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The Nutshell:

How Video Gaming Outscored The Box Office

By Alex Dodds

Context

10 years ago marked a watershed moment for the gaming industry. In 2009 Activision launched Call of Duty (CoD) Modern Warfare 2, and put on a show with all the glitz and glamour usually reserved for Hollywood with a movie-style premiere at Leicester Square. Following it up two years later with Modern Warfare 3’s $250m budget, gaming was no longer confined to niche magazines and online forums. It was out in the open, taking up editorial columns in broadsheet papers and segments on the national news. 

Its rise has been exponential and the figures speak for themselves. 2018 was the first year where gaming revenue overtook movie box office receipts ($43.8bn and $41.7bn respectively) and comfortably surpassed streaming services ($28.8bn), as gaming revenue increased 18% YoY.

Confident in its position of being able to reach an audience that traditional media could only dream of, and being able to turn its most avid players into worldwide celebrities and millionaires, it has grown to be considered by many a sport in its own right.

Actors arrive dressed as soldiers for the midnight launch of Call of Duty: Modern Warfare 2 

Just as CoD’s launch mimicked the film industry a decade ago in its extravagance, the game industry as a whole has copied media’s changing business models. The industry is shifting; trading in one-off purchases of CD ROMs and game cartridges, for diversified revenue streams and recurring revenue models.

Which brings us to why we’re focusing on it in this month’s Nutshell. As an industry, gaming has seen levels of disruption to rival its more esteemed peers - but often with much less of the fanfare. In-game purchases are the new norm, subscription revenue is starting to take hold and access is replacing ownership. It has also seemingly cracked the conundrum of how to create customer loyalty and generate revenue through creating a proposition that its' customers return to time and time again, in some circumstances to extreme lengths.

Let’s lock and load, then step in.

Time Machine

Blink and you’ll miss it. Video gaming is a young medium - so when - and more importantly - how did the pretender step up to snatch the commercial crown from its more established peers?

The rise of gaming has always been inextricably linked with the development of computing and latterly the internet. Video gaming went from the preserve of MIT professors in the 50s and 60s into public consumption, first in the arcade then into the home. From Pong to Fifa to Fortnite, we have witnessed the rise of multi-revenue channels; with player accessories, in-game purchasing and a new frontier for advertising to name but a few. 

The advent of more powerful mobile devices (tablets, laptops, phones) has also increased its' reach and the amount of time customers can feasibly game for. From bedrooms to boardrooms and couches to commutes, games like Candy Crush and Pokemon Go have successfully penetrated every moment of our waking life. Gaming’s growth has been massive and shows no sign of slowing down. 

The “Netflix of Video Games”: Membership and the Future

As it has matured, the industry has developed a laser focus on what consumers want - read on to see how gaming companies learned from parallel industries and are moving from ownership to access.

  • PlayStation Now: The early mover in the subscription space was Sony with PlayStation Now in 2014, offering unlimited access to new content each month. 
  • Apple Arcade: Apple’s foray into gaming subscriptions launched in September. With no in-app purchases and more stringent privacy protections than the rest of the App Store, Apple is looking to improve the customer proposition and ensure its long-term success. 

  • Google Stadia: Not to be one to miss out, Google is launching its own game streaming service in November. Unlike Arcade, Stadia the subscription currently only extends to one game, however it intends to have a back catalogue of free games included in the monthly fee.
  • Microsoft Project xCloud: The battle royale for game streaming supremacy is very much upon us. With details of Microsoft’s project less readily available, it seems to follow the Stadia route of granting access to a games catalogue for a monthly fee and enabling use on multiple devices.

Virtual or Real Communities: The Social Aspects of Gaming 

The video game industry now stands toe-to-toe with its elder siblings in the fight for consumers’ attention. Its superpower is versatility - in its appeal to spectators as well as players - as it has grown powerful communities to sustain high levels of engagement after the initial buzz.

  • Pokemon Go: Through community events, smart game design and by rewarding the creation and growing of ‘friendships’, Pokemon Go has built off-platform communities that meet up and play all over the world in real life.
  • TwitchCon: Twitch’s quest for live streaming dominance continues apace with its annual get-together for the gaming community to share experiences, meet their heroes and network with potential sponsors, generate buzz around the platform and boost engagement.
  • Activision Blizzard’s Overwatch League: Like any other spectator sport, esports needs a space where its fans can come and watch. The purpose built Blizzard Arena in California delivers that and more, giving its’ customers a community space that keeps the game exciting and offers different revenue streams.
  • Fortnite’s Item Shop Voting: What better way to engage your community than letting them decide on the proposition they want? Fortnite have done just that, giving their community the chance to vote for their favourite in-game item to return.

Digital Advertising: One to Watch 

Games have created a new frontier for the ad industry, as brands seek to capitalise on legions of highly engaged fans. From the more traditional sponsorships at esports events, to the new innovative and immersive in-game adverts; brands and agencies are pushing the boundaries of advertising to reach this huge market.

  • Domino’s partnership with Gfinity: To get a slice of that hungry gamer market, Domino’s have partnered with Gfinity (an esports competition and content company) for access to their large, mostly young, demographic, by gaining exclusive rights for the quick service restaurant sector and an in-show presence throughout the 80 hours of live FIFA, Rocket League and Street Fighter V broadcasts.
  • Bidstack’s in-stadium advertising with Football Manager: London start-up, Bidstack now offers the opportunity for native and programmatic advertising on billboards around the virtual football stadium, giving brands year-round exposure for a cheaper cost.
  • Wendy’s Fortnite character: Winner of the prestigious prize for social & influencer at Cannes Lions, Wendy’s, who never use frozen beef, used its character to destroy freezers in burger restaurants in the game, getting players to join in.

Manifesto Thinks...

During its formative years, the video game industry stood firmly in the shadow of its siblings - film, music and television. It worked off a similar playbook, focusing on reaping the commercial rewards of hardware and physical sales. But in the internet age, the games industry has embraced the techniques and tactics of membership and subscription businesses to redefine the shape of the wider entertainment industry - teaching us some crucial lessons in the process. As Netflix highlighted in its 2018 earnings report, “we compete with Fortnite more than HBO.” 

Once a follower, gaming now leads the way. 

To get here, the industry has taken a lead on thinking holistically about using membership to meet the needs of its customers. The diversity of successful business models in gaming is telling. From propositions that provide access over ownership to communities that offer the chance to form horizontal relationships, and channels like Twitch that allow fans to engage with the medium, we can conclude that gaming is perhaps even more suited to membership than film or TV. 

And like with any successful business model, the customer proposition remains front and centre. This has translated to an ‘arms race’ for ever better customer experiences, with exclusive being the watchword. Exclusive game licenses, exclusive contracts for gaming celebrities and the snapping up of gaming studios to create exclusive content.

Commercially, this translates into exceptional growth for the industry - driven by advertising revenue, in-game purchases and sponsorships, as well as (and sometimes instead of) the recurring revenues traditionally associated with subscriptions. 

While video games are a showcase for innovation, the success of the industry has also highlighted a key aspect of Manifesto’s approach to membership economics - ignore the customer proposition at your peril. In practice this involves balancing the quest for commercial growth with providing a market leading product and experience. 

As other entertainment industries seek to anticipate the same challenge, they should look to the gaming industry to understand what the future could hold.

Check out our latest launch a deep dive into Membership EconomicsTM & Media - How do Media companies make money in the Membership Economy: