Despite a recent string of down months in U.S. video game sales at retail this year, a new report from research firm Gartner paints a very rosy picture for the global video game industry. When adding in revenues from burgeoning online, mobile and digital gaming sectors, Gartner estimates that worldwide spending on the gaming ecosystem will exceed $74 billion in 2011, up 10.4 percent from the $67 billion spent last year. By 2015, spending is expected to reach $112 billion.
The gaming ecosystem is undergoing major technology and business model transitions that will last beyond 2015, according to the new report. The explosion of smartphones and tablets running on Apple iOS and Google Android is opening up games to the masses. In addition, casual online game publishers like Zynga, which recently registered for a $1 billion IPO, is indoctrinating an older and female-centric audience to games like CityVille and FarmVille.
The key driver for game sales will remain software over the coming years. Big titles like this fall’s Gears of War 3 from Microsoft, Call of Duty: Modern Warfare 3 from Activision and Battlefield 3 from Electronic Arts will drive software sales to $44.7 billion worldwide in 2011. Gartner believes console games will continue to dominate the overall gaming market in the next five years as it absorbs almost two-thirds of consumers’ gaming budgets.
“This large market size means that many consumers embrace gaming as a core piece of their entertainment budget and will continue to play as long as game publishers deliver compelling and fun games,” said Fabrizio Biscotti, research director at Gartner.
Within the gaming software market, mobile gaming will experience the largest growth opportunity with its share growing from 15 percent in 2010 to 20 percent in 2015.
“As the popularity of smartphones and tablets continues to expand, gaming will remain a key component in the use of these devices. Although they are never used primarily for gaming, mobile games are the most downloaded application category across most application stores,” said Tuong Nguyen, principal research analyst at Gartner. “For this reason, mobile gaming will continue to thrive as more consumers expand their use of new and innovative portable connected devices.”
The tried and true video game console business will remain the bread and butter of the industry for the short term. In 2010, sales of video game consoles and software generated more than two-thirds of the gaming ecosystem revenue, and Gartner predicts revenue to grow 4 percent in 2011. This year, global hardware sales of consoles like Xbox 360 and portables like Nintendo 3DS will generate $17.8 billion. Online games are expected to drive an additional $11.9 billion in revenue.
Over the next five years, gaming hardware’s market share will remain constant while software spending will lose share to online gaming spending, the fastest-growing segment. Gartner estimates consumer spending on global online gaming (subscriptions and microtransactions) will show a compound annual growth rate of 27 percent through 2015, with consumer spending on subscription fees slightly declining while spending on virtual goods will grow exponentially.
“We find that subscription fees are giving way to ‘freemium’ models, in which the game is provided for free to gamers but is monetized through advertising (both in-game advertising and display advertising) and in-game microtransactions, such as the sale of value-added services or virtual-good purchases,” said Brian Blau, research director at Gartner. “This trend is prevailing given the rise of social gaming, in which online gaming is connected to social networking sites and social networking platforms.”
Recently, Blizzard Entertainment opened up World of Warcraft for anyone to play for free up through Level 20 in the game world, in the hopes of adding to its over 11 million paying subscribers. The LEGO Group is discontinuing retail sales of its LEGO Universe massively multiplayer online (MMO) game next month in favor of a free digital download and players can explore part of the game world for free as long as they like. And Sony Online Entertainment has attracted over 17 million players with its PC and PlayStation 3 game, Free Realms.
“Users have become multichannel-oriented by choice and expect vendors to continue to deliver quality content and experiences by extending their gaming possibilities across multiple platforms,” said Blau.
Blau believes there do remain challenges that the game industry must overcome.
“If today’s mobile technology does not evolve quickly enough, the gaming industry is set to see the rate of innovation severely decline,” said Blau. “Alternatively, it will provide opportunities in technology and content genres that we can’t foresee today.”
The industry is expected to receive a revenue boost in the first half of 2012 when Nintendo launches its Wii U console and Sony releases its PS Vita portable device. New consoles from Sony and Microsoft have yet to be formally announced, leaving the mobile sector to push new smartphones and tablets out on a regular basis.