The Gaming Disruptor

Cloud delivery marks the newest chapter in video gaming’s evolution. There are big questions about how it could shift the balance of power.

THE GAMING DISRUPTOR

BY CHRIS ARKENBERG

LA S T YEAR VIDEO GAMING moved into the mainstream. At the convergence of social streaming, smartphone media behaviors, massively multiplayer gaming networks and spectator esports, the modern video game industry is becoming a 21st century form of media and entertainment. Now, cloud gaming is emerging as a new wave of potential disruption for the industry.

In 2019, two of the world’s largest digital platform companies announced their entrance into cloud gaming. This is a long-sought capability that moves game engines away from devices and into the cloud, transmitting games over networks. This could remove the need for consoles and lower the barriers of entry for would-be gamers. Games could become much larger and more immersive, running on the unlimited resources of the cloud, potentially hosting vastly more people.

Although cloud gaming services have been around for some time, none have really been able to successfully compete with existing solutions. Cloud gaming is more complicated than streaming video and faces significant technical and market challenges.

Unlike video – which is linear and essentially the same for every viewer – video gaming is highly interactive, and the view is different for every player.

Latency – the time between a player’s action and the resulting response in the game – becomes very important. High latency can introduce unacceptable lag making gameplay impossible.

Successful cloud gaming may require content delivery networks (CDNs) that are customized for the dynamic, fast-paced, interactive experience of competitive video games. With considerable bandwidth demands, telecoms may see opportunities in upselling subscriptions to cloud gamers, while finding a strong use case for the adoption of the 5G mobile technology standard. As 5G wireless reaches greater deployment, it can allow for faster connections. Conversely, some cloud gamers may bear the costs of higher bandwidth needs.

Likewise, gamers may not yet see the value in cloud gaming, or how it could be better than their existing experiences. The video game industry is mature, and its success has only grown. It is unclear whether the prospect of cloud gaming offers sufficient incentive for game companies and players to change how they create, distribute and consume video games.

If cloud gaming is successful, it could shift the balance of power towards top delivery networks. While the two biggest players involved in cloud gaming today are enormous high-tech corporations, a growing number of game companies are likely to pick up on the opportunity. Some have already announced

BEYOND THE CLOUDS

THE ADVENT OF CLOUD DELIVERY IS NOT THE ONLY trend that is contributing to the gaming industry’s enormous success. Game companies are investing heavily in multi-year development of AAA franchise titles that deliver hyper-realistic narrative experiences. They can now monetize past the point of purchase by selling additional storylines, capabilities and gear as downloadable content (DLC). More of these game worlds are being deployed as durable, persistent online subscription services with virtual economies and social affordances.

One of the biggest free-to-play multiplayer games reported earnings over $2 billion in 2019 from players buying access to exclusive experiences and virtual goods that personalize their play and appearance. They have hosted celebrity events and brand crossovers, showing how such games can now act like sets that can continuously feature new experiences.

Social streaming platforms enable game companies, players, teams, leagues and influencers to widely share the gaming experience. In North America, social streaming has helped expand esports, which increasingly show up on game company earnings. More game companies are investing in esports as an area of growth, and more game franchises now include multiplayer features tailored to esports competition and viewing. Indeed, the rise of esports has shown not only the growth of the multiplayer gaming experience, but also the draw of video games as a spectator sport.

As a result of this shift, game companies may be starting to think like broadcasters. Top titles are increasingly tracked not only by counting players, but also viewers on social streaming platforms. Traditional media companies are buying rights to bring league matches to their broadcast and cable audiences, hoping to reach younger generations less inclined to watch TV. Likewise, traditional sports teams, players and their financial backers are investing in esports to reach people in the same demographic, who are less likely to engage Game companies may be starting with traditional sports. While video games to think like broadcasters. Top have primarily drawn revenues from game titles are increasingly tracked purchases, subscriptions, and downloadable not only by counting players, but digital content, 2018 esports revenues saw also viewers. $353 million in sponsorships; $164 million from advertising; and $176 million for media rights, according to the research firm Newzoo. However, it’s unclear if esports can work with traditional broadcast formats and audiences. The esports experience is inherently social and interactive, and gameplay can be harder to follow with only one camera. Esports viewers are scattered across social streaming channels run by leagues, teams, game companies and influencers. This poses challenges for broadcasters and brands trying to reach and activate consumers who are less aggregated on top broadcast channels. The esports industry itself may face a reckoning as investors that understand TV and sports better than competitive video gaming look for returns on their investments.

plans to develop their own cloud gaming services.

Likewise, if cloud gaming succeeds in its promise to remove the need for consoles, allowing games to be streamed to any device, the console market could be strongly impacted. As we’ve seen with video, changing the distribution model can be disruptive, but once the dust settles, content is usually still king.

Changing the economics of delivery could possibly ignite a wave of merger and acquisitions for content while minting new studios and IP. This would likely amplify competition – and innovation – suggesting that the changes animating the video game industry may not subside anytime soon.

Today, video gaming is a growing share of the media and entertainment pie, especially among younger generations. And it’s more than just people playing games: it is a confluence of innovative and engaging gameplay, immersive storytelling, social media, high-octane competition, democratized broadcast and spectator sports, all wrapped in virtual and real economies that are stretching around the world.

If cloud gaming is successful – and transformative – the future could include vast hyper-realistic and highly social worlds living in the cloud. Riding technology and generational behaviors, video gaming may be evolving into a significant form of 21st century entertainment.

Chris Arkenberg is a research manager at Deloitte’s Center for Technology, Media and Telecommunications, Deloitte Services LP. He can be reached at carkenberg@deloitte.com.

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ANALYZING THE NUMBERS

THE ENTERTAINMENT SOFTWARE ASSOCIATION (ESA) ESTIMATES that there are 2.5 billion gamers supporting the $150 billion global video game industry, with 18% growth in the last year. According to Newzoo, a market research firm focusing on video gaming, China and the United States are the two largest markets, roughly equivalent in size at around $36 billion each. The U.S. market has shown greater expansion in 2019, underwritten by the launch of three new North American franchise esports leagues and launches of top video game titles. According to the ESA, 65% of American adults play video games, and the average age of gamers is 33 years old, with roughly 46% female. U.S. gamers are spread across mobile, PC and console roughly evenly, with smartphones a bit higher. In Deloitte’s 2019 Digital Media Trends survey, 30% of streaming media subscriptions are for game services. As you might expect, younger generations report higher numbers, with 54% of Generation Z playing video games weekly. However, Deloitte’s survey found that mobile gaming has the broadest distribution across Mobile expansion generations, bringing more Generation X and Boomers hasn’t cannibalized into the market. much of the According to Newzoo, the largest expansion of the console and PC global video game industry has been in mobile gaming, market. Rather, which accounts for about $68.5 billion and showed it has expanded 10% year-over-year (YoY) growth from 2018 to 2019. the overall number Smartphones now host the largest cohort; according to of gamers. investment advisers Banyan Hill, over 2 billion people play mobile games. The company anticipates that mobile gaming will be a $100 billion market by 2021.

Newzoo estimates that gaming consoles are a fast second in the revenue ranking, at $47 billion in 2019, with considerable YoY growth at 13%. That’s a testament to both the success of consoles and top gaming titles. Finally, personal computers (PCs) claimed an estimated$35 billion in the global market with around 4% YoY.

But there are some important nuances in these numbers. Mobile expansion hasn’t cannibalized much of the console and PC market. Rather, it has expanded the overall number of gamers, reaching more smartphone users that are increasingly turning to mobile games to fill their idle time.

Although PCs have slowed globally, many top esports are still dominant on PC, leveraging their customization and capabilities for high-performance gaming. Consoles are also optimized for high-performance gaming, and their growth may continue as the next generation of consoles hit the market over the next year.

Beyond just the hardware, video gaming has become an ecosystem of technology, media and entertainment. In particular, social streaming services enable gamers to broadcast live video of their play, while helping audiences find and engage with content.

Social streaming helped expand esports from a mainly Asian phenomenon to a global one, leveraging top players and social influencers who built their own large and lucrative audiences.

The stats for a week of engagement in October 2019 reported by the top social streaming platform: 216 million hours watched; 1.3 million average number of viewers with a peak of 2.9 million simultaneous viewers, across 3 million streams from 45,000 channels. These numbers represent a very different media and entertainment landscape than traditional broadcast and streaming. It is both highly social and very fragmented.