Technology

Thriving in the face of digital disruption: how video gaming reimagined its potential

2021 Macquarie Technology Summit related insight


 

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.

 

From gaming to global get togethers

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.

"Technology is democratising access to video gaming – both from a player and developer perspective. Much like online video streaming platforms gave everyone the chance to make moving images, virtual worlds are allowing budding developers to release their own Los Santos or Saffron City more easily than ever before."

eSports: central to gaming’s virtuous circle

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.

"The success of Disney lies in its ability to create and capture value by leveraging its name across a multitude of channels – from movies and TV shows to theme parks, branded resorts, toys, merchandise and entertainment experiences. It has built a unique ecosystem that stretches its brand across inter-related segments."

"Online gaming platforms are mimicking that by anchoring themselves at the heart of a more immersive online experience that brings together a broader range of entertainment."

Immigrating online

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.

"An effect of the pandemic was to acclimatise more of us to a digital environment that we liked, because not only could we participate in it at our leisure, but we could do more than one thing in it with different people."

"Virtual worlds have expanded beyond multiplayer combat, to become digital versions of society that mix entertainment, information and communication. Whereas video games and social media alone might be interactive, together in a virtual world they are immersive and increasingly reflecting our real world lives."

"As a result, the world that will emerge from the pandemic is very different to the one that entered it. Virtual worlds are going to be a much larger part of that."

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

 

Where technology takes it next

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.

"As gaming expands in complexity, it draws in more participants and engenders demand for higher-end devices and equipment by forcing players to upgrade and adopt new hardware. That, in turn, acts as a stimulus for investment in innovation by manufacturers."

"So, whilst hardware and peripherals such as VR headsets are a fraction of the broader industry today, they are poised for growth and should play a more meaningful role in the next stage of the industry’s growth."

Lessons for other industries

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.

Han Joon Kim is Head of Internet & Media equity research for Asia at Macquarie Capital, based in Hong Kong. 

Tim Nollen is Director and Senior Media Tech Analyst at Macquarie Capital, based in New York. 

  1. Kelly Coffey, OpEd: Disney Needs to Bring Back VMK, Inside the Magic, 18 October 2020, https://insidethemagic.net/.
  2. Tim Nollen, Han Joon Kim et al., Video gaming: Entering new realms, Macquarie Research, 19 October 2020, http://www.macquarie.com/research.
  3. Tom Wijman, Three Billion Players by 2023: Engagement and Revenues Continue to Thrive Across the Global Games Market, Newzoo, 25 June 2020, https://newzoo.com/.
  4. Tom Wijman, The World’s 2.7 Billion Gamers Will Spend $159.3 Billion on Games in 2020; The Market Will Surpass $200 Billion by 2023, Newzoo, 8 May 2020, https://newzoo.com/.
  5. Billy Heyen, Super Bowl commercials 2021: How much does an ad cost for Super Bowl 55?, Sporting News, 2 August 2021, https://www.sportingnews.com/.
  6. Field Level Media, Report: NFL revenue dropped by $4 billion in 2020, Reuters, 12 March 2021, https://www.reuters.com/.
  7. Michael Colangelo, Does the NFL have an aging fan problem?, Touchdown Wire (USA Today), 5 February 2020, https://touchdownwire.usatoday.com/.
  8. Eagles become first NFL team with esports tournament provider, Philadelphia Eagles, 15 December 2020, https://www.philadelphiaeagles.com/.   
  9. The future of NFL esports and the Madden Championships, Esports Insider, 10 December 2020, https://esportsinsider.com/.
  10. Mats Deutschmann, Learning and Teaching in the Virtual World of Second Life, Trondheim: Tapir Academic Press (Norway), 2009.
  11. Don-Alvin Adegeest, Gucci partners with Zepeto to personalise avatars and virtual world, FashionUnited, 9 February 2021, https://fashionunited.uk/.
  12. Paul Tassi, ‘Mario Kart Tour’ Breaks ‘Pokémon GO’ Record With 20 Million Day One Downloads, Forbes Inc., 26 September 2019, https://www.forbes.com/.

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