Why the Game Business is Getting Harder

This article previously appeared on my LinkedIn newsletter, Scaling games. It is now included in my archive on Substack, since I’ve converged all my writing into one place.

In my previous article, I wrote about why scaling games is so hard. In this article, I want to discuss why it is actually getting harder–at the same time as the opportunities for growth and sustainable businesses are better than ever.

One of the ways you can describe the competition in an industry is Michael Porter’s Five Forces Framework.

We can apply this to the game industry to see how this has evolved over the last few years: 

Threat of New Entrants

In Q1 of 2022 there were $98.7 billion in game deals. Even after subtracting the huge acquisition of Activision by Microsoft (the largest tech acquisition of all time), that’s an extraordinary figure that reflects the capital available to game developers today.

Once upon a time, almost all funding for new game development came from publishers. That’s changed dramatically in the last two years. Although there is ample publisher funding available to game developers today, there are also numerous alternatives:

·  Venture capital (as I write this, over $2B of new funds for games from the likes of Griffin, Hiro, Makers and others have been announced in only the last few weeks)

·  Private equity

·  Crowdfunding

·  Crypto/Web3 – over $3B for games in 2021 

This means that good teams have more opportunity to build their dream game than ever before. Consequently, the new entrants to the game industry are numerous.

On the other hand, there are significant barriers to entry despite all these entrants. Building and scaling the live services that players expect is often labor-intensive and complicated. Content-rich experiences can require extensive artistic development.

Other aspects of game development are democratizing: 3D graphics is now a commodity due to Unity and Unreal. The days of manufacturing boxes and stocking store-shelves are long-gone. And platforms like Roblox are enabling a whole new community of people to create interactive worlds and experiences.

Although there is more capital for developers than ever, this capital is chasing a dwindling supply of people with the expertise to build a quality game.

Threat of Substitutes

The five-forces model of industry competition isn’t simply referring to close substitutes (such as selecting between an MMORPG like World of Warcraft vs. Guild Wars). It refers to all the possible substitutes that “solve the problem.”  What are the “problems” that games solve?

• Entertainment, escape

• Social connection, community

• Competitive achievement

• Creativity

An MMORPG like World of Warcraft isn’t just entertainment–it is social. In my fireside chat with Alexander Brazie, who worked on both WoW and League of Legends–he described WoW as a chat room with a set of game mechanics around it. If you buy into that argument, then social networks and TikTok are competitors as well; so is playing an in-person board game or going to a sports event with your friends.

Thanks to the dematerialization and digitization of so many experiences we can expect that the number of substitutes to games–both generally and specifically–will only increase. “Metaverse” platforms like Roblox, along with the democratization of the creator platforms, will give many forms of traditional game development a huge number of options. Even a mod can be competitive to entire games!

Bargaining Power of Customers

Players hold an enormous amount of power in the game industry. Games are a discretionary purchase, and there are more options to choose from than ever before. And many games are free-to-play or free-to-try.

Customers wield not only the ability to vote with their wallet–but also the power to express their opinions online in ways that impact distribution and awareness. Once, the curation of games was the business of professional journalists and reviewers. That’s still relevant for some genres of games, but overall games are now subject to the ratings of the communities that play them: the App Stores, whether on mobile; the built-in stores on consoles; or the PC game stores like Steam and the Epic Game Store–as well as the discourse in communication platforms like Discord.

Industry Rivalry

Some industries are defined by cutthroat competition. The game industry is a bit different–it is more about coopetition.

Almost everyone I’ve met in the game industry just wants to build great products and connect with audiences–putting competitors out of business isn’t usually part of the conversation.

Most people talk about games being a “small industry” – a funny thing to say about an industry with millions of developers. They’re usually referring to the idea that someone who works for you in one company could just as easily be your boss in the next. Which leads us to the most important force in the game industry today:

Bargaining Power of Suppliers

Great games require great talent–full stop. Talented people are the most important “suppliers” in the industry. 

Right now, talent is in short supply. And talent impacts everything I’ve described above.

Talent is needed for leadership, game design, storytelling, art, LiveOps, and a range of complex engineering.

The app stores and advertising networks represent access to customers, and they’re virtually non-negotiable in terms of their cost structure; that represents another domain of suppliers who can’t be bargained with. The result is a focus on optimization over negotiation. And who does the optimization? Again, it’s the talented people who make up this industry. And relative to the number of games and number of funding sources, there are fewer and fewer of these experts.

Prescription: Capital Efficiency

The game industry is an interesting place:

• It’s getting harder to find talent but easier to get funding.

• It’s harder to find customers, but easier to scale to huge numbers when you connect with the right kind of customers.

What do you do in an industry like this? I find that success comes from “shots on goal.” Give yourself runway, give yourself time to experiment and time to refine your craft. Try a lot of things–and get player feedback to help you refine your game.

Spend your resources building the things players care about, rather than reinventing the wheel and setting yourself up for compounding technical debt. Leverage systems that enhance composability and unlock creativity–rather than slow you down.

Yes, the game industry is getting harder. But it is also getting bigger. It’s the most important media category of our century. So while it is getting harder, the rewards are immense for those who approach it in a way that favors the refinement of craft, experimentation, and scalability.

What do you think? What did I miss, or what less-competitive opportunities exist? I’d love to hear from you in the comments!

In the next articles, I’ll talk return to some of the aspects of scaling games that impact the various sections of game’s life: finding the fun (and shipping a game); getting the business model right; and scaling your player acquisition.

Further Reading & Viewing

• My original article on SCALING GAMES outlined Why Scaling Games is Hