Technology
18 June 2021
In 2005, fifty years after it brought its hallmark make-believe escapism a little closer to reality by opening its first theme park, The Walt Disney Company became a forerunner among multinational media and entertainment companies when it launched an online virtual replica.
VMK – Virtual Magic Kingdom – allowed users to explore the central attractions of its flagship California park without having to leave home. They could connect with Disney fans from around the world and take part in online games that were printed out and exchanged in its parks for unique codes. When entered online, these codes gave the user access to rare prizes.1
Ahead-of-its-time, VMK was an early attempt at using emerging technologies to bring the online and offline worlds of entertainment together. Disney closed VMK after just three years; although had it foreseen its potential in today’s flourishing world of virtual social environments, it may well have lived to see another day.
Instead, it was video gaming that acted as the primer for today’s emerging hybrid virtual-physical worlds that have collectively been termed the ‘metaverse’. What started out as multiplayer combat has metamorphosised into a fast-growing network of interconnected virtual experiences where people can not only play games with others, but also compete in sports tournaments, socialise, watch live events and interact with brands.
Video gaming is a $US150-200 billion global market that is growing by high-single digits annually.2 At five times the size of the global box office industry and now rivalling the global TV advertising industry in scale, it has long been the largest category of consumer entertainment. Thanks to a well-established ecosystem of developers, distributors and promoters that continually evolve their offerings, the number of gamers worldwide has seen consistent growth3.
Over a third (35 per cent) of the world’s population – 2.7 billion people according to Newzoo, the leading global provider of games and esports analytics – play some sort of video game on a personal device. Last year they spent $US159 billion doing so and that could reach $US201 billion by 2023.4
Number of active video gamers worldwide vs. population
Source: Statista, Our World in Data, Company data, Macquarie Research, October 2020
However, the scale of the market belies its ease of accessibility. Though synonymous with global publishing labels and household names, its steady move online has opened it up to anybody with a good idea, says Han Joon Kim, Head of Internet and Media equity research at Macquarie Capital.
A core component of the online games sector is eSports – participating in and watching professionals play in online sports tournaments has become big in its own right. eSports – which reflect traditional sports leagues by having teams, players, organised competitions, media rights, sponsorships and prize money – are attracting huge audiences. More than 100m people watched the 2019 League of Legends World Championship online – a viewership figure comparable to the annual Super Bowl championship in the US.
eSports is now a ~$1 billion business
However, while a 30-second commercial at the Super Bowl sells for over $US5 million5, eSports has a few innings to go before it can command such a premium. Its global annual revenue is around $US1 billion2, compared with $US13 billion for the US NFL6.
Macquarie research finds eSports teams are, however, worth more than NFL teams in proportion to the revenue that they generate. By summing the estimated values of the top 13 teams in each sport and dividing it by the revenue generated by the entire league or industry, the multiple of team value to revenue at 4.5x for eSports is higher than the NFL’s 3.1x ratio.2 The higher multiple suggests these eSports teams will have higher growth than traditional sports teams in the future.
One reason is the increasing average age of traditional sports audiences7 leading professional leagues to look at the promise of eSports to back-fill and attract a younger fan base. Late last year, the Philadelphia Eagles became the first NFL team to sign an eSports tournament provider,8 and the NFL itself and games developer EASports signed a broadcast agreement with Fox Sports in the US to take their eSports competition, The Madden Championships, to a mainstream audience.9
This is just one example of how eSports – like its physical counterpart – is encircled by a value chain of multiple stakeholders fuelling one another’s participation in the pursuit of commercial benefit. Something that Tim Nollen, Director and Senior Media Analyst at Macquarie Capital, says is akin to the successful strategy pursued by Disney.
Replicating this strategy in the form of a digital ecosystem has seen gaming platforms broadening their offering beyond play to incorporate related entertainment like concerts, movies and exclusive brand and marketing experiences. But unlike the video streaming services that remain the mainstay for consumption of this content, these are being created as immersive and realistic alternate digital realities where people can live, work and play.
Due to the lockdowns and furloughs caused by the COVID-19 pandemic, consumers have had more time on their hands and brands have sought new ways of connecting with them at home, as physical shops shuttered. This added 15 per cent more gamers2 to the global tally, and many won’t be putting their consoles away anytime soon despite communities and economies opening back up, says Kim.
For sceptics of their appeal, Second Life offers a taste of things to come. Launched before Disney’s VMK and though now facing stiff competition from newer rivals, at its peak it managed to attract hundreds of global educational institutions to its virtual campus10. There, real world professors delivered lectures to users who have opted to take their digital avatars to class.
Retail brands are also recognising the ongoing potential. What started as an experimental part of advertising budgets has become an increasingly important marketing opportunity. American fashion designer Marc Jacobs has created bespoke outfits for players of one game, and Italian luxury house Gucci created ‘digital’ shoes, which can be worn only in virtual or augmented worlds online.11
By integrating multiple media formats, video gaming platforms have begun to merge elements of the physical world into digital games and new and emerging technologies like augmented reality (AR) have the potential to take this to the next stage by making the real-life environment viewable from a device.
Advances in smartphones have already allowed for basic augmented reality-based games like Pokémon Go – which became one of the most successful mobile games of all time12 – to take off in popularity. Nintendo’s upcoming new augmented reality game, Mario Kart Live, will advance the concept and allow players to build bespoke racetracks around their house and physical obstacles in different rooms.
Virtual reality (VR) would advance this integration even further, but the technology remains in its infancy having not yet reached a critical mass to warrant heavy investment by gaming hardware. Its tipping point could be any day, though, as gaming increases in sophistication, says Nollen.
The success of the gaming world and its transition from the console and cartridge business model of the 1990s and early 2000s has been its ability to use technological disruption to its advantage. But- importantly – it has done so in a way that adds value to multiple parties, including operators, developers, hardware providers and players themselves.
The industry benefits from a maturity level that is constantly being extended through new and interactive technologies, which expand the opportunities for innovation among developers. As well as new revenue streams for those creating the software and distributing it to gamers, it brings new diversity of products and commercial opportunity for the whole ecosystem of entities. In doing so, it grows the market and self-perpetuates by bringing new consumers and providers into the industry.
The evolution of gaming into a digital ecosystem
Source: © Copyright Newzoo 2021
The lesson for others looking to get involved, as technological change takes place around them, is to consider how best to create an ecosystem where the value created by each member influences the value received by the others.
The Macquarie Technology Summit once again brought together global leaders driving technological change across multiple aspects of business and community.
