Predicting game industry trends, both the macro and micro, takes more than gut instincts and guesswork. Long-time industry veteran and President of Xsolla, Chris Hewish, joined GamesBeat’s own Dean Takahashi on stage at GamesBeat Summit 2023 to talk about what’s happening in the industry now, and share proprietary and public data and insights from partners and Xsolla’s extensive network of gaming professionals.
Macroeconomic trends and industry predictions
Mergers and acquisitions activity in the game industry dropped 43% in Q1, compared to a year ago, according to DrakeStar. The report also noticed some sector weakness, including the major drop in blockchain game investing, from more than half of all investments to only 20%.
“You could predict that, seeing that things like the crypto crash and NFT prices going down, lots of scams like FTX surfacing — all this was hurting that sector,” Takahashi said.
“Q1 this year has been off to a mixed start,” Hewish agreed, “but mixed leaning positive.”
For instance, while Games Industry.biz reported an 11% drop in EU game sales from the same period last year, the number of big releases has risen, including Elden Ring, Pokemon Legends: Arceus, Horizon: Forbidden West and Gran Turismo 7. Console hardware sales also boomed by 67% across selected European countries, driven by a demand for the PS5, which has seen 5x sales in March 2023 compared to last year.
“When you think of console, tentpole titles are always big,” Hewish says. “There are some really good indicators there that there’s a growing user base on the console side of things, with all these PlayStation sales. The second half of the year, that should result in more game sales as players want to get games to play.”
Investments are also a strong signal of what’s going on with the industry, with a lot of big funds still backing games. Konvoy’s recent prediction that the gaming market will reach $201 billion in 2023, a 9% increase from $184 billion in 2022, was due in part from the 29% QoQ increase in gaming VC funding and deal volume up 5%.
“If you look at a lot of the reports now on the financial side in a macro sense, the consensus is that we may avoid a recession,” Hewish said. “The interest rates, cost of living increases are leveling out a bit. That also bodes well for a second half of increased spending, increased consumer confidence and consumption.”
The tech industry and game industry were out of sync, Takahashi pointed out, with tech investments declining at the same time game investments were growing, and tech industry layoffs in Q4 didn’t really start hitting game companies until Q1 and Q2.
But the game industry seems to maintain and still grow throughout a lot of these trends, Hewish said, noting that Amir Satvat’s game jobs spreadsheet shows close to 14,000 current job openings in the game industry.
“That indicates, as you mentioned, investments shifting back into traditional games,” he said. “Overall we’re in a good place this year for the game industry.”
Opportunities coming with generative AI
While the fear of recession still looms large, generative AI is creating a lot of new opportunities Hewish said. While it’s a buzzword right now, “It really is a new technology that’s going to dramatically impact how we run our businesses. It’s something that you should be considering.”
While the notion that new hot trends kill the trends that came before is as common as ever, as exemplified by the Insider headline declaring the death of the metaverse at genAI’s hands, Takahashi sees it as an iterative process.
“The opportunity for the metaverse gets better when you have a technology like generative AI that can help with users creating their own content,” he said. “User-generated content is usually not that high quality, but if you have something like generative AI at your disposal as a consumer, you can create better content. We now have a better idea of how we could fill out a lot of the metaverse.”
New markets as walled gardens fall
Walled gardens are under siege, through a combination of regulatory changes, legal challenges and the new Digital Markets Act (DMA) going into effect next year in Europe.
The DMA will force gatekeepers to open up their app stores or their ecosystems to allow sideloading and third-party app stores. It’s a huge opportunity, Hewish said — a full 10% percent of the Android business in China comes from third-party Android app stores.
In the Epic versus Apple saga, the recent appellate court ruling found that Apple was violating California’s anti-steering rules, which means that developers should be able to steer people from within the app to outside offerings through web shops or online offerings. That lets publishers communicate with their communities in an entirely new way, and generate more business — and it means the 30% platform tax on both Google and Android will be a much smaller bite into profit margins.
“Matthew Ball, in his book, pointed to the 30% tax as something that would stop us from getting to the metaverse,” Takahashi said. “He argues quite persuasively that the walled gardens need to go away in order for the open metaverse to thrive — or at least before we get to the open metaverse, we need a more open game industry.”
The fall of the walled gardens means that direct-to-consumer marketing is now possible — and today it’s key to profitability, Hewish said. It’s not just avoiding the 30% tax, he says.
“You get to use all the power of ecommerce that you’re not really able to use within an app store or on a third-party platform, with bundles, limited-time offers, targeted offerings,” he said. “It’s a meaningful opportunity, and the customer satisfaction is high.”
Developing direct relationships
Back in 2021, nearly two-thirds of mobile game players were indicating their preference for shopping directly from a brand rather than through a third-party retailer, and studios like Niantic have been establishing their presence in the market with web stores that remove friction and maintain the feel of the user’s in-game experience.
Xsolla has seen the success of the direct-to-consumer model first-hand with its white-label web shops, Hewish said.
“It is not just taking a dollar off of an app store and moving it to the web — this is an incremental growth to businesses,” he said. “We’re seeing them attract new users, get higher converting payers, people who are spending both in-app and on a web shop.” For instance, Tilting Point’s Star Trek game added 25% more revenue to the game’s business without detracting from the revenue generated on the app store, he explained. On average, other partners are generating 8%–14% more revenue in total, without cannibalizing app store sales.
Across more than 60 partners with over 120 games, 45% percent of overall revenue comes from their web shops, and 80% of players are repeat buyers, making five purchases per month on average. And 35% make more than 10 purchases.
“This works because they’re getting personalized offerings,” he said. “They feel more engaged with the developer, with the game. You can put videos up in web shops. You bring in influencers to drive people to web shops. All these things that you can’t do on a third-party platform, you can do on your web shops.”
That includes something like the Xsolla Drops Program, which unites game developers, media portals and influencers to run engaging B2C campaigns, or drop events, that target gamers directly.
Watch the whole panel on-demand here.