Research on GAAS

TLDR

This article explores the gaming industry's evolution and current state. It examines key metrics showing the industry's massive scale ($240 billion) and rapid growth, with 3.42 billion gamers worldwide and revenues of $187.7 billion in 2024. The article traces the industry's transformation from a simple three-part structure (developers, publishers, platforms) to today's vertically integrated ecosystems dominated by major players like Sony, Nintendo, and Microsoft. It analyzes how subscription models have become a dominant revenue stream, similar to Netflix's impact on entertainment. The piece concludes by discussing mobile gaming's rise due to accessibility and fragmented gaming experiences, while predicting virtual reality headsets as the next major platform evolution once they overcome current technical barriers.

Introduction

Lately, I have been deeply immersed in a newly released game by NetEase, called Where Winds Meet(WWM).In fact, I've been involved with video games since I was a child, but recently I want to understand how video games actually work.

Metrics

In 2024, there are approximately 3.42 billion gamers worldwide, and the gaming industry generated a revenue of $187.7 billion throughout the year. The number of viewers for The Game Awards (TGA) in 2024 reached a new high, with a total of 154 million views.

Image Source: Newzoo

The global scale of the gaming industry is approximately $240 billion, which is equivalent to twice the combined size of the film and music industries. Moreover, this scale continues to grow at a rate of over 10% annually. Among the top 10 tech companies globally by market value, 7 are closely related to gaming, and in recent years, they have been accelerating their involvement in the gaming industry.

History

For the past 20-30 years, game industry was very simple and pure, developer developed games, and then publisher released the games on major platforms. These three areas are relatively independent yet they cooperate with each other. But gradually, as the upstream developers find that the development costs are getting higher and the cycle is longer.it's becoming more and more difficult to survive independently. However, the large publishers and platforms in the middle and lower streams rely on their proximity to users and the capital advantage brought by users, gradually annexed upstream developers, cause the industry to begin vertical integration, and slowly the three giants of traditional game consoles:Sony, Nintendo and Microsoft. In the early days, it was essentially the domain of Sony and Nintendo. If you look at the top ten best-selling game consoles in global history, these two companies basically dominate the list. In particular, Sony has built an ecosystem around its PlayStation (PS) console. The company is known for securing exclusive deals in various forms to reinforce its leading position in the gaming industry. It's undeniable that Sony produces a wide range of excellent games, which helps maintain its ecosystem. Once a certain level of market share and content richness is achieved, Sony has the capability to implement a subscription model and charge membership fees.

Sony introduced PlayStation Plus, where for a monthly fee of just around ten dollars, subscribers can access hundreds of games freely. The advantage of this subscription model is that it effectively broadens the moat around Sony's established ecosystem. Consequently, players have a stronger incentive to remain within the ecosystem Sony has built, significantly enhancing user retention and engagement. It's not just Sony; now, all major gaming platforms worldwide—such as Microsoft, Nintendo, Apple, Google, NVIDIA, Electronic Arts, Ubisoft, and others—have launched their own subscription services. It seems that after Netflix established dominance with its streaming subscription model globally, consumers have gradually started to embrace this format as well. In fact, this has become a very mainstream revenue model for gaming platforms. From the distribution of Sony's business income, it is evident that only a small portion of its profits come from hardware. Most of the revenue is generated from its gaming ecosystem. With continuous advancements in technology, mobile phones have significantly enhanced in performance, supporting higher quality gaming experiences. Their high portability and alignment with the gaming penetrating markets have spurred the explosive growth of the mobile gaming industry. Indeed, most gamers struggle to access immersive gaming environments. Instead, fragmented gaming experiences:

• short gaming sessions lasting only minutes
• flexible play that can be paused anytime
• quick social engagement opportunities

have become the norm. These advantages have propelled mobile devices to the forefront of gaming platforms. Looking ahead, it's predictable that in the next 10-20 years, mobile devices will evolve into something like virtual reality headsets, characterized by

• enhanced mobility and portability
• superior graphical fidelity and rendering capabilities
• comfortable and natural user interaction experiences
• affordable and reasonable price points

Consequently, the technical barriers are clearly delineated, and it's evident that once devices like virtual reality headsets overcome these technological challenges and meet these demands, they will undoubtedly become the dominant gaming platforms.

