of shifting regulatory and cultural norms over time. Games businesses need to be aware of, and regularly review, their workers' employment status in the UK and consider a range of compliance issues, from working time, holiday entitlement, overtime and pay rates to lesser-considered tax compliance matters and the impact that union involvement may have on a workforce. The importance of correctly categorising members of the workforce is very much a hot topic, particularly in the games industry which tends not to conform to the more traditional ways of working (see our article for more).
As a result, we expect the games industry will have to learn to operate in an environment which currently has an enormous amount of uncertainty for those working in it with potentially serious ramifications for developers and publishers who get it wrong. In 2020, we are likely to see more formal and informal oversight of working practices in the games industry and, potentially, increasing attempts by those working in the industry to unionise in order to protect their rights, in particular, people who are currently classed as self-employed but don't necessarily think they should be. If those working in the games sector do unionise, there will be more organised employment tribunal claims and businesses may require increased insurance. This could become significant for buyers and sellers of games businesses. The political pressure exerted by unions may well be the catalyst for the implementation of the Taylor Review employment reforms, and bolstering HMRC's enforcement powers by, for example, the establishment of a labour market enforcement agency with wider powers to fine and chase businesses on any non-compliant employment practices.
We're not alone in predicting continued growth for next year but it's also clear that regulators will continue to look at the impact of games and eGaming on children and other vulnerable individuals given the wider regulatory focus on online harms. Opportunities will come from developing technologies which will provide new ways for users to experience games and new monetisation opportunities for developers and publishers.
by Jo Joyce
by Graham Hann
by Multiple authors