Top 5 developments driving growth for video games

1. Traditional platforms are bridging the gap between technologies

During the pandemic, many industry participants expected next-gen tech like game streaming and extended reality (XR) to overtake mobile, but lackluster consumer adoption has shown that we’re not quite ready to live in the metaverse. It’s actually gaming’s most traditional platforms — PC and console — that are riding the wave of blockbuster releases and helping drive growth in the industry during this transitionary period.

Mobile market stalling

Over the past decade, mobile was the video game industry’s primary growth driver, but that has slowed since the pandemic. Apple’s identifier for advertisers (IDFA) restrictions, combined with a softer economic climate, gave advertisers serious pause, and they pulled back from the mobile format. As a result, year-over-year in-app advertising revenue growth plunged from 46% in 2020 to only 16% in 2021. Smartphone saturation across global markets poses another challenge. While smartphones spread rapidly during the 2010s, their growth has plateaued.

The takeaway: Going forward, mobile publishers can create more relevant ads, improve targeting, and help achieve a better balance of ads and purchase offers. These efforts can help improve the gaming experience while growing average revenue per user (ARPU).

Slow start for new platforms

Early iterations of game streaming and XR underwhelmed consumers, leaving an uncertain timetable for mass adoption in their wake. Today’s one of the most adopted streaming platform is Microsoft’s Game Pass, but its capability seems to be limited to smaller, less-complex, single player games. Game streaming may not be a near-term driver of the industry, especially given Microsoft’s announcement that it intends to sell Activision Blizzard streaming rights to appease UK regulators.

Console and PC carry the day

In the early days of the pandemic, locked-down players flocked to console and PC games. Despite COVID-19 driven impacts on supply chains that delayed new game launches and PS5 shipments, gamers were happy to buy a Switch and try out Animal Crossing or dust off their last-gen PlayStation and Xbox consoles. Flash forward to 2023, and the PS5 has sold more units life-to-date than the PS4 or PS3, and the marquee releases of The Legend of Zelda: Tears of the Kingdom and Starfield set records for game sales, subscription sign-ups and console purchases.

Delays in game production actually led to a period of outsized growth for console and PC platforms. Players seemed happy to spend on last-gen consoles and games in the early stages of the pandemic, and then premium new titles became available as we emerged from the pandemic in 2023.

The takeaway: Despite challenges from newer platforms and access technologies, industry growth continues to rely on hits meant to be played on large, sophisticated devices like a PC or console.

2. Platforms are aggressively pursuing IP, setting the stage for content silos

The gaming industry is in a late-stage gold rush for premium intellectual property. This sets the stage for a future with platforms having their own exclusive games, just as video streaming services have exclusive shows. Major players are making big acquisitions of premium IP, signaling their expectations that content and game titles will be differentiators — the keys to market success. While publishers will remain incentivized to make games available across devices, streaming technologies could make bulky devices like PCs and consoles obsolete. Publishers won’t have to rely on device gatekeepers to get their games into players’ hands.

According to industry specialists, the future of cloud gaming and streaming is expected to bring great experiences to players, no matter what kind of games they enjoy. And when that day comes, players won’t need original equipment manufacturer (OEM) devices to play the hottest games. Publishers will have the freedom to go straight to the players themselves. The only thing that will set games apart will be the content, motivating publishers to make their games exclusive to their own platforms.

We already see this trend emerging. Microsoft and Sony have acquired studios, IP and content — positioning them as rising over-the-top (OTT) gaming platforms. Large independent publishers have some tough decisions to make. Will they jump on the bandwagon and create their own direct-to-consumer (D2C) streaming platforms or will they team up with an established entity? If they go the traditional route and make their games available elsewhere, they might miss out on the profit that come with game distribution. As for smaller publishers that don’t have the same scale of content, they’ll likely keep relying on the major outlets for distribution. In fact, some of them might even prefer to find a buyer instead of being a small fish in a big pond.

The takeaway: When game streaming expands, consumers stand to benefit the most. Getting top tier games will no longer require a $400+ device. Gamers can just sign up for a few subscriptions at a fraction of the price. This subscription model can increase the addressable market and ultimately help drive growth similar to what mobile gaming enabled in the 2010s.

3. Publishers need to innovate on monetization for ARPU expansion

Today, publishers take home $136 billion of the $262 billion video game market, with PC and console capturing $48 billion and mobile capturing $87 billion. The balance goes to distributors and game stores, mobile adtech players and game developers. However, despite having the largest position within the large and fast-growing video game market, there’s even more opportunity waiting to be tapped by publishers in the space.

While the overall industry has seen some major technological advancements, the way games make money hasn’t quite caught up. Free-to-play games, ads, optional purchases and real-time bidding for ad inventory — these have been around for over 20 years in other digital media formats. But the gaming industry is just beginning to adopt these models. While it’s a great first step toward better monetization, there’s still a long way to go.

