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As Axios wrote yesterday, the future of media is gaming, and we fully agree. Yet gaming is not only at the center of media, but at the core of building the new social square (both in virtual worlds as well as in real life social connections). To close out 2022, we are revisiting some of the most notable trends and key events in gaming from this year.
Further Content Consolidation: Consolidation became a major trend in gaming as large players looked to expand existing portfolios to further offer a compelling experience to the gamers on their respective platforms.This year saw >$102b in total M&A (up from $38b in 2021). Some of the major purchases of 2022 included Microsoft acquiring Activision Blizzard ($68.7b, currently being investigated by the FTC), Take-Two acquiring Zynga ($12.7b), Sony acquiring Bungie ($3.6b), Meta acquiring Within, and even some rumors that Amazon would be acquiring Electronic Arts. We wrote about the Era of Consolidation in January and this trend has continued to play out. Looking back at 2021, here are a few of the major acquisitions that preceded this year’s M&A activity:
The Rise of Subscriptions: The continued rise of subscription-based business models in the gaming industry is directly related to the rise in content consolidation. Consumers expect significant value for each incremental dollar spent for subscriptions, and this is a clear tailwind for why gaming has moved in this direction as well. As discussed in our September newsletter, Subscriptions’ Place in Gaming, subscription models have grown across almost every form of media. C+R Research recently surveyed 1000 people and found that, on average, consumers paid for a total of 12 subscriptions and spent $219 per month. This total was $133 more than C+R estimated (CNBC).
In gaming, subscriptions are proving to be a more palatable monetization strategy for consumers. Instead of paying for singular games on an inconsistent basis, subscriptions offer consumers access to a vast library of games in return for predictable monthly payments. Groups like Xbox are even bundling the cost of hardware into the monthly price of Game Pass, spreading out the financial commitment across months (or years) instead of upfront costs for consumers. As households are more cost conscious during economic turbulence, it is no surprise that gaming companies are quickly adapting to meet consumer preferences.
Mobile Monetization Difficulties: Mobile gaming accounting for upwards of 60% of global gaming revenue. With notable privacy changes coming from Apple and Google, targeting and monetizing users is getting harder. This is putting a question mark around ad-based business models in gaming and could push developers to focus on premium paid experiences in the future (in August we highlighted the acute headwinds this poses for the Hypercasual genre). This shift makes sense because Apple then gets to keep more of the revenue (30% of paid experience) versus the 0% they currently get from advertiser-to-developer payments. It is worth noting though that Apple is starting to pursue a cut of advertising dollars as well by requiring developers to use in-app purchases for “sales of ‘boosts’ for posts in a social media app” (The Verge). Looking ahead, we believe it is likely that Apple will eventually launch their own ad network.
Extended Reality (XR) Is Still Awaiting Mass Adoption: Virtual Reality (VR) adoption has been slowly ticking up and we are seeing a lot more investment come from major industry players. This year saw Meta release its latest headset, the Meta Quest Pro, as well as Sony beginning to take pre-orders for the PS VR2 which will officially release in February of 2023. Breadth and variety of content is still one of the biggest issues but we do expect to continue to see adoption rising which will encourage more content development.
For Augmented Reality (AR), outside of social media filters, the struggles are generally due to a lack of hardware. Similar to VR though, we are seeing a lot of investment coming from major players in the space. We are still excited about this space and believe that significant adoption will come when dedicated hardware (not just phones) is built for AR.
AI Can Help Optimize Content Creation: AI is the year-end buzzword of gaming and the wider tech ecosystem overall. We are seeing a lot of investors and founders shift focus to leveraging AI technologies and models for different use cases in gaming. Trends seem to point towards AI being primarily used for content creation (developer and player creation), emergent gameplay, and realism. This will be a continued trend as companies like OpenAI, Hugging Face, and Google continue to build and release foundational AI products and services. There are a few very specific applications when it comes to supporting and optimizing content creation that will be additive to the industry in the near term, but we think that much of the AI + Gaming hype is overblown and a new shiny object for the industry after the blockchain craze of 2021. In the long term, we are bullish on the potential of AI generally and specifically within gaming, but they will start with very narrow use cases and be quite limited in functionality. It will not be a silver bullet to game creation and humans will need to be involved at all levels to produce quality content in the near term.
Blockchain Gaming’s Slowdown: Blockchain gaming saw a significant slowdown in funding and consumer excitement. Investors seem to be less interested in chasing hype and are expecting to see games come before blockchain integrations. Founders can no longer sell a blockchain vision that lacks a compelling experience. Within the established gaming industry, 2022 saw Steam and Minecraft banning non-fungible tokens (NFTs), and Apple announcing strict rules around blockchain applications. We also saw a number ofblockchain gaming infrastructure technology come to market solving theoretical problems that may never materialize. Many of the darling blockchain game projects have fallen from grace and consumer adoption has dwindled without the financial incentives of a booming crypto market. Consumer excitement has also diminished with major fraud coming from once-trusted organizations and exchanges like BlockFi, FTX, and Terra. We still believe in the future of blockchain technology and its potential within gaming, but this year has been a stark reminder to the industry that games first and foremost need to be fun. Looking forward, we expect some blockchain content to succeed and many to fail (much like what is experienced by the wider gaming content market).
Increased Regulatory Scrutiny: After almost 11 months of investigation, the United States Federal Trade Commission (FTC) announced it is seeking to block Microsoft’s $68.7b acquisition of Activision Blizzard (ATVI); the deal is also drawing scrutiny from other regulatory bodies globally. As a result, the deal that sparked conversations about an era of consolidation in gaming might actually be signaling a major regulatory hurdle for future acquisitions. Back in October 2021, Meta announced their intent to acquire Within, the developer of the top-selling VR fitness application, Supernatural (was rumored to be ~$400m according to The Information). In July 2022, the Federal Trade Commission (FTC) announced that they will be seeking to block this acquisition in an effort to protect competition. The results of these lawsuits by the FTC will set new precedent for future acquisitions and could have a far-reaching impact on how the games industry landscape looks in the coming years.
Below is a list of our most read newsletters in 2022:
The whole team at Konvoy is thrilled to continue investing at the frontier of gaming. Great things ahead.
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