Despite the recent layoffs, the gaming industry is booming with critically acclaimed titles and sales records being broken left and right! 

The gaming industry’s impact ripples far beyond the 3.4 billion players it will reach and the $187.7 billion in revenue it will generate in 2023. We can say with more confidence than ever that gaming is at the heart of media and entertainment. Just think of all the blockbuster movies and shows as of late from Mario to Last of Us and Gran Turismo. 

For the past decade, we’ve looked at mobile gaming as the driver of gaming growth, both in terms of new players and revenue generated. Yet this year it’s the console segment that is the biggest revenue growth driver, with an impressive +7.4% year-on-year increase. 

The console games sector grew in 2023, after a couple of decline years, due to the elimination of two roadblocks:

Eliminated Roadblock #1 Major game delays in 2021 and 2022

The growing complexity and scope of game development already slowed down development and the pandemic disrupted development schedules even further. Moving into work-from-home setups, especially for the console’s many massive AAA titles, further hamstrung the majority of the studios. However, there were a handful of prominent studios that thrived with remote work emerging as exceptions to the general trend.

Eliminated Roadblock #2 Supply chain issues 

Remember those pandemic-caused supply chain problems that kept all them sweet PS5s out of our reach? And if you were one of the few lucky ones with the newest device, there weren’t that many games for it. Now consumers are getting their hands on not only new consoles but also new games for those consoles, which translates into booming sales.

The result of the two issues above being fixed is that we now have an unprecedented console games release calendar in 2023. And the growth numbers look incredibly impressive year-over-year, due to not-so-impressive prior years.

This analysis is based on my conversation with Newzoo’s Lead Analyst, Tom Wijman. If you want to truly understand what is happening in the gaming market from Console to Mobile down to cloud games, AR, and Web3, do listen to the full conversation below.

The Three Competing Strategies

While the growth of the console market in 2023 is nothing short of exceptional, the real question is, how are the console publishers able to keep the growth rates at their current level? This is most likely the key question in the boardrooms of these companies. None of them wants to present a down year. 

As console publishers are looking to keep up their growth by expanding into transmedia, PC, and mobile, they are also executing three arguably mutually exclusive strategies within their core console business. This presents a series of threats that the publishers perhaps are not fully considering.  

Strategy #1 Bigger, Better (and more expensive) Games

Console publishers rely on blockbuster franchises. These franchises drive hardware sales in addition to bringing billions of Dollars into the publishers’ coffers.

The report describes that AAA games released on modern platforms cost $200 million or more to produce. However, a big AAA franchise costs upwards of $500 million to build and another 500 million to market. Not to mention games like Grand Theft Auto 6, which reportedly have a staggering budget of $2 Billion.

The Threat: Increasing costs + competition from GAAS and subscription services 

The consensus is that console games in general are too expensive to make compared to the price they are sold for (Capcom President Thinks Game Prices Are 'Too Low'). 

Yet I don’t think there’s much to worry about with the big console franchises.

Sure, the costs have gotten out of control. But the sales are still high enough to return the investment handsomely. The only thing that can hurt a major console franchise is if they fail miserably to deliver against players’ expectations with consecutive titles. 

But what if you’re spending all that money to build a new franchise? With the costs increasing to hundreds of millions up to a Billion and more, releasing and marketing a console game is ever riskier for those without an established IP, an existing fan base, and control of the platform you’re selling the game on. 

But what makes the proposition of launching a new console game even more risky is that dominant publishers are adopting two other strategies that further diminish the chances of success of a premium single-player title. 

With players spending an extensive amount of their time playing live-service games (GaaS) on the console in addition to enjoying the massive catalog of games through their chosen subscription service, there’s a risk of them simply not bothering to pay the premium price for the new console game. And why would they when they can simply play other games and wait for when this new title is on sale or available via subscription  

Strategy #2 Transition into GaaS (Games-as-a-Service) 

Focus on the GaaS model has been at the forefront of every significant console game publisher company’s strategy. The reason for this is simple. The continuous engagement and financial success of live-service games, exemplified by Fortnite, Rainbow Six, Rocket League, Call of Duty, and other similar titles, remain a driving force in monetizing and engagement. 

As a result, the number of live-service games, that optimize against player engagement, is growing. These games continue to thrive by offering regular seasonal content that keeps players engaged and invested in virtual experiences.

The Threat: Players’ finite time and the all-or-nothing results

With ever larger premium titles, the endless catalog of a game subscription service, and relatively stagnant growth of players, not to mention other live service games, a new GaaS title has to battle tooth and nail to win enough paying players that would sustain it.

What makes this climb even more risky is that console gamers expect top-notch production quality from their games. This means that the cost to make and run a live-service game is extraordinary on the consoles. And if this expensive live-service game doesn’t find a loyal growing and paying player base that can pay back development costs and cover the high ongoing live-service costs, the game will be shut down. 

A failed live service game is a massive L for any console publisher. Unlike with premium games, you can’t recuperate the costs by putting the game on sale or the subscription service. And it’s hard to see publishers being able to avoid these expensive misses given the existing competition for console players’ finite time and the fact that the player base as a whole is not growing that fast on consoles. 

The PC market has set the example. There’s only room for so many live service games. And most genres are dominated by one or two titles (Valorant + Counter-Strike, DOTA + LOL…) making it inaccessible for new entries. 

Strategy #3 Games as a Subscription

Microsoft and Sony, along with Nintendo, EA, and Ubisoft have been offering subscription services for a long time. But it wasn’t until recently that the subscription war erupted with Xboss Pass, which presented efficiently the most aggressive bundle in the business by giving away top-tier premium content on launch day.

However, the market is not bullish about the subscription model. According to Newzoo, the user base for subscriptions hasn't quite matched the internal projections set by the console companies. Something that the leaked Xbox documents confirmed (Microsoft management is not happy with ‘the state of Xbox right now’ claim insiders). The struggle is reflected in the new game content coming to the subscription services. It’s just not as fast and frequent as in the past.

The Threat: Lack of new content and stalling growth

Subscription services are scale economies where your cost of doing business decreases as your product supply increases. In other words, the more subscribers your service has, the cheaper each game will be to produce as the cost of a new game will be divided by the subscribers. That is why the growth of the subscription base is so important for the company. 

In practice, subscription services live and die off new and exciting content. Netflix has something new and unmissable to offer us every month. And even when they don’t, they rely on their marketing machine to make any old or new content exciting. Just think of Money Heist or Squid Games. Whoever got hundreds of millions of us watching Spanish low-budget hostage series and Korean murder porn is a marketing genius! 

But how likely it is that a console games subscription service can achieve success that eludes most of the streaming platforms? Games are notoriously hard and expensive to make. And console gaming doesn’t have the equivalent of Love is Blind. Something cheap to produce with guaranteed engagement.

The demand for a constant stream of new content pushes subscription service providers to acquire studios and set up exclusive publishing deals. All of this is very expensive. Despite Microsoft’s massive shopping spree, they are miles away from being able to offer unmissable content every month via their Game Pass (Xbox Game Pass growth slows as Microsoft misses target). And if Microsoft can’t do it, do other publishers stand a chance of building a truly self-sustaining games subscription service? 

The problem with the Three Simultaneous Strategies

According to Newzoo, the number of players on consoles is not growing at a significant enough rate to cater to the three competing business strategies. At the same time, the cost to make and launch AAA games is increasing and these titles need ever more astronomical sales to return on investment. To make matters worse, the existing players are being hijacked by live services of older titles and engaged by the ever-growing catalog offered by the subscription service.

A likely outcome is that the subscription model, especially the Xbox Game Pass, will lower consumer price expectations and drive the devaluation of gaming content in a cannibalistic race to the bottom. Xbox Game Pass doesn’t have to be profitable. It’s enough for Microsoft that the service can continue to grow and capture more consumers helping the parent company to show a diversified portfolio. As a result of this, frontline premium games will suffer as they begin to seem expensive in comparison to what is available in subscription bundles. 

Even live service titles may not be safe from Game Pass stealing away attention and engagement, as consumers will view the incremental Game Pass title as functionally free. Content overload combined with ecosystem lock-in has pernicious spillover effects on industry-wide engagement – less playtime per game, shrinking game communities, and weaker attachments to IP.

Microsoft is inflating the market with Game Pass forcing others to follow suit. The pipe dream for publishers is cloud gaming, where subscription holders can access their content from any device. But that is not a reality for at least the next five years. Today’s reality is the self-imposed threat of following three competing strategies all at once. 

Written by Michail Katkoff. Special thanks to Eric Kress and Phillip Black.