Head of Consumer Electronics & Digital Entertainment Practice
"In 2015, more than 70% of video software revenues were generated by digital sales and distribution, compared with 22% in 2008."
Dematerialisation, a driver for disintermediation and growth in the video games sector
The global video game software market rose in value from 35.3 billion EUR in 2008 to 47.7 billion EUR in 2014, driven by dematerialisation, the emergence of new segments and the continued success of relatively new segments. Dematerialisation has meant an increasing number of consumers can be reached, on any platform equipped with a screen, fixed or mobile, and with increasingly varied content. In 2014, 69% of video game software revenues were generated by digital sales and distribution, compared with 22% in 2008. Revenues from dematerialisation have experienced an average annual growth of 26.8% over the period, compared with 9.7% for revenues from physical sales.
The video games sector, which is digital by nature, has a long history of dematerialising distribution and in-game content. Use of dematerialisation now seems to be accelerating and expanding into all segments of the sector. The success of browser games, massively multiplayer games, online gaming on consoles and personal computers, and smartphone gaming (since the end of the 2000s), has meant that 2012 was a defining year when the majority of revenues were generated from the digital side of this economy, switching over from the physical.
Breakdown of the video game software market by type of revenue, 2008 and 2014
Source: IDATE, Video Games in the Cloud, June 2015
Role redistribution along the value chain
Dematerialisation affects all segments of the video game industry. It has led to disintermediation in the value chain and raises questions over the role of certain stakeholders downstream. It has afforded new power to developers, who now have the opportunity to speak directly to their gaming customers. 'Online' has ultimately eroded a silo-based industry structure and allowed practices and cross-platform services to emerge that both benefit gamers and boost creativity within the sector.
Industry repositioning and revaluation up the chain
On an industry-wide scale, dematerialisation of video game market segments has moved value along the value chain. Value creation is now closer to players with a direct link to their customers. Disintermediation of the sector is moving in this direction.
In the PC gaming segment, value creation seems to centre around digital retailers (Steam, GOG), aggregators (Big Fish Games) and publishers (EA Origin, NCSoft). In the mobile gaming segment, value creation seems to have moved towards app store owners (Apple, Android, Amazon), and to the console manufacturers themselves in the case of console games.
On Smart TVs, anything is still possible between TV channels, the Internet giants and the proponents of a cross-platform ecosystem (e.g. Apple, Samsung, LG, Sony). Gaming platform operators, the major beneficiaries of these developments, have also had to rethink their revenue sharing models to the benefit of game development studios.
Dematerialisation has also allowed the sector to continue generating additional revenue, converting new customers to new types of game, especially ubiquitous games, which are playable simultaneously on multiple platforms, both fixed and mobile.
In this context where dematerialisation is continuing to gain ground on the physical market, the sector will continue its dynamic growth in the coming years. However, not all links in the chain will fully benefit from this growth, such as distributors, who are seeing their share captured by others.
Revenues earned by the various links in the video game market value chain (million EUR)
Source: IDATE, Video Games in the Cloud, June 2015
The impact of dematerialisation
The impact of dematerialisation varies depending on the market segment, but disintermediation is a common theme.
The PC gaming segment, which is easily accessible for independent (indie) developers, has diversified and opened up to casual and social games while retaining a special place for massively multiplayer (World of Worldcraft) or multiplayer (League of Legends) games.
The mobile gaming segment (on smartphones and tablets) has built itself around app stores, and the viral and rapid nature of these stores. With these devices now almost permanently connected, games are also being viewed as a potentially continuous entertainment experience. This implies a new approach is needed, based more on encouraging users to buy, rather than selling a product.
The console gaming segment has evolved and now allows all users to download indie and casual games, but also AAA titles. In addition, many features that use the cloud have emerged. These features may relate to the game, other content, consumption, user account management or access to broadcasting services. In this context, console manufacturers remain the cornerstone of this segment's economy with their e-stores.
Finally, on Smart or connected TVs, video games take the form of streamed content, known as cloud gaming or Games on Demand. This young segment, which first emerged around 2010, is strengthening and seems to be garnering interest within the industry.
Find out more about dematerialisation in video game industry, new strategies and organisation as well as forecasts and shifts in the value chain in our dedicated market report