Revenue Model

Currently, there are essentially five revenue models for games:

• Direct Sales
  The buyout model is one of the earliest revenue models for games, originating in the era of single-player games. In this model, players make a one-time payment to purchase the game, which they can then play indefinitely. This approach remains common in the PC and console gaming sectors, where revenue is solely linked to sales volume. Sales volume is influenced by various factors, with one well-known strategy being the development and maintenance of intellectual property (IP). By sustaining an IP, creating a specific player ecosystem, and continuously releasing new titles, companies can enhance the loyalty of existing players while attracting new ones, thereby ensuring a stable sales baseline. However, this approach did not work in early China, where the legal framework for game copyright was underdeveloped and players had a low awareness of copyright issues, leading to widespread piracy. This made it difficult for domestic game companies focusing on retail to survive. In its early days, Tencent also built its game portfolio by investing in or acquiring game studios and introducing foreign games, rather than following other major game companies in developing IPs. It wasn't until later that in-app purchases and gacha systems became the primary revenue model.
• In-App Purchases
  In-app purchases first emerged in MMORPGs, where social interaction is a crucial element. To lower the entry barriers for users, the revenue model was eventually modified to include in-game purchases. Players could enhance their gaming experience by spending money to acquire rare items. However, the significant rise in popularity actually came with the introduction of the gacha system in mobile games in recent years. The gambling elements in these systems have enticed many players to make impulsive spending decisions.
• Advertising Revenue
  Advertising-based revenue models generally appear in slower-paced casual games or mini-games developed by individuals or small studios. In the former, the leisurely pace of casual games makes players more tolerant of brief advertisements, typically lasting around ten seconds. In the latter, the limited player base necessitates adopting the quickest and simplest revenue model.
• Time-Based Charging
  Time-based charging also first appeared in MMORPGs and still mostly exists in this genre. The previous in-game purchase model could lead to significant imbalances in MMORPGs, where the gaming experiences of non-spending players and spending players would differ drastically. In competitive activities, spending players often had an overwhelming advantage, causing non-spending players to leave. Once these players left, the spending players lost the superior feeling of outperforming non-spending players, which led to a decrease in their spending. Some MMORPGs have been destroyed by this negative cycle.
• Subscription Model
  The subscription model predominantly appears on gaming platforms such as PlayStation and Xbox. This approach requires a high level of game diversity and exclusive IPs, making it difficult to replicate.

After briefly introducing the five revenue models, I must tell you that, except for Direct Sales, the other four essentially adopt a Games as a Service (GaaS) strategy. This involves using a free-to-play model to build a foundational player base while minimizing the impact of spending on competitiveness. Spending enhances the player's experience rather than their competitive edge. By continuously offering new maps, characters, effects, costumes, and other features, a market is created where players feel the need to spend, thus forming a continuous cycle. A notable success story of this approach is Genshin Impact. Unless a remarkably impressive new game is launched, players are likely to remain in this Mobius loop: Microtransactions -> enhanced gaming experience -> new content -> Microtransactions -> enhanced gaming experience, and so forth.

In fact, the best answer to the current gaming revenue model is Games as a Service (GaaS).

1. Extensive advertising and marketing strategies enable new IPs to achieve significant reach, with minimal demands on the player base.

   Low barriers for player acquisition.

2. The free-to-play model drastically lowers entry barriers and, combined with widespread marketing, attracts a large player base.

   Rapid and widespread game dissemination.

3. Well-designed and engaging core gameplay keeps players immersed for much of their leisure time.

   Significant proportion of recreational time spent in the game.

4. A non-competitive and gacha-based microtransaction system.

   0 pay-to-win dynamics with non-repetitive microtransactions incentives.

5. Continuous and high-quality updates.

   Once the overall game framework is stable, it allows for low-risk, ongoing revenue.