The gaming industry is attracting more companies, even those outside the traditional gaming market.
This segment comprises consumer spending on video game software and services (not hardware or devices) across both traditional and social/casual gaming, as well as revenue from advertising via video games. Revenues from eSports are not included.
Traditional gaming comprises revenues associated with playing games on PCs and game consoles (both TV-connected and portable). This includes physical (disc-based) game sales at retail (both bricks-and-mortar and online retailers), digital game sales (including Steam, Good Old Games and Origin for PCs, and the PlayStation Store, Xbox Games Store and Nintendo eShop for consoles), and additional downloadable content (DLC) and subscription services. Online/micro-transaction revenue also includes spending associated with free-to-play Massively Multiplayer Online games (MMOs), but does not include spending on social and casual browser-based games, which are included in the social/casual gaming component.
Social/casual gaming revenues encompass consumer spending on app-based games played on tablets and smartphones, as well as browser games aimed at a casual audience (e.g. Ruzzle and Zynga’s Words with Friends). This includes revenues associated with the purchase of social and casual game apps, subscription services for social and casual games, and the purchase of virtual items within social and casual games. Also taken into account are revenues relating to “hardcore” mobile games (e.g. Infinity Blade 2).
Video games advertising revenue includes only static advertising in video games. It does not include dynamic advertising inserted into or displayed alongside the game in an app or browser during play.
The gaming industry is not only creative when it comes to game content and technologies, but also in terms of business models. In past years, the gaming industry had to develop new business models in order to compensate declining revenues from the traditional selling of games, especially in the serious games segment for consoles and PCs, but also for online and mobile games. The willingness to pay “one time” for the full game content decreased, similar to the film and music industry. Various business models have been applied in recent years to monetise gaming: crowdfunding, free-2-play (F2P), micro-transactions, games with episodes, pre-order discounts and downloadable content (DLC).
While crowdfunding has gained importance (e.g. by using Kickstarter), especially F2P games such as League of Legends (LoL), Hearthstone as well as Candy Crush Saga have proven to be very successful in winning consumers who are willing to pay for extra features via micro-transactions. The strategy of giving the player the freedom to pay for content provides many opportunities and can prevail if implemented and applied carefully in skilful models, if the quality is right, and if paying does not affect the chance to win. When such models are applied, players may ultimately spend more money during the lifecycle of a game than they would for a normal full-price title without add-ons, as the price hurdle constitutes a serious obstacle that does not exist for the entry decisions regarding F2P titles. Full-price titles have reacted to this trend by offering DLC. A monthly fee after the purchase of the game, as used for a long time by the big online role-playing games, is a payment model that today only famous and legendary games such as World of Warcraft can afford to maintain.
Regardless of the number of business models, crowdfunding and one-time OTC sales using digital channels such as STEAM remain the models most applied by Swiss game developers. Many of the other business models such as DLC, episodes and micro-transactions require constant game updates and the creation of new content and episodes, an effort that is often not affordable by small developer firms within Switzerland.
“With respect to new business models, the large multinational firms are actually the first movers. Small players especially in the indie-game segment are still mainly depending on one-time sales of their games. Many other business models are only profitable on a huge scale (DLC, episodes, etc) or hard to successfully apply due to a required hype-status of a game (e.g. microtransactions applicable for hype-games such as Fortnite but not for no-name games).”
In recent years, Electronic Arts, one of the largest game manufacturers, has always been an early adapter of alternative payment models and has experimented with different models like premium packages (Battlefield 4) and micro-transactions (for ultimate team mode in FIFA). EA realised that the current customer base needs more: they like durability, longevity and an evolving game structure. Moreover, they are willing to pay for this evolvement over time.
EA therefore launched in 2014 a flat rate for gamers called EA Access as an experiment aimed at enhancing the loyalty of gamers and making it possible to repack old games (e.g. FIFA series). In 2017, Sony (PlayStation Now) and Microsoft (Xbox Game Pass) also entered the flat rate market. While PlayStation Now is streaming the games, Xbox Game Pass requires that they are downloaded. There is a continuing trend towards flat rate and streaming offerings for gamers, similar to the music and film industry. However, the implementation is more difficult from a technical standpoint and companies need to define a clear strategy, this because offering a flat rate might not work for all kinds of games, and in-app sales with micro-transactions will become more difficult to justify. Nevertheless, there seems to be a substantial consumer desire for flat rate offerings in the video games segment.
A continuously changing environment in terms of business models is likely, but the trend towards flat rates and special offers is expected to prevail. This includes flat rates for software but also special offers and plans for Internet connectivity, and hardware.
“I expect we will experience a further influence of gaming on other industries. We will see more movies and books that build on games and even more games on successful IPs from movies and TV series. This will create more attention for the gaming industry and offer further possibilities with respect to business models.”
