Gaming: The Problem & Opportunity of Poor Monetization
The gaming industry is missing an immense opportunity to increase the monetization of their player base. As of the end of 2022, the global gaming industry earned ~$59 per gamer to generate ~$183b in revenue. This $59 per gamer is relatively flat over the past 4 years since 2019 (peaked at $61 in 2021), yet the gaming market has expanded by ~400m gamers and $30b in revenue over that same time period. In short, the gaming market has recently been achieving revenue growth through more content and increased user adoption but not through enhanced revenue per gamer.
What Created This Problem
A few reflections on why the gaming industry has this problem:
- Mobile in the Emerging Markets: mobile gaming has exploded since 2015, yet most of these new users are in the emerging markets (lower revenue per user). Even today, many gaming companies do not pursue marketing strategies in those markets, despite widespread adoption, because the revenue opportunity is lower.
- Free-to-Play: the successful business model of Free-to-Play (FTP) drove tens of thousands of studios to pursue this monetization strategy. In this vertical, a successful game achieves 2-4% conversion to paid while monetizing the other 96-98% on ads (or choosing to not monetize the long tail of users at all). This model inherently lends itself to a volume strategy approach, which has been viable given that >2b people play video games on mobile alone. This has led to most games being free-to-play in the industry today and most gamers getting comfortable accessing full game experiences for free.
- Fear of Gamers: it is no secret that gamers are incredibly passionate about the games they play. There are countless positives of this, yet one risk to game studios is that the gaming community has very high standards and expectations of what game studios create (loyalty is hard to earn and lost in seconds). Given the rise of “so much is free” in the gaming industry (Twitch, Discord, FTP games, Fortnite, Warzone, etc), many game studios have been hesitant to upset their community by gate keeping their games behind paywalls.
The industry has now found itself in a conundrum: the gamer has been trained to expect too much for free. This simple fact is the result of 10+ years of the gaming industry growing and evolving to where it is today. Much of this growth has been fantastic for gamers, industry participants, and the world at large. Yet the “revenue per gamer” metric is now anemic, flat-lined, and concerning.
Macro View: The Under-Monetized Gamer
Since 2015, the gaming market has been rapidly growing at an impressive rate of ~10% each year. Over this time period, from 2015 to the end of 2022, there are a few key things to highlight from the data:
- The size of the gaming market is growing; however, it has not improved its monetization per gamer since 2019
- Gamer growth (6.4%) is ~6x higher than global population growth (1.1%), which is meaningful given that 39% of the world plays video games
- Gaming industry revenue growth (10%) is >3x global GDP growth (3.1%)
- Revenue per gamer (+4.1% per yr since 2015) is only 30% higher than annual GDP growth (3.1%)
Key statistic: the growth in the numbers of gamers (6.4% annually) is outpacing the revenue per gamer growth (4.1%) by a factor of 1.5x. In short, we are adding gamers faster than the industry is figuring out how to efficiently monetize them.
The Opportunity: Why This Is Exciting
The exciting part of this observation is: “What if we could fix this?”
As a VC firm in the gaming industry, we spend an inordinate amount of time thinking about what the industry “might look like”, what a company “might achieve”, and “what if this sub-market were to grow rapidly”. To that end, it is important to highlight the opportunity that lies ahead of the gaming industry. Below are a few key points to highlight this:
- Increased Monetization of “Per Hour of Entertainment”: as you can see below, the cost to the consumer per hour of entertainment is dramatically lower in the gaming industry versus other industries of Media & Entertainment.
If the gaming industry were able to add $0.01 or $0.02 to each hour of entertainment across all three platforms of gaming, this would add between $30-60b to the industry in annual revenue.
- Optimization of the Revenue Per Gamer: looking at the revenue per gamer since 2001 until now, you will notice that the industry has gone through a few fluctuations in regards to the optimization of revenue per gamer.
There was a deceleration in the early 2000s ahead of mobile gaming taking off in 2006+. Then a stagnation from 2008-2012 as the industry was growing yet not monetizing as well. Starting in 2014, the industry began growing rapidly until 2020, when COVID brought in over 140+ million gamers per year and forced people indoors where players dedicated more time to gaming.
Looking at the recent stagnation in revenue per gamer (~$59) since 2019, if the trend of +$3/year of additional revenue per gamer were to have occurred, this would have resulted in an additional $5-24 billion in annual revenue for the gaming industry.
Takeaway: it is clear that gaming is an incumbent not only of entertainment, but also culture more broadly. Gaming is also a key tenant of not only media but also the social fabric of over 3 billion people worldwide. Today, gaming is monetizing gamers at ~$59/gamer per year and there is much room for improvement, especially on the price per hour of entertainment at ~$0.07 vs Spotify ($0.18/hr), Netflix ($0.28/hr), or Disney+ ($0.49/hr). We estimate the gaming industry is missing out on an additional $10-30 billion in revenue per year given that the revenue per gamer at $59/year has been flat since 2019. Gamers continue to receive too much value for free/cheap, and that is a fantastic opportunity for gaming companies around the world.