So far 2023 has been a stagnant year for the video game industry. DFC Intelligence forecasts that worldwide revenue for PC and console games will remain flat for the year at $74 billion. However, from a strategic perspective the industry is undergoing a remarkable business model transition. As large publishers focus on live services there is growing potential for smaller publishers and developers.
Living Games Redefine Launch Strategies
Heading into the holiday season one of the most notable aspects of the video game industry is that all the major products have already been released. Call of Duty: Modern Warfare III, launched November 10th, is the last major release of the year.
This underlines the largest underlying trend of recent years. The video game industry is moving towards a living games model where games grow over time. For most products the launch of the game is just the start of the journey. This disruption is reshaping the industry power dynamic.
When looking at the major games from the big three console manufacturers it seems not much has changed. Nintendo had The Legend of Zelda: Tears of the Kingdom, Sony had Marvel’s Spider-Man 2, and Microsoft had Starfield. These games are by-and-large traditional single player experiences. Other major games of 2023 include Hogwarts Legacy, Lies of P, Assassin’s Creed: Mirage, Alan Wake 2, Super Mario Bros. Wonder, Resident Evil 4, and Baldur’s Gate 3. These games are primarily single-player experiences. In fact, 2023 will go down as one of the best years ever for premium single-player games
Large Publishers Focus on Living Services
It takes a closer look to understand how much the industry has changed. Electronic Arts is one of the largest video game publishers in Western markets. Over the past decade, EA’s business has transitioned to a live services model. The company updates its core sports franchises but has not released any major new titles recently (the single player Immortals of Aveum was a disappointment).
Like much of the video game industry EA revenue and stock price has been flat in 2023. Much of this is because of concerns over the company’s growth prospects. EA has predictable revenue and earnings but is not showing growth. EA has grown so large that traditional one-off video games that generate $100 million or so are too small to be worth the effort.
Small Publisher and Developers Make a Comeback
One of the big news items of 2023 has been industry layoffs. When revenues are not growing, companies look to cutting employee costs to increase profit. Of course, this can be a vicious downward cycle where product quality declines as a result.
However, there is another possible explanation for the current employment trends. The movement to live services is shifting the talent resources required in the industry. As individual games become an ongoing operation the types of skills needed change. Overall, a live services model will likely mean MORE employees. However, from production to operations to marketing it will require a different skill set. Companies are grappling with those changes and this is a major market transition.
As the largest publishers move to premium live service games this is opening up the market to smaller publishers. The growth of development tools and AI, now allows for smaller teams to build sophisticated games. The largest companies are going after live service games that are expensive to maintain and operate. This has opened up the market to smaller companies to create more traditional games that if successful are highly profitable. This is where new job opportunities emerge.
Finnish company Remedy Entertainment is a perfect example. The company has developed several hit products for larger publishers. Remedy now is able to maintain control of the development process and ownership of its IP. The 2023 hit Alan Wake II is published by Epic Games, but Remedy remains in control of the franchise. Belgian based Larian Studios, publisher and developer of the 2023 hit Baldur’s Gate 3 is another example of the growing opportunity for smaller companies to compete in a world of giants.
Major Trends to Watch
In looking at revenue for premium console and PC games add-on content and subscription revenue is already the industry driver of growth. However, it takes a deeper dive to understand some of the major changes to focus on:
- Focus on Production AND Operating Costs: The key metric for larger company success is now profitability measured by production and operating costs.
- Impact of Microsoft/Activision Blizzard: It will take time to assess the full implications of this acquisition but it sets up Microsoft as a leader in both premium PC/console games and mobile games. Right now DFC thinks this will be a positive for the industry assuming Microsoft does not abuse its position.
- Ongoing Analysis of Live Games: Games like Diablo IV that follow a live service model, require continuous monitoring to evaluate the activity of the player base. Blizzard announced an ironic $666 million sales for Diablo IV in its first five days but it is not clear if the game will become an ongoing live services product.
- Games Gain a New Life Via Post Launch Updates : Cyberpunk 2077 had a disappointing 2020 launch. However, the game has been rejuvenated through updates and expansions. The Cyberpunk 2077: Phantom Liberty expansion was one of the top products in 2023.
- Asian Companies in Western Markets: Asia companies are looking to once again try and have an impact on Western markets. Will their understanding of live services models increase their chances of success?
- The End of Platform Exclusives: The disappointing performance of PlayStation 5 exclusive Final Fantasy XVI suggests a potential decline in third-party platform exclusives.
DFC Intelligence is launching its new industry segmentation. The focus is on understanding products by type and business model across platforms. The latest DFC consumer surveys have showed record forward looking purchase intent. DFC is offering a free 2024 video game industry outlook report for qualified industry professionals. Contact us for more details.