The worldwide digital videogames market totaled $49 billion in revenue in 2014, according to SuperData Research. And 95 percent of that dough came from mobile and PC gaming, where free-to-play games are increasingly the norm — on all counts, a big departure from the console gaming world.
But don’t mistake change for revolution, says SuperData co-founder and CEO Joost van Dreunen. Some of the biggest trends in 2014 were driven by veterans within the gaming industry, and the formula for “making it” in the gaming world is largely the same as ever, he said in a recent interview with Re/code.
Van Dreunen, who also teaches at NYU’s Game Center, took a break from grading papers to discuss free-to-play economics, the growing cross-pollination of Asian and western games, and what’s ahead in 2015. This interview has been edited for brevity and clarity.
Re/code: Compared to this point last year, what’s the biggest difference in digital games? Where has the greatest change happened?
Joost van Dreunen: Well, there’s specific moments and a general feel. The specific moments would be like the moment when King went public and you see all these people wondering, “What’s happening? Is mobile gaming this thing now?” It brought all this attention the industry hadn’t had before. And then there’s — of course — Gamergate, this confusing debate about ethics and gender all sort of at the same time.
Those are the dots. If you connect them, you see the industry’s maturing. It’s finally coming of age. Yes, it’s a mainstream form of entertainment, but it’s starting to actually behave like one. You have the shakeout of this boys’ network, this core gamer demographic that Leigh [Alexander] identified right — “gamers are over.” That’s no longer a reasonable classification of people who play games, boys in basements. We’re looking at a really interesting time for 2015 and beyond, now that we have this mass audience, mass appeal and media economics approach rather than a bunch of publishers running the show.
Are the leading mobile game companies like King, which makes Candy Crush Saga, and Supercell, which makes Clash of Clans, part of the new establishment now, along with those traditional publishers, like EA and Activision?
The question is, are we looking at an entirely new industry, or in parts? Every generation thinks they invent sex. And every generation is wrong. Sure, now we have mobile gaming and digital distribution, but 80 percent of the traditional rules still apply. It’s still about marketing, it’s still about development. Can you pull your team together? Do you have a credible go-to-market plan? Do you have a way to get customers engaged? How do you build loyalty and lifetime value? That never went away, it’s just we’re doing it under different conditions.
In that disruptive moment, there’s been this rise of these companies like King and Supercell that have been tremendously successful, but it’s also because they have been doing this for over a decade. These guys are experts, they’re veterans. There’s a lot of pre-existing knowledge and know-how that goes into the success of the day.
On the topic of those companies, let’s talk about the current state of free-to-play. SuperData recently said that the average revenue generated per user in mobile games is not keeping pace with the rising cost to acquire those users. What’s going on there?
This is something that’s been going on for over a year. As we see the mobile games market maturing, and in a sense saturating, you’re seeing increasing costs in development. So people will want these nice AAA-published, polished games, and you need to have a cool marketing campaign. Here in New York, I see bus stops with ads for Candy Crush Soda Saga everywhere. It’s an unreal experience. Two years ago, it was the new kid on the block. And now it’s this established brand, and that’s expensive. That’s something the traditional publishing industry understands all too well. You see Grand Theft Auto V with a $260 million budget; half of that was development and half of it was marketing. That’s the same direction mobile is headed, whether you like it or not. It’s growing, but it’s also going to cost you more, so buckle up.
What would it take to unseat the current free-to-play leaders?
First you need to qualify, which free-to-play market? If you focus on the west, for instance, I think one contender is some big Asian company. Pick one: NCsoft, Nexon, Tencent, whatever. They know this market inside and out, they’re just trying to figure out how to make that workable for western audiences. So that’s one way to do it, a nontraditional party playing a huge role in a different market. And vice versa: In Asia, you see Borderlands Online from Take-Two and Call of Duty Online from Activision. They’re making a really strong play, coming up with cool, AAA-published stuff, releasing it free-to-play, localizing it, maintaining it in China, in Korea and so on. So that’s one way to go.
Another is, it’s still very accessible to build a brand and a name. It’s still very much an open game, versus the retail model, where if you don’t know the distributor, your game will not make it to the store on time, it will not get primo shelf space, and so on. There’s still primo opportunities for even small fries to make it to the big leagues. It’s just not as easy as it was two years ago. Ultimately, what we’ll see over the next year is a lot of innovation through acquisition from big companies. King is on the hook with shareholders to perform and catch lightning in a bottle again. They’re probably going to have to acquire someone to do that. Scout a bunch of studios, buy them up and build up whatever IP they’ve acquired.
When new companies like the ones you mentioned from China come in, is it a different sort of competition because we’re talking about “games as a service”? The incumbent can update a game to get players to come back, but it seems different from retail, where it’s okay that a game is no longer on the shelves after a couple months.
That’s the tricky part of the transition that EA, Activision, Ubisoft and Take-Two are trying to deal with. They’re used to making back most of their money at a profit in the first couple of weeks after a retail launch. Now, they have to gear up for a 12-month or 24-month rollout for a particular title. You have to keep developing, you have to maintain servers, you have to deal with customer support for online play. It’s a very different animal.
Let’s talk about PC. This year, World of Warcraft celebrated its tenth anniversary and added three million subscriptions, back to 10 million total, even though the paid subscription model has lost a lot of buzz. Is this turnaround unique, or are subscriptions not dead after all?
World of Warcraft is unique, that goes without saying. But people are quick to say, oh, here’s the new stuff, all the old stuff is irrelevant. MMOs [massively multiplayer online games, like World of Warcraft] are built to promote social interaction. How easy is it for people to say, “Oh, a new game came out, I’m going to surrender all my friends and find me 20 new ones?” There’s a lot of stickiness to that category or genre. That said, the games industry is highly competitive and highly volatile. Free-to-play League of Legends is taking market share away from these pay-to-play subscription titles.
What about on consoles? It seems like retail-based pricing is still the norm there, unlike PCs and consoles. Do you have a sense for why that is?
Free-to-play on console is real, it’s here, it’s just going to take a while. Consumers are not as receptive out of the gate to say, “I’ve just bought this $400 thing, and now I’m going to spend $100 building up my free-to-play character.” In the U.S. on the PlayStation 4, average monthly spend is about $18; on the Xbox One it was about $17. The money is there, it’s just a small percentage [out of all revenue]. On mobile, 75 percent to 95 percent of revenues come from the free-to-play model. On the console, that’s much lower. People are still interested in owning the disk or downloading the full game digitally. Free-to-play is a much tougher sell.
We talked about what has changed the most in 2014, but would you care to make a prediction? What changes will we be talking about at this time next year?
It’s probably a few things. In no particular order: There’s probably going to be some consolidation, mostly innovation through acquisition and buying market share, all that good stuff. I suspect there’s going to be one or two big acquisitions, along the lines of Microsoft buying Mojang. Something crazy like somebody buying Ubisoft. If they can’t convince shareholders that their digital distribution strategy is solid, they might actually become up for grabs.
Second, of course, it’s all going to be about the hardware — this virtual reality stuff? We’ll see if it makes a splash or not. I think it’s too early, but I want to be wrong about that. I really want that to take off. But I don’t see the games industry running with that the same way Hollywood would.
Right, it seems like a catch-22. All these game companies say we’re going to wait and see if VR takes off, or if there’s a big hit, but the fewer people that get into it at the ground level, the less likely a big hit becomes.
Always. I think with the iPhone, I don’t think Apple thought of mobile games as a thing. They would’ve taken a different strategy. Mobile gaming just kind of happened with a big install base and games that were cheap to develop. The difference with virtual reality is that it’s not cheap. To really do that well, you have to have a really strong team to make that happen.
And then there’s Asia, with Microsoft and Take-Two trying to enter. It’s opening up a little bit. Who knows? Tencent might be able to buy something. China in particular will be a key topic for 2015 as well. Of course, this is kind of like Lorelei — “Look at this, it’s amazing, it’s destiny! Let’s go check it out, it looks beautiful.” But I think a lot of ships will run into cliffs along the way, because China is not just some market waiting for western publishers to bring this amazing thing. It’s a very different culture, and there’s a lot of parameters that you have to take into consideration.
This article originally appeared on Recode.net.