WW Video Game Market Forecasts 2016-382x495Of course, it is common knowledge by now that the global video game industry is very big business and consumers spend a great deal of money to play games. Many analysts, including DFC Intelligence, have tried to size the overall video game market. The latest DFC forecasts estimate that the size of the video game software market in 2015 was $73 billion. When you add in spending on dedicated hardware like PlayStation, Xbox and Nintendo systems the overall number rises to about $90 billion.

The reality is these impressive numbers only scratch the service of consumer spending on games and the overall impact of the game industry in general. When one starts adding in all the different revenue streams the video game industry starts to look not just like a $100 billion annual industry, but a $200 billion one. The new DFC report The Business of Video Games looks at many of these other sources of consumer spending.

For starters, there is the spending on products that could arguably be considered games but DFC does not classify as game industry revenue. This includes decorative items such as screen savers and ringtones but also includes many products that border more towards the gambling mentality such as gacha in Japan. Gacha is basically where consumers get an unknown “prize,” much like a random toy from a candy machine. This starts to go down a slippery slope where the definition of games starts to expand to include the human psyche that built Las Vegas. DFC does its best to eliminate this type of revenue from its video game forecasts although that is not easy to do.

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The biggest additional source of game industry revenue is the spending on hardware. Consumers spend more on the hardware to play games than they do on the actual games. DFC estimates that the market for high-end gaming PCs is nearly $30 billion. However, that only includes the do-it-yourself systems and the high-end PCs marketed specifically to gamers. There are many low end PCs that call themselves “gamer” systems and there is of course the consumers that buy a PC simply because they want to play games. Games are a huge, but not easily identifiable component of overall PC hardware sales.

The same can be said for portable devices. Much of the driving force for spending money on a high-end smartphone or tablet device can be attributed to games although once again that is a number that is not easy to quantify. What is easier to identify is spending on accessories specifically targeted towards gamers, which includes not only controllers but high-end mice, keyboards, headphones and other devices designed specifically to enhance the game experience. The emerging virtual reality (VR) market is all about an accessory designed to enhance the experience on a hardware system. Of course, games are seen by many as a major potential driver of VR.

Hardware was once seen as almost a commodity but hardware is once again becoming sexy in large part due to games. Apple is the obvious big success story in hardware but companies like Google, Facebook, Valve and Amazon are all entering the hardware market because they realize how much it drives content. When it comes to entertainment content, games are clearly at the high-end of the spectrum in terms of driving hardware performance.

Outside of hardware there are entire industries that have grown around providing services to gamers and game companies. Game information is the most identifiable of these segments and it is largely advertising driven. Historically game magazines were big business and a key advertising tool for publishers. Of course, the magazine business has now gone online and the number of users has soared even as revenue per user is a pale fraction of what it once was. Amazon and Google fought over Twitch.tv because it was all about having that consumer base for advertising. Facebook has realized they mark far more money advertising to gamers than they would trying to sell games to consumers. Gamers flock to YouTube to watch videos of gameplay and esports attracts tens of millions of users to specific tournaments. Once again these are areas that are not easy to quantify but are part of the video game economy.

Loot Crate-SThen there is the issue of business to business spending that should not be counted as consumer spending. The dirty secret of the game software business is it is a net loss industry. In other words game publishers and developers spend more money delivering games to consumers than consumers spend on games. For example, leading publisher Electronic Arts generated about $31 billion of revenue in fiscal years 2008-2015. However during that time period they lost $1.4 billion. In other words EA spent $32.5 billion to make $31 billion. EA is of course a leading publisher with market valuation that has hovered recently in the $20 billion range. A company that has not been as successful is Walt Disney. From the period of 2008-2015, Disney’s game division generated about $7.5 billion but they managed to lose $1.1 billion. In other words, for every dollar EA spent they lost about 5 cents while Disney lost about 15 cents.

Of course, companies like Disney have many other revenue sources one of which is merchandising of popular characters and IP. The video game business has now grown a huge merchandising business and games like Angry Birds and Minecraft generate a fortune from selling clothing, toys and many other items. In the game industry merchandise is not just for kids. Companies like Jinx and Loot Crate are targeting a 30-s0mething audience with game related clothes and paraphernalia.

An entire infrastructure has been built up providing services to game companies that range from back-end tools, analytics, and monetization support to advertising and marketing services. A company like Unity is growing based on the number of game developers that use its tools. Of course, this growth will be dependent on consumers continuing to pay and spend money on games and that is why overall software spending is a fairly good barometer of Unity’s addressable market potential. However, it is only one of many factors that must be considered in evaluating service providers. If game developers and publishers are not profitable than the companies that provide services in the area will suffer as well.

Headline-SThe idea of a $200 billion video game industry borders on the “meaningless hype” category designed mainly to drive media attention. However, this is a total addressable market number that, as DFC has discussed, is only a small part of the equation. Nevertheless, there is some truth behind that figure and it would not necessarily be an incorrect figure to use. The issue is which of the many niches in the game industry are growing, which are potentially profitable, which have the most competition and most importantly for individuals or companies looking at the industry, which are best suited for their particular circumstances?

These are areas that DFC Intelligence continues to closely examine in our research. An example of some new DFC reports include:

The Business of Video Games: This 300-page report analyzes the value chain of the game industry and how revenue is split among development, publishing and distribution. There is also a look at other sources of industry revenue including hardware accessories, service providers, game information, esports, IP licensing and other ways companies can profit from the growing global base of game consumers.

Worldwide Video Game Market Forecasts: This report contains complete five-year hardware and software forecasts for mobile, console and PC games, including console systems, dedicated portable devices, iOS and Android devices.

Video Game Consoles: Market Forecasts 2016: This report analyzes the prospects for the major game console systems and forecasts how revenue will be split between digital and physical sales. Five-year forecasts are broken down by region.

Since 1995, DFC has published in-depth strategic market reports and subscription-based research services. DFC research is used by more than 300 leading companies in over 30 countries worldwide.