Publishers should consider a hybrid approach between direct player purchases and ad revenue. Rewarded video has introduced the concept of opt-in ad viewing, which decreases the impact on user experience and player retention. Technology for in-game advertising — dubbed gaming natives because the ads look and feel similar to game content — exists today and can make the ad feel less intrusive.

Publishers should use first-party data and data clean rooms to make sure they’re showing ads and offer walls that increase ARPU without disrupting player experience. It’s all about finding that sweet spot where you can keep users engaged and make money at the same time. This is easier said than done, especially with Apple and Google depriving app publishers access to the personally identifiable information (PII) the industry used to rely on for targeted ads. However, emerging concepts like contextual data and clean rooms are providing new types of data that can help publishers fine tune monetization.

The takeaway: Publishers should implement a holistic monetization strategy and then use available data and technology solutions to make it happen. Track your strategy’s impact on player KPIs, and continuously improve the approach by increasing ARPU and retention statistics.

4. Gametech innovators help boost profitability and player experiences

The video game industry has been on the cutting edge of tech for decades. And at the heart of this innovation is the gametech market, which allows developers and publishers to create, operate and monetize their games. PwC internal analysis estimates that technology solutions used for game development and operations represent about $8 billion of addressable spend today. And adtech platforms that drive user acquisition and player monetization are competing for an additional $17 billion (a subset of a $148 billion in-app advertising market that extends beyond gaming to social media, video streaming and other apps). This represents the portion that adtech players can capture, excluding walled gardens. As the industry evolves and embraces artificial intelligence and machine learning in building next-gen products and produce revenue, it’s gametech players who are ideally positioned to provide these solutions.

Some of the most exciting innovations taking place in the industry today are in game development. Generative AI (GenAI) can be used to create digital assets such as the artwork or dialogue for non-playable characters. It can also help port games to different languages and cultures more effectively. Today, it’s usually human testers who conduct quality assurance and quality control processes, but more traditional AI can be utilized for these tasks. AI applications can save time, drive down the cost of game development and unlock new markets for games that were previously limited to particular regions or languages.

More advanced AI applications can be used to help boost player adoption, retention and monetization — especially in free-to-play games. AI can power solutions designed to incentivize good behavior in multiplayer formats and create more enjoyable gaming experiences. Gametech players with access to monetization and gameplay data can build applications that take player loyalty and monetization to the next level. They can show ads and offers that are tailor-made for each player’s preferences, all while making sure it doesn’t intrude on user experience.

The takeaway: Now is the time for gametech players to invest in acquiring or developing these new capabilities while these technologies are relatively new or still in the theoretical stage. The prize is massive, with the ability to reduce costs and expand addressable markets. A key question the industry will have to answer is how this value creation is shared across gametech players, developers, publishers and the players themselves. And they’ll also need to consider how to implement emerging tech, especially GenAI, responsibly.

5. Gametech transforming industries beyond gaming

The video game industry often serves as a new technology incubator, and successful innovations quickly find their way to other industries. This opens up opportunities for gametech players who can monetize their research and development investments in multiple sectors. They should consider this potential for cross-industry success when making investment decisions.

Physics-based game engines illustrate the cross-sector potential of these innovative solutions. They can generate animated video and visual effects, like those used to create virtual fans at Major League Baseball games during COVID-19 lockdowns. They’ve been used to build digital twins in architecture, engineering, construction, automotive design, government and defense, and so on. These digital twins can be customized and placed on top of cloud compute resources to run physical simulations of retail locations, manufacturing warehouses, city streets — any space where physical objects interact with each other. Internal PwC research estimates the digital twin market size is $12 billion today, growing at around CAGR to reach $66 billion by 2028. Gaming engines stand to capture a big piece of that market.

Extended reality (XR), which encompasses AR/VR, is another area for growth opportunity. Most notably, Apple announced that Unity Technologies would be the preferred development partner for its XR headset Vision Pro, and Unity became the first non-Apple entity referenced in Apple’s Worldwide Developer Day unveiling of the new device. XR may be a long way from mass-market adoption, but gaming engines are already helping create the digital ecosystems that people access via XR technology. PwC estimates that the global XR market will grow to $7.4 billion by 2027, and gametech players will be play a critical role in shaping those digital ecosystems.

Finally, gametech solutions are being used in visual effects within film and television, an $11 billion global market. Mobile adtech players have ventured into device management and monetization, giving wireless providers and OEMs a platform to monetize a smartphone’s home screen and lock screen. This newer market is restricted to Android devices today, but PwC estimates that it still generates $10 billion for telcos, OEMs and adtech players.

The takeaway: Going forward, mobile players will continue to seek new ad inventory and look to the adtech players for support in monetizing it. And gametech players more broadly should consider emerging tech investment opportunities, such as gaming engines.

Get in the game to drive ongoing growth

The gaming industry is in transition. Traditional platforms are holding steady and paving the way for more modern platforms. And while tech-driven transformation is in sight for the industry, it’s not here yet. But when it arrives, this transformation will change how games are made, how they’re played and how they’re monetized. In the long run, gametech players stand ready to enable development and monetization, drive innovation and enhance gaming experiences.