What are the business models for video games?

The latest gaming book has been marked by the switch to mobile technology, but while on-the-go gaming is well suited to the busy lives of millennials, gambling on mobile devices also has its limitations. Mobile phone displays are small (well, at least until the iPhone 6s came out), and processing speeds and internal memory restrict gaming on most cell phones.

While mobile gaming has caused the death of portable gaming devices, consoles continue to boom and each new console generation embraces a new age of technology and capabilities. Virtual reality and artificial intelligence technologies are two sectors which may well play a key role in gaming ‘s future.

The last couple of years have seen the growth of a new trend – free-to-play online video games such as Fortnite and Apex Legends. Since it is completely free to register and play these games, one would think that the gaming industry isn’t making much money off of them.

The free-to-play model, by comparison, has proven to be one of the most popular forms of video game platforms in modern era. Today, much of the income from the gaming industry comes from the strong demand for in-game goods which can be purchased with real money.

The most common in-game items include cars, weapons, or character outfits and other skins. Thanks to in-game purchases, the free-to-play games such as Fortnite still bring in billions of dollars in revenue each year.

For example, over one billion of Fortnite’s $2.4 billion in revenue was generated by the selling of in-game products. With this growing trend, most online games are now transitioning to the free-to-play model with a emphasis on thousands of dollars selling through in-game products.

The new industry rules following a free-to-play model and the growth of subscription cloud services demand new monetization pathways from the game developers. And in-game skins becoming one of the main options for them to keep and entertain communities, and monetize their games at the same time. Either the game developers build in-game items economies themselves, or they hire a third party to provide that for them. It seems like this market is not very competitive for now, and there are only few third-parties that offer this solution.

In a market already filled with hits, game developers have been struggling with how to stand out. In particular, publishers want to extend their current intellectual property by introducing new franchises – based on old properties in some cases – and launching new ecosystems. Case in point: All sequels from well-established franchises were the top 10 best-selling games of 2017.

Although the most profitable games can now have longer-tail sales, it also means that franchise games can impact earnings more materially — for better and worse. Rabid fandom and social media means one game miss could have an enormous negative effect on the entire brand of a business. So if a publisher can launch a popular franchise, combined with built-in player interest in sequels the long tail effect might drive earnings growth not just for a quarter or two, so likely years to come.

One avenue has been providing high quality digital updates and new features, even among older games. By offering expansion packs, subscriptions for multiplayer maps, new characters, and “loot boxes” which contain digital uniforms or in-game items, publishers have been able to monetize their core games for far longer than they have in the past.

Perhaps better for publishers: there are high margins for digital products and live services, and a good game with a strong in-game monetization will reap long-term rewards. Nonetheless, the drive for digital content and live services isn’t risk free. There have been signs that some gamers are resisting in-game purchases, which may delay growth in this area.

Long term, subscriptions for digital content, multiplayer gaming and game add-ons could turn into reliable revenue sources and allow video game publishers to take risks on new titles while maintaining a steady revenue stream from their existing games.

In the next 2-3 years there will be a demand for B2B solutions that unfold, build and manage in-game items economies for the game developers. And the competition and amount of tools in this sector will only increase.

Eventually, the advent of third-party platforms will not only allow the video game industry to further expand but will also boost the gaming experience. Now gamers can take their hobby to the next level and interact with like-minded people, have fun, trade in-game products and even make it a company.

Check out my related post: How to create a pitch deck from the mindset of the venture capitalist?

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