The gaming sector is unique. Originally viewed as a children’s diversion, attracting limited attention compared to TV, movies, or music, gaming is now by far the fastest growing sector of the media industry. With the average player age recently exceeding 30 years old, gaming is now the second largest media sector that is about to reach $200 billion.
The COVID-19 pandemic spurred growth in various media and technology sectors in 2020. Within media, gaming outpaced other segments with an 8% growth rate to reach $198 billion (versus TV's 1% decline to $408 billion
However, the industry is expected to resolve these challenges and recover in mid-term, as games become more embedded in everyday life (Exhibit 1). Games have consistently held a 40% share of global mobile app downloads over the past 5 years. The number is even higher in the Middle East, reaching 45-50% in 2020.
The Middle East is a unique market for gaming. Governments in the GCC region have invested heavily in the industry and recognized its potential, implementing strategies to attract gaming companies. In Saudi Arabia, a National Gaming and Esports Strategy plans to create 40,000 jobs and develop 30 games by 2030, while in the UAE, AD Gaming and DMCC Gaming Center aim to attract global businesses and support local talent.
The gaming sector is expanding and changing, which makes the definition of a “gamer” more nuanced. While mobile dominates the gaming market, the split of revenue across different platforms does not always match the preferences of the core global gaming community. According to a BCG survey of 10,000 participants from 10 countries, most core gamers primarily play on PC and console. This is because only PC/console games enable high-engagement AAA titles, demanding more player’s focus and dedication.
However mobile games absorb twice as many hours per week as PC/console games, and the mobile gaming market is more diverse (Exhibit 2). It attracts casual players who enjoy “time killer” games like Candy Crush but may not identify themselves as "gamers." Nevertheless, these casual players contribute substantially to the growth of the mobile gaming market.
The Middle East is a significant market for both core and casual gamers. Saudi Arabia leads, with a market of ~$1.8 billion (Exhibit 3). It is a skewed towards mobile gaming which accounts for >65% revenues, though this is partially explained by a stronger presence of non-casual mobile games like PUBG Mobile, Free Fire and FIFA in the top-10 downloads (versus only Free Fire in the top-10 globally).
While PC/console and mobile experiences are different, they have started slowly converging. Mobile devices can now offer very high-quality graphics and gaming experiences, while smartphone evolution increasingly reflects and enables the sophisticated gameplay that was previously available on PC/console only. Also, as smartphones are tailored to communication, mobile games can integrate social gaming features better than PC/console.
This has led to more popular PC/console (though mostly PC) titles being adapted to mobile, including leading games like League of Legends (LoL – mobile version is LoL Wild Rift), Call of Duty (CoD Mobile), Diablo (Diablo Immortal). Some leading games are even going with mobile first (e.g., PUBG). And many titles initially released on PC or consoles, such as Minecraft, FIFA, Genshin Impact, and even Fortnite are experiencing resounding success on mobile. Another example is Square Enix, which acquired Eidos and reimagined popular games like Hitman, Tomb Raider, and Deus Ex by releasing IP-driven mobile puzzle games.
However, true convergence resulting in cross-play is still far from being fully implemented. While it can be easily realized in some game genres (e.g., the collectible card video game (CCG) Hearthstone), it is difficult to ensure the same experience for shooters or RPGs whose gameplay is heavily optimized for PC. An additional challenge for cross-platform development is the need to optimize a game for an increasing number of devices.
The mobile gaming industry has experienced significant growth in recent years, with the widespread adoption of smartphones and the increasing power of mobile computing. And PC/console game publishers are actively investing in this trend. Factors contributing to this growth include:
Unique market conditions are accelerating mobile segment growth in the Middle East. With half its population under 25 years old and tech-savvy, these countries require localized content. For example, Chinese publisher Tencent deployed an Arabic version of the Battle Royale game (PUBG Mobile) in the region. It is now one of the most popular games in the Middle East
Despite mobile being the top-line driver of the gaming market, it does not mean that the PC/console is in decline. Core gamers still prefer playing on PC/console as games are more immersive and complex.
Constantly improving visual and game content and leveraging popular IP (e.g., the recent Hogwarts Legacy) have traditionally formed the heart of gaming’s strong appeal to a young audience. Today there is an additional growth factor for PC/console market – the rise of game streaming as separate content, run by both professional players and casual gamers.
The growth of gaming streams is a global phenomenon, which increased markedly during the pandemic. Streaming’s audience will exceed one billion people in 2023, increasing with a CAGR of +16.3% from 2020 to reach 1.4 billion in 2025
While streaming growth has slowed, viewership is still up 6% from its COVID-19 pandemic peak in 2020, and 164% higher than 2018. Live streaming slightly decreased in 2022, but Twitch was the least affected, dropping only 6% YoY and keeping its strong leadership position. Facebook Gaming was hit the hardest in 2022, dropping 56% YoY from 2021. While YouTube Gaming has also seen a decrease in hours watched, it has since pulled away from Facebook as the definitive second most-utilized live streaming platform in the West.