Total Swiss video games market revenue is expected to reach approximately CHF 633 million in 2018. The traditional gaming segment (console and PC games) still accounts for the lion’s share of overall revenues (56%), whereas social/casual gaming is becoming more important in this regard. Video games advertising remains stuck at a low contribution level, also in terms of growth. While the traditional gaming segment growth rate is moderate with a CAGR of 2.4%, social/casual gaming is continuing its rapid upward trend and therefore driving the overall industry growth.
The traditional gaming segment will remain important as it still gets a boost from strong sales of hardware. According to GfK, 225,400 consoles were sold between May 2017 and April 2018, an increase of 27% over the same period last year. Sales of PCs optimised for gaming grew by 5% according to GfK (40,600 units between May 2017 and April 2018). PC gaming has picked up again thanks to STEAM, which has become a key channel for sales of games and therefore constitutes a key revenue driver. This is especially true for indie-games developers, since STEAM provides the opportunity for a flourishing pay-once business model.
In addition to hardware sales, user numbers are also important indicators of the state of the market. According to a calculation by Statista, user numbers are growing annually in all segments. The user figures of 1.83 million (download games), 1.66 million (mobile games) and 0.59 million (online games) underscore the Swiss population’s high degree of involvement in gaming. According to the JAMES Study, in 2016, 80% of Swiss teenagers played video games, with 2 out of 3 teenagers gaming at least once a week. On average, those young people game one hour per day, and almost two hours on weekends and holidays (median). This attests strongly for a promising future in the Swiss gaming industry.
Overall, mobile gaming is gaining importance. Mobile game developers are very successful in winning consumers through the integration of the newest technologies, creative new features and inspiring and user-friendly themes and well-designed user interfaces.
The Swiss video games market is well positioned and attracts a large consumer base. The Federal Council have decided to endorse the game-developer industry out of the conviction that games, as a “digital cultural asset”, are carriers of new forms of creative and technological advancement and have great potential for innovation, both culturally and economically. Pro Helvetia, which has been a booster of the Swiss developers for several years, has been asked to continue and intensify its support activities. However, the Federal Council has not yet provided an answer on how to economically and commercially back the industry. This is an important aspect that needs to be further addressed since it is a crucial pull factor for international investments: investors are often attracted by co-investments or the active promotion of a production polestar.
“The Federal Council’s decision to designate games as a digital cultural asset is a major step and important for the Swiss game developer landscape. But to really boost the industry and attract investments (similar to the film industry) the government needs to address the economic and commercial questions. Without the promotion of co-investments, gaming will remain largely an import product in Switzerland.”
eSports: eSports continues to drive gaming to the next level and can therefore be interpreted as the key business innovation in the gaming segment. For a game to be viable, the possibility to compete is crucial – because it is a marketing and business platform with increasing importance. Several analyses have shown that gaming traffic during the live event increases and remains at a higher level after the actual match. The Swiss eSports League was officially launched in early 2018 after a pilot phase in 2017. It now attracts numerous players of different games in their thirst for competitive gaming. Even though eSports in Switzerland is still relatively small, the potential and the importance of this medium is huge. Platforms will grow, the number and size of eSports events will increase, and the crowds of spectators will continue to increase. eSports is constantly changing the industry, the way we look at gaming, and the potential that games harbour in terms of new business opportunities. Companies and well-established brands are investing in this leisure time activity as they recognise the promise it holds. An increasing number of broadcasters and telecom networks have identified gamers as target groups and eSports as a promising genre of sport entertainment. Postfinance has founded a professional eSports team and is recruiting professional League of Legends (LoL) gamers. They will receive a one-year contract for playing “League of Legends” at the global eSports level. UPC, together with brack.ch, Baloise and Hellofresh, launched a "carefree service package" for gamers and eSports gamers, as well as a weekly show “Arena eSports” for spectators. Quickline is sponsoring the Swiss game team Silentgaming and FC Basel and FC St. Gallen are also investing in their eSports team. The potential, thanks to the massive number of spectators that can be reached, offers fertile land for new businesses and an interesting venue for brands.
The Swiss video games market is quite fragmented, but dominated by multinational firms. The most important players can be categorised as follows:
Video games is a global market and also Switzerland is being dominated by multinational firms such as Sony, Nintendo, Microsoft and Electronic Arts, especially in the serious games segment and the soft- and hardware business. The fact that video gaming is a global business can be easily seen in the hardware and mobile games, where hypes of new releases take place at global level. eSports activities also evidence this globalisation: the same games (FIFA, LoL, Warcraft, Battlefield, etc.) are played throughout the world, with top-notch gamers competing against each other in front of a global audience who stream these matchups on their own devices.
Organisations and institutions
Organisations and institutions are important players as well. They sow the seeds in the developer scene in order to cultivate fruits for the market. Organisations like Pro Helvetia, Alp ICT and swissnex help the local game development community to create a sustainable business. They organise workshops and events, and foster visibility at the international level. The Swiss Federal Council’s designation of games as a “cultural asset” is an important seal of approval and is the starting point for federal backing (mainly executed by Pro Helvetica). Also, investments in education are vital to the industry. The University of Lausanne GameLab (UNIL GameLab), HEAD Media in Geneva, EPAC in Saxon, SAE Geneva and SAE Zurich, Zurich University of the Arts (ZHdK), the University of Luzern, and the Game Technology Center at the ETH offer bachelor programmes in game development. Last but not least, the International Game Developers Association Swiss Chapter (IGDA), the Swiss Gamers Network (SGN) and other associations are also key promoters of the industry.
In Switzerland, around 80 start-ups are engaged in the development of video games and generated revenues of ca. CHF 50 million in 2017 according to SGDA. These studios are mainly concentrated in Zurich, Lausanne and Geneva. The fact that games have been deemed a “cultural asset” (with the commensurate economic and social potential) provides better options and perspectives and ensures that a talented workforce of gaming specialists can be educated and retained in Switzerland. Many Swiss games still struggle to be profitable, but given the efforts that have been taken and heightened visibility at the international level, this might change in the years ahead.
Platforms have become an essential channel for the gaming industry. Kickstarter has become a major platform for crowdfunding game development and is an essential means of establishing a business model for many indie game developers. STEAM is absolutely key as a commercial channel for gaming. Not only has it revitalised PC gaming as a whole, it also allows small businesses to continue their one-time OTC sales approach, which is crucial since many indie game producers are not able to afford continuous updates/upgrades of their games – a major hindrance to a viable long-term business model. Another very important platform is Twitch, a streaming facilitator. Especially for eSports as a key driver in the gaming industry, Twitch is pivotal as it attracts a global streaming audience. Hard figures evidence the importance and growing influence of Twitch since 2013: the number of viewed minutes has grown by 246% t0 reach 355 billion minutes in 2017, which is roughly equivalent to 675,400 years.
Mobile gaming has grown and continues to outpace the trend in traditional gaming. The high degree of mobile penetration in Switzerland, the number of available mobile games and the increasing channels and possibilities to monetise mobile games are key factors that make mobile games an important driver of this segment. Moreover, the mobile phone has been ranked as the number one leisure-time activity of teenagers. The JAMES study has shown that a majority of teenagers is gaming on a weekly basis. The “digital natives” generation is very interested in gaming, especially mobile games. The study reveals that the mobile phone is an absolutely indispensable tool for teenagers.
Internet bandwidth is increasing and the rollout of FTTH is continuing to improve up- and download speed. Highspeed Internet is a key requirement for Cloud gaming as well as collaborative and competitive gaming (eSports). Also VR and AR continue to drive the gaming segment: small Swiss developers in particular are exploring niche markets by introducing technologically enhanced games.
The gamification of services remains a key trend in the gaming industry. It will strongly influence the future development of gaming as a whole and the cross-industry spill-over effects with respect to technologies and business models.
Game events on the rise
Game events per se are becoming increasingly important. Trade fairs and events devoted to video gaming are extremely popular: the latest "Polymanga" in Montreux, "the Numerik Festival" in Yverdon, "Swiss Toy Digital" in Bern, "Fantasy Basel" and "Zurich Game Show" attracted more visitors than ever before. Not only do these events lure customers, they also raise public awareness of eSports and consequently have gained significantly in importance among players, organisers and companies that have discovered these young and active gamers as their target group.
The Swiss video games market is expected to grow at a 5.1% CAGR through 2022, which is a slightly lower growth prognosis compared to last year’s outlook. This decrease is a result of adjusted economic growth expectations that also affect the gaming segment, as purchasing power and consumer spending is expected to be affected by the general economic environment. A substantial adjustment has been made especially in the social/casual gaming area. After several years of double-digit growth, social/casual gaming is expected to normalise towards an average growth rate of just under 10 per cent over the next five years. Console and PC games continue to gain in terms of volume and the total traditional gaming market is projected to grow at a CAGR of 2.4% to reach CHF 388 million in 2022.
Western Europe is expected to grow between 2017 and 2022 at a 5.5% CAGR, a slight downward revision of approximately 0.5 percentage points. Therefore, due to the larger correction of market expectations in Switzerland, the European market should outperform the anticipated Swiss trend. The expected growth slowdown of the video games market in Western European countries is a sign of saturation when compared to the fast-growing economies in the Asia/Pacific region, where forecasts suggest a CAGR of 8.0% for consumer spending and 9.2% for video games advertising over the next five years.
Switzerland constitutes only a small part (2.57%) of the Western Europe video games market and its impact is therefore limited. However, on a per-capita spending basis, Switzerland comes in fourth highest with a spending rate of approximately CHF 63 per year. Only the UK (CHF 75 p.c.), Ireland (CHF 67 p.c.) and France (CHF 65 p.c.) achieve higher numbers. Comparing the 2017 per-capita spend with that of 2015, no major shift has taken place in the ranking of European countries.
Director Advisory, Strategy and Digital Change Expert, Bern, PwC Switzerland
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Leader Swiss GAAP FER, PwC Switzerland
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Manager, PwC Switzerland
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