Video Game Industry Research

Introduction

Welcome to Data is King, a blog series where I’ll attempt to uncover the path to success in the entertainment world using data. As an avid consumer of entertainment myself (aren’t we all?), I wanted to discover new insights about industries I’ve interacted with my whole life. I hope this blog series brings new, insightful information about entertainment as a business and an art form.

This post is about maximizing revenue in the console and PC game segments of the video game industry. Before we continue, I want to acknowledge the substantial mobile gaming segment as well. According to estimations reported by TechCrunch, mobile games make up 45% of the industry, have experienced 10.2% year-over-year growth, and received $9.6B in investments over 18 months between 2018 and 2019. Smartphone games have the luxury of living on devices with around 80% penetration rates in countries like the United States and the United Kingdom. Not only that, but they also appeal to young kids and older adults who won’t line up at Best Buy to purchase a $500 PlayStation 5. Even in my three-person household, mobile gamers are the majority (my mom loves her Plants vs. Zombies, and my dad loves his Boom Beach). Despite mobile gaming’s significance, I decided not to include it in my overall research. The mobile gaming segment is a different beast entirely, operated by completely different publishers and developers, existing on completely different hardware, and requiring different strategies. Focusing on console and PC games will result in more cohesive findings and strategic recommendations. This post will cover a quick overview of the video game industry for consoles and PC, analyze what types of games ship the most units, and explain how modern trends and future technology will shape the video game landscape. All the data came from Kaggle datasets containing sales data, Metacritic data, additional genre data, Twitch data, and Esports data. Plenty of programming went into transforming the data (you can check out my code here), and I made all the visualizations in Tableau. Without further ado, let’s get into it!

Industry Overview

The total yearly sales revenue in the video game industry resembles a camelback over the past two decades (I approximated the sales revenue with limited data, and you can check line 140 in my code for an explanation of my process). Sales adjusted for inflation in 2018 were down around 30% from 2002 (the first year with more than 500 documented games on VGChartz, a website containing video game sales data), and down 56% from the peak in 2009. As displayed above, the decrease in sales revenue was synonymous with the overall game count decrease in the same timeframe. From a pure unit sales perspective, the industry outlook seems bleak. Luckily, there’s much more nuance to the situation. Video games today have a longer lifespan than ever before, and with the ease of digital purchases within their menus, additional revenue streams stretch far beyond unit sales alone.

Let’s look at acclaimed developer and publisher Rockstar and their Grand Theft Auto series in a little case study. Rockstar is a big-budget developer whose massive games take years to develop. Grand Theft Auto V was released in 2013, five years after Grand Theft Auto IV in 2008. However, seven years later, it’s still not even confirmed if Grand Theft Auto VI exists, and Grand Theft Auto V has lived for console generations spanning the PlayStation 3, PlayStation 4, and soon to be PlayStation 5. Grand Theft Auto V is the most valuable entertainment product of all time, earning $6B as of 2018 and likely blowing past that number in 2020. And while much of its earnings came from unit sales, even more came from digital currency purchases in its online game mode. Parent company Take-Two Interactive made 62% of its revenue through in-game purchases in the first quarter of 2019. Holding companies like Take-Two Interactive know how to maximize revenue on a per-game basis: extend each game’s lifecycle and milk as much cash out of it as possible. Many publishers are catching on, and all their strategies (including the more devious ones) will be covered soon.

Above is the sales revenue market share across all video game publishers since 2002, with each’s rectangle size symbolizing their total game sales revenue. 845 distinct publishers have lived and died in that timeframe, but a few major names have built entrenched empires over years of industry experience. In addition to publishing games, Nintendo and Sony Computer Entertainment own the consoles the games live on, most recently being the Nintendo Switch and PlayStation 4. Meanwhile, third-party publishers such as Activision and EA Sports own incredibly valuable intellectual property. Activision’s Call of Duty franchise boasts nine of the ten highest selling shooter games ever made, shipping 288M total units according to my data. EA Sports, on the other hand, owns the exclusive rights to make NFL video games with its Madden franchise, and they recently extended their contract with the NFL through 2026 at the cost of $1.5B. Even film giants such as Warner Bros., LucasArts, and Disney Interactive have turned to the video game industry as an additional revenue source. The competition is mighty, indeed.

What Wins?

With fewer games released per company each year, it’s incredibly important for each game investment to surmount the fierce competition and produce enough revenue to keep the company healthy. For developers like Rockstar or CD Projekt Red, the fourth-largest company by market cap on the Warsaw Stock Exchange, an entire decade’s worth of revenue can stem from just two games. Choosing what game to make is a critical investment that impacts hundreds of workers’ lives. It’s only responsible to harness data to help make these monumental decisions.

To make sure you’re aware, from this point on, I’ll be analyzing games using their total units shipped rather than their sales revenue. When categorizing games by different genres and multiplayer status, especially, it would be unwise to assume a uniform price. Free-to-play pricing models have become rampant among multiplayer games in recent years, and I’ll touch on the advantages of this pricing strategy and more soon. With that out of the way, let’s continue.

Shooters and sports games have dominated the multiplayer scene since 2014 (the first full year of the PlayStation 4 and Xbox One console generation) according to my data, thanks in part to the aforementioned Call of Duty franchise and various professional sports titles of EA Sports and 2K. Between the two genres, however, shooters have far fewer barriers to entry. Many professional sports leagues have signed away their rights to specific publishers exclusively, but companies worldwide have free reign when it comes to shooters. In this console generation, especially, many developers are taking advantage and innovating. The battle-royale shooter subgenre, a game style where dozens of players battle online with only one rising victorious, will be remembered for changing the industry forever. Fortnite has been the most successful battle-royale game thus far, and its parent company Epic Games rose from a $865M valuation in 2012 to a $17.3B valuation as of August 2020. Epic Games is the 5th most valuable startup in the United States today, and it’s more than twice as valuable as Major League Soccer.

Role-Playing epics (like CD Projekt Red’s Slavic medieval fantasy The Witcher 3: Wild Hunt) and movie-like action-adventure games (like Rockstar’s western Red Dead Redemption 2) are among the top single-player experiences, while Grand Theft Auto V made up over half of the action category on its own. There is a common denominator between these three games and other bestsellers such as The Legend of Zelda: Breath of the Wild and Marvel’s Spider-Man: open-world gameplay. With continually improving hardware and development practices, many single-player games now provide living worlds that the player can freely interact with, and the trend has no signs of stopping. On the negative side, puzzle and strategy games perform poorly across both distinctions, which is a shame considering they’re some of my favorites. When I split the results among large and small developers and publishers (using the median total units shipped as a divider), there was little difference in the genre rankings.

Of course, most video games can’t be pinned down to just one genre. Below are the multiple linear regression results on the natural logarithm of total units shipped (the dependent variable) using primary, secondary, and tertiary genres (the independent variables). For those unfamiliar or who haven’t read my post on the film industry, multiple linear regression works by modeling the relationship between the independent variables and the dependent variable by fitting a linear equation to the data. I removed the top and bottom 10% of units shipped and log-transformed it due to its power-law distribution (being heavily skewed to the right), normalizing the data points to better fit the linear model. We only care about the results of statistically significant variables, i.e., variables with a p-value less than 0.05, or those having higher than a 95% confidence level. The coefficients, or the linear equation slopes, show the amount of change in the dependent variable given whether each independent variable is true. It may be challenging to interpret the dependent variable’s coefficients, but I ranked all the statistically significant variables by their impact to show some insight. Finally, I had some concerning numbers arise in the Jarque-Bera test, a test that warns if the residuals’ distribution doesn’t follow the normal curve. I plotted the residual distribution to the right to be transparent about the results. The residuals are skewed to the right, meaning there were outliers in total units shipped despite the log-transformation. The coefficients still hold insights, and I’ll take the skew into account in my interpretation.

Rank Genre Coefficient

1 Music 0.2267

2 Action-Adventure 0.1977

3 Family 0.1273

4 Shooter 0.1033

5 Sports 0.0935

6 Fighting 0.0785

7 Role-Playing 0.0376

8 Action 0.0331

9 Arcade -0.0828

10 Racing -0.0838

11 Strategy -0.0871

Interestingly, the music genre has the most substantial impact on the units sold. However, many indicators point to it being a fad product. The motion-controlled dancing series Just Dance likely influenced the model heavily on the right side of the skew, but its popularity peaked in the earlier half of the console generation. Just Dance 2015 shipped 4.7M units, but for every consecutive game through Just Dance 2019, the units shipped totaled 3.1M, 2.5M, 2M, and finally 1.5M. Rhythm games with guitar and drum set controllers like Rock Band and Guitar Hero experienced similar fates by the early 2010s, and today, the latest music game craze is the virtual-reality game Beat Saber.

To no surprise, action-adventure, shooter, and sports games do well in the model. Even after removing the top and bottom 10% of earners, the action-adventure genre still boasts many titles on the skew’s right side. The family category was the most successful secondary and tertiary genre, representing many marquee titles on the Nintendo Switch, such as the fantastic platformer Super Mario Odyssey. As for the losers, racing games don’t sell particularly well outside the famed Mario Kart series, and arcade and strategy games just don’t sell well period.

Let’s now jump from analyzing genres to multiplayer status, a key selling-point for many games today. Above, I categorized single-player games as supporting one player at maximum, small multiplayer supporting up to four (usually the maximum for local play on one console), and large multiplayer for all higher player counts (likely requiring online infrastructure to connect people over the internet). Many small and large multiplayer games also have single-player modes, but it’s a notable distinction that they invested time and money to add multiplayer options and build online servers.

Large multiplayer has gone from the laggard to the leader, increasing its yearly total units sold by 157% since 2002. Video games have trended away from small-multiplayer couch co-op to more impressive online spectacles since the early 2000s, and it’s easy to see why. The count of total online memberships has increased every year, reaching a staggering 103M active users on PlayStation Network alone in 2020. As you can see below, large multiplayer games dominate on a per-game basis today, far outshining their humbler beginnings.

Singe-player games experienced a precipitous drop in average units sold since 2002. However, it mostly stems from the influx of independent developers creating smaller, unique single-player experiences that don’t sell as AAA titles do. Independent games became increasingly available to find and download with the advent of digital marketplaces on the Xbox 360, PlayStation 3, and PC in the mid-2000s. An indie game renaissance was ignited years later in 2012, highlighted by the independent game Journey receiving 31 game award nominations and winning 19, and it has carried on ever since. Of course, most independent developers don’t have the resources to maintain massive online servers for large multiplayer games, and this is where the most significant revenue opportunities lie in video games today.

*PS4 – PlayStation 4

*PC – Personal Computer

*XOne – Xbox One

*NS – Nintendo Switch

Another critical decision for developers and publishers is what platforms to release their games on. The chart above focuses on third-party games, i.e., games that are not exclusive to one console. Unfortunately, the Nintendo Switch doesn’t match the competition. Many bigtime AAA games never make it to the Switch, simply because it would be a technical nightmare to port over the PlayStation 4, Xbox One, and PC versions. The Nintendo Switch’s 32GB of memory pales compared to the 500GB and 1TB versions of the other consoles, and games like Red Dead Redemption 2 take up 100GB on their own. The hellish shooter game Doom is one example of a AAA game released on all four platforms. However, it shipped just 430K units on the Switch compared to the 2.9M units, 2M units, and 1.4M units on PlayStation 4, PC, and Xbox One, respectively. These numbers may seem surprising given the Switch has sold nearly 56M consoles. Well, at least one company is rolling in the riches from that user base: Nintendo. The top 12 highest selling Nintendo Switch games in 2018 were all first-party Nintendo games. See the Nintendo Switch game market share below for yourself.

The true selling point for Nintendo consoles is Nintendo games for many consumers. Third-party developers and publishers should focus on the other major platforms and the PlayStation 5 and Xbox Series X coming out in the 2020 holiday season.

Finally, let’s look at the third-party game demographics for the PlayStation 4, Xbox One, and PC. The chart above displays the average units shipped broken down by multiplayer status and ESRB rating, an age suggestion rating including E for everyone, E10 for everyone ten and up, T for teen, and M for mature. I removed sports games because they disproportionately skewed the numbers for E-rated games, considering only a small number of publishers have access to their rights.

M-rated games shine across all categories. Large-multiplayer M-rated games sell more than double the next highest distinction on average, and shooters made up just under 50% of their total. Meanwhile, role-playing, action-adventure, and action combined to make up 90% of the popular M-rated single-player games. For the younger gamers out there, E-rated games fare far better on the Nintendo Switch, albeit most of them being first-party Nintendo titles. The demographics look almost exactly the same when I filtered by PlayStation, Xbox, and PC exclusively.

The Future and the Moral Dilemma

The video game industry is already a behemoth in the entertainment world, and it’s only going to become a bigger part of the world’s culture. On top of the PlayStation 5 and Xbox Series X coming soon, Microsoft and Google recently launched Project xCloud and Stadia, two video game streaming services made possible through immense cloud-computing. These services make high-end gaming possible on phones, tablets, and laptops, forgoing a console. If these services catch on, console-quality games will be just as readily available as mobile games. Each game on these services must still be individually purchased, and this will likely continue for marquee titles. However, Microsoft Game Pass and PlayStation Now are two new, Netflix-like services that provide unlimited select games for monthly subscription fees. Microsoft Game Pass cracked 10M users at the onset of the COVID-19 pandemic, and the entire industry has thrived with people quarantined in their homes.

Technological innovations have been synonymous with video game quality and availability. In line with Moore’s Law, video games have become exponentially more complex, and the internet has opened new ways to interact with the medium. One of the biggest influences is a social media platform for streaming video game gameplay: Twitch.

Above are the most-watched genres in Twitch’s history. The numbers are truly staggering. Shooters total to nearly 240B minutes watched, the equivalent of billions of dollars in advertising spending, and these numbers don’t even consider Twitch clips shared over YouTube, Twitter, Facebook, and more. The best part: this exposure costs nothing for developers or publishers. Twitch and all its contemporary streaming platforms are the best advertising opportunities for video games today. So, what games get viral on Twitch? Shooters dominate, especially considering strategy games are monopolized by two giant Esports mainstays: League of Legends and Dota 2. Both genres prevailed in the Esports scene, however. Esports revenues eclipsed $1B in 2019, achieving a 41% compounded annual growth rate since 2014. The commonality between all Esports games is multiplayer, of course. And multiplayer games dominate on Twitch.

Multiplayer games ship the most units, and they get the most free advertising by a mile. Whether it be through Esports competitions or the 10M+ independent game streamers on Twitch alone, competitive multiplayer games reach a larger audience over the internet. And with free pricing models, developers and publishers can compound the virality effect even further. The previously mentioned Fortnite became a viral sensation thanks in part to being free to play across almost every platform (including smartphones). It introduced cross-platform multiplayer servers where players from different consoles could play together, and its large player count kept the multiplayer community densely populated. But most importantly, its tremendous player count helped monetize the game through digital purchases. While many free-to-play and freemium pricing models would be lucky to convert 10% of people to spenders, studies show that an incredible 70% of Fortnite players spent money on the game in some fashion. While most paid video games cost $60, the average Fortnite player spent $85 on the game (likely influenced by heavy outliers). These numbers are incredible, but also a little concerning.

The above chart comes from research and estimations from Statista. As alluded to earlier, the DLC (downloadable content or digital purchases) market is the most significant part of today’s industry. But that doesn’t come without its consequences. Many video game DLC practices resemble slot machines more than marketplaces, and there’s considerable concern about how it may get children and teenagers addicted to gambling. The most common casino-like practice is loot boxes. Players earn loot boxes by playing the game (or paying for them), and these loot boxes shoot out randomized prizes, such as cosmetic items and gameplay upgrades, when opened. Like gambling in Las Vegas, the dopamine spikes from obtaining rare items from loot boxes (or getting triple sevens at the slots) hacks our brains. However, while casinos are reserved for those 21 years and older, many games with these practices seek out impressionable kids intentionally.

Another frowned-upon DLC style is pay-to-win. Pay-to-win DLC allows players to bypass in-game challenges to unlock upgrades and abilities. Often, developers will make it incredibly hard to unlock these upgrades through gameplay alone. Electronic Arts (EA) used an egregious combination of pay-to-win DLC and loot boxes in the multiplayer shooter Star Wars Battlefront II in 2017, and consumers were not happy. EA lost $3.1B in shareholder value after an extreme backlash, and countless videos like the ones below popped up all over YouTube. Videos like these receive millions of views, and no matter how silly the thumbnails might be, they are incredibly damaging.

Thankfully, many video game companies learned from their mistakes (or have been forced to change). Fortnite ceased its loot box use entirely, and Star Wars Battlefront II removed all gameplay-impacting items from its loot boxes. In a more recent trend, the absence of paid DLC has become a selling point. PlayStation is the leading platform in the video game industry, and the majority of games in the most recent PlayStation State of Play presentation touted having no microtransactions at all.

Closing Observations and Recommendations

The video game industry’s future is bright. The internet and technological innovations have made the medium more social, engaging, and available in our daily lives. Tech giants like Google, Apple, and Facebook have set their eyes on video games in recent years, and I can only imagine the boundary-pushing experiences that will likely release in the next decade. With such lucrative and wide-ranging revenue opportunities comes plentiful competition, however. Now more than ever, video game developers and publishers need to use data to understand industry trends and maximize their revenue. I’ve identified several pointers for multiplayer games, single-player games, and for all developers and publishers in general. These are my strategic recommendations.

First, some overarching tips:

· Prioritize releasing games on PlayStation, PC, and Xbox in that order. These three platforms provide the highest unit sales on average.

· Consider releasing games on Stadia and Project xCloud. If the movie and music industries are any indication, streaming can disrupt the console market soon.

· Don’t be too greedy. Manipulative DLC practices can backfire and damage a company’s reputation. A loyal customer base is more valuable than the few extra exploited dollars today.

For multiplayer games, here are some suggestions:

· Make the game viral.

· Consider making the game free to play. Knocking down price barriers can result in significantly more downloads and opportunities for monetization.

· Focus on being popular on Twitch. Games that are exciting to watch will benefit from Twitch’s immense internet exposure.

· Consider making the game a viable Esport. Like traditional Twitch streaming, Esports is growing quickly and provides instant recognition.

· Consider making a shooter. Shooters are the most popular genre in multiplayer, and they have continued to pick up steam.

· Monetize the game well. Provide a plethora of interesting downloadable content that drives players to purchase without exploitation.

For singe-player games, here are some suggestions:

· Consider making mature, action-adventure or role-playing games. These types of games rival blockbuster films, providing an immersive story-telling experience that drives people to purchase.

· Consider making the game open-world. Open-world gameplay is the new, most sophisticated single-player game experience. Learn from standouts like The Legend of Zelda: Breath of the Wild for how to engage players with an open world properly.

Well, that about wraps things up! I hope you enjoyed it, and if you did, check my research on the film industry. Thanks for reading!