Game streaming is why popular titles like LoL or Fortnite stay relevant for the community as it allows interaction with top streamers. Game publishers also reward those who watch streams with “drops” – giveaways of unique digital items to people who watch a stream for a certain time. Both elements incentivize people to watch their favorite streams and strengthens their commitment to the game.
Streaming platforms also play a significant role in discovering and promoting new games. Since Epic Games’ success with Fortnite, when it cemented its leadership position by paying top streamers to play, more games follow same approach (often even without direct payments to streamers). Some newer titles strongly benefit from streaming at the time of release, like Elden Ring which became a leader in streaming right after its launch. This resulted in 12 million units sold in first 2 weeks and significant time spent within game.
The importance of these platforms is hard to overemphasize as viewers tend to stay on platform rather than follow top streamers. For example, a popular streamer Ninja left Twitch for Mixer for an estimated $25 million dollars; however, most viewers stayed on Twitch, which was one of the reasons for Mixer's closure.
China is expected to remain the largest market for live streaming audiences (forecast CAGR of 7.6% from 2020 to 267.5 million people by 2025
With such dynamic changes in the industry, game publishers and developers are adjusting their strategies.
Innovation in the mobile market incentivized publishers to explore new monetization methods, in particular "free-to-play" with in-game monetization instead of upfront purchase. Electronic Arts released its flagship shooter franchise Battlefield with a free-to-play version called 2042.
The potential to extend the life cycle of their titles through new content and in-game purchases makes this shift attractive compared to developing completely new games every few years. However, publishers must carefully design monetization to ensure it supports the game and its community, not harm it with:
Extension of a game’s life cycle as well as the demand for more immersive and high-quality experiences drive publishers to invest more time and resources in developing their games. AAA games require tens or even hundreds of millions of dollars in investment. For example, Rockstar Games' GTA V had a budget of $260 million and CD Projekt's Cyberpunk 2077 had a budget of over $300 million.
Considering the variety demanded by core players, it is not realistic for publishers to shift to few games with longer life cycles in near future. Instead, hundreds of high-profile AAA games are released each year, though only a handful of those have budgets at the level of GTA V or Cyberpunk 2077.
While this model expands opportunities to generate a return on investment over a longer shelf life, major games still require large upfront investment and long development periods, which can delay cash inflows for several years.
Focus on proven IP is a strong media industry trend, extending well beyond gaming. Considering the significant investments required to create blockbusters and high audience expectations, recognized IP reduces commercial risks. In film and video, franchises like Fast & Furious and Marvel have gained substantial investments and extensions. Gaming follows the same path, with publishers such as Activision-Blizzard, Naughty Dog, and Tencent aggressively building on their existing IP. For example, Activision-Blizzard has focused on its Call of Duty, Diablo, Warcraft and StarCraft IP for many years.
Over last decades major IP franchises have created active, loyal communities. As with comics two decades ago, the movie industry noticed this trend and has turned to gaming IP as a source for new content (Exhibit 6). In return, this provides an opportunity for game publishers to extend the community for their games and attract new audiences. Beyond movies, publishers are also leveraging gaming IP in other segments like amusement parks, toys, and retail. These further strengthen the connection with IP fans and benefit the games.
How will the gaming sector change moving forward? There are multiple technological, demographic, and media industry trends, many mentioned above, that will continue to play major roles. Among those, four will likely have the largest impact:
On one hand, gaming industry growth continues with wider demographic appeal. Mobile gaming is now attracting all ages, particularly in Western markets. In the US, games appealing to Gen X and Baby Boomers (45+), make up nearly 25% of top grossing games in 2021, a 6% increase from 2019.
On the other hand, children and youth still account for most of the sector’s audience growth. Gen Z is the first demographic cohort that spends as much time gaming as watching video content (Exhibit 7). As each child adds to the gaming market, the audience will continue to grow.
Innovation in the gaming market is very different from other media segments, with a much stronger contribution from consumer communities:
It is expected that this trend will continue, especially with platforms like Roblox and Minecraft that ease game development and innovation for gamers.
The gaming industry is already highly consolidated. Further consolidation is expected to continue in the medium-term as major publishers, media companies, and technology firms acquire studios and other gaming-related assets on a global scale (Exhibit 8). More than 650 gaming M&A or investment deals were announced or closed in the first six months of 2022, and gaming companies such as Epic Games raised billions on the strength of the market.
Today top-10 players already control more than 70% of the market. The top 3 players (Tencent, Sony and Microsoft)
Game publishers follow two main paths in their M&A strategies:
1. Consolidation of game development
Gaming companies are consolidating to achieve economies of scale and support the increasing costs of game development. Such scale also facilitates experimentation with new intellectual properties to ensure success in the medium- and long-term. Both Microsoft and Sony are building gaming ecosystems:
2. Extension of internal capabilities
As games become more complicated, game publishers also seek to extend their reach along the value chain, especially parts related to technologies embedded in the games.
One good example is in-game advertising. As games become even more immersive, lengthen their life cycles, and encourage players to spend more time, it highlights the opportunity to leverage space in PC/console games for advertising. Currently games either do not have ads (mostly AAA PC/console games) or feature pre-agreed product placement. However, new technology can allow personalized advertising in real time, and thus boost games’ advertising revenues (e.g., a billboard in a game can contain actual ad that is personalized to a player). Game engine Unity and app economy developer AppLovin's attempts to merge with IronSource illustrate this trend.
Another example is motion tracking and facial animation technologies. As PC/console games rely on these technologies to build an immersive experience, access to advanced and unique solutions is a critical success factor. That is one of the reasons behind game publisher Take-Two Interactive’s acquisition of Dynamixyz, a company focused on cutting-edge facial recognition technology.
Gaming is not just affected by technologies, but also drives innovation and experiments with new offerings. This is especially true in areas like cloud solutions, the Metaverse, and blockchain:
The Metaverse. The concept is a virtual world with its own economy, built upon Virtual Reality, Augmented Reality, and Non-Fungible Tokens (NFT). Gaming has a significant influence on the Metaverse, having first created the concept decades ago. Games like Second Life and World of Warcraft established compelling places for players to spend time and multiple digital items to acquire, which the Metaverse seeks to re-establish with more advanced technology.
Today there are many potential Metaverse use cases, though games remain central to driving early adoption and attracting a wider audience. Recent examples of the intersection between gaming and the Metaverse:
In addition, the gaming sector is instrumental in making the Metaverse a reality. The Metaverse faces several challenges, such as enabling multiple people to interact in virtual reality simultaneously. Gaming technology is crucial in overcoming these challenges. For example, game engines like Unity or Unreal Engine are essential for real-time 3D rendering, while rendering and tracking technologies like OptiTrack or Vicon are vital for proper functioning of VR cameras.
How do these play together?
Many factors and different dynamics move the gaming market. Microsoft is a one example to look at as we try to imagine the gaming offering of the future. The company is currently building on all the key trends, with the result that:
Its portfolio of assets allows Microsoft to create a single convenient subscription to access all of its offerings at a better value price for the consumer. It also gives Microsoft a "flywheel" with multiple data and income streams increasing the value of its overall offering.
Companies from many different industries are expressing strong interest in entering the gaming sector. Their rationale ranges from opportunistic investments to participate in the growth opportunities, to strategic investments to drive synergies with core businesses through IP and technology, brand positioning, or additional monetization.
Investors can consider gaming companies to diversify their portfolio and participate in the promising sector growth.
Media companies can benefit from incorporating gaming IP and broader gaming concepts into their offerings. Netflix serves as a prime example of this strategy, having:
IP owners can benefit from acquiring gaming companies and using their IP to create a strong, diversified revenue stream across various channels. For example:
Technology companies can find synergies between their own assets and the gaming industry by creating a compelling ecosystem value proposition. For example:
Telecom operators (telcos) have various options to enter the gaming field, though selection largely depends on their specific circumstances. For example:
Irrespective of the sector, one important factor to consider is the geographical market for such investments. While China and Western markets seem to be obvious candidates, the Middle East has growth potential driven by two fundamental factors. Firstly, its demographics trend toward a young digital savvy audience that actively consumes gaming content. Out of 35M people in Saudi Arabia, 23.5M (67%) identify themselves as game enthusiasts. This creates a sizeable market not only for gaming, but also for many brands that target this audience.
Secondly, we see substantial governmental efforts to establish a thriving gaming industry. For instance:
Saudi Arabia’s Public Investment Fund (PIF) invested over $3 billion in 2022 to develop the sector, which is part of a significantly bigger $38 billion commitment by PIF to be deployed by its company Savvy Games Group (SGG) for M&A only.
Satya Nadella, CEO of Microsoft said: “Gaming is the most dynamic and exciting category in entertainment across all platforms. We’re investing deeply in world-class content, community, and the cloud to usher in a new era of gaming that puts players and creators first.”
Gaming has been on the rise and is destined to outperform other sectors in the media industry in the next decade. And while gaming is itself evolving quickly, it will also shape other media and technology sectors due to its:
As part of BCG’s series of gaming reports, our next report will focus on Esports, an important part of the sector that is revolutionizing the way consumers engage with video games.
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