Not Just a Game, But a Game Changer

The year was 1976 when a game called Pong, an electronic version of tennis originally created by Atari in 1972 as an arcade game, first appeared in the homes of households, marking the birth of the video game market. The gaming market has undergone a remarkable journey, evolving from simple electronic recreations to a multi-billion-dollar global phenomenon. In the United States alone, consumer spending on video games reached $57.2 billion, with approximately two-thirds of the population playing video games regularly. The broader economic impact is estimated to be over $100 billion, supporting around 350,000 jobs across the country, according to the Entertainment Software Association. When considering the global market, including mobile, online and cloud gaming, the video game industry is a $400 billion business, with more than 80% of internet users playing video games. It has become a pervasive form of entertainment, representing about 16% of the entire global entertainment and media market.

The evolution of the gaming market not only reflects technological advancements but also intricate shifts in business models and consumer behavior. Four key aspects have shaped this extraordinary evolution.

Market Emergence and Technological Innovation

One key aspect of this evolution has been the shift in the economics of innovation. The emergence of the home video game market was facilitated by advancements in technologies such as transistors and microprocessors, which paved the way for pioneers like Magnavox and Atari, seeking application opportunities for those technologies, to invent electronic video games as a new form of entertainment. These innovations enabled the modularization of game development, separating content (software) from medium (hardware). This modular approach fostered specialization and entry to the market by a plurality of new players, ushering in a diverse array of gaming offerings. This architecture, with consoles and cartridges, along with the television, laid the foundation for the digital platform-centric model that still powers the gaming market today.

Business Model Evolution

Initially focused on individual product sales, gaming companies transitioned towards monetizing complementary products and services. Console makers strategically price hardware to build large userbases, subsequently profiting from game developers through licensing fees. This has been historically the case for all console providers and is also the case for mobile gaming. Apple, for instance, charges developers a fixed license fee for their SDK development kit, and a transaction fee (generally 30% of the app’s price; 15% in the case of smaller developers and/or apps adopting a subscription model) for sales of the game in their App Store. 

Game developers, in turn, have increasingly moved to leveraging their customer base to generate economies of scope through cross-selling additional products and services. Companies like Epic Games, producer of Fortnite, are creating their own marketplace for games in the attempt to gain control over the direct relationship with their customers and increasingly compete with platform providers like Apple or Google on this realm. Other companies like Electronic Arts have created their own set of development tools to enable other developers to lower their costs of game development for multiple platforms, innovate on gameplay dynamics and market their games more effectively. They also use an internal venture unit to finance game projects they deem of potential value.

This shift in focus from core to complementary products reflects a broader trend in digital markets.

Integration of Complementary Innovation and Direct Consumer Relationships

Companies have strategically integrated complementary innovation and controlled market infrastructure to shape user experiences and interactions. All hardware companies produce their own game titles. With some of these games becoming a “killer app” (software that is so good that it motivates consumers to buy the compatible hardware platform just to play the game), hardware companies can leverage them to attract consumers as well as other game producers. This integration has served as a dual strategic lever, enhancing both production capabilities and competitive positioning. Notable examples include Atari’s dominance that, on the strength of these titles, reached an 80%–90% market share between 1979 and 1981, and Microsoft's recent acquisition (pending approval by regulators) of Activision, a producer of very popular games, to gain dominance in cloud and mobile gaming.

Sophisticated Innovation and Commercialization Strategies

The gaming industry has witnessed a surge in innovation and commercialization strategies, driven by the pursuit of realism and user engagement. Console makers have adopted sophisticated communication and marketing strategies to shape user expectations and promote specific use cases. Exclusive deals with game producers have been employed to showcase console functionalities and inspire further innovation. Meanwhile, game developers have escalated production costs to enhance gameplay features, partnering with popular media franchises to enrich content. This pursuit of excellence has led to record-breaking investments, exemplified by Genshin Impact's (an action role-playing game) staggering $700 million development budget.

As the gaming market continues to evolve, these key trends offer valuable insights for industries undergoing digital transformation. The convergence of technological innovation, strategic business model evolution and sophisticated commercialization strategies underscores the dynamic nature of the gaming industry, driving the continued growth and success of this platform-based model as a serious game changer.