Flipping the Revenue Model 

According to Ark, back in 2010, around eighty percent of video game revenue came from purchasing the game itself. Essentially, the consumer went to the store, perhaps a GameStop, and paid $20–$60 for the newest version of their favorite game, took the disc home, and played through it as quickly as possible. The remaining 20% of revenue came from in-app purchases, money spent upgrading characters, unlocking levels, and accessing premium content. In just five short years, that revenue split shifted to 50–50, and last year gamers all but completed the transition with in-game purchases making up approximately 75% of game revenue. This trend will likely continue as gaming evolves closer to virtual worlds, where gaming, social media, and hanging out merge.

The Value of the Entertainment Dollar 

When it comes to spending money on entertainment, gaming is a bargain compared to many forms of traditional entertainment. We’re fortunate enough to be able to choose how we want to be entertained. Many people choose to binge-watch show after show on Netflix or another streaming service, while others stay up on the newest music. There are even some folks who still subscribe to a hard-copy newspaper, but more and more time (and money) is being spent on gaming, and this growth is observed across all age groups. Today, gaming is around half the cost per hour compared to cable television and comparable to video-on-demand subscriptions. While Ark forecasts the costs to rise moderately in the next couple of years, gaming still looks to provide a good bargain compared to other forms of entertainment. 

A Third Place

Sociologist Ray Oldenburg coined the term “third place” to define a place where people interact outside of the home and work (first and second places, respectively). Other third places include bars, parks, recreation centers, churches, etc., but like so many other things, the third place may be moving online for many. If that turns out to be the case, that means people will be willing to spend more money and time in virtual worlds, creating a surge in revenue over the next decade. Ark predicts the average time spent playing gaming will increase from 1.1 hours per person per day to 1.5 hours over the next five years, a 36% increase. That’d be quite the tailwind for the industry as a whole. 

Augmented Reality (AR)

Augmented Reality is one of those ideas that you’re told repeatedly is on the verge of explosive growth, but another year goes, and it seems as if nothing happened. Still, large companies like Facebook, Snapchat, and Apple are spending more on AR, so it could soon have its day.

Virtual Reality (VR)

Remember Wright’s Law? Based on Wright’s Law, VR headsets will be available with complete visual immersion in approx. 10 years. The question then becomes, what is the delivery method of VR games? Computers? Consoles? Phones? Standalone units? Virtual Reality still has a way to go, but products like Facebook-owned Oculus Rift highlight the appetite and possibilities of virtual reality as entertainment.

The Democratization of Game Development

Remember when you had to know how to code to make a website? Now almost anyone with basic computer skills can build a slick website, like vermillionprivatewealth.com ;), thanks to pre-established frameworks that remove the necessity of advanced coding. A similar movement is taking game development by storm, thanks to engines like Unreal and Unity. These engines allow indie developers to bring ideas to life on much smaller budgets than possible before. 

Some games are immersive in the sense that you can play and create, participating with other users as both a player and developer. Roblox, for example, “is powered by a global community of over two million developers who produce their own immersive multiplayer experiences each month using Roblox Studio.” The line between gaming and game development is quickly blurring.

There is certainly a lot happening in the gaming-verse, and the industry looks primed to take another big leap in the coming years as games become more interactive and community-focused. New technology looks to present advanced gaming devices at more affordable prices, and consumers will likely continue to shift entertainment dollars into games and gaming platforms. This is why the gaming industry presents an attractive backdrop for investors over the next decade.

***This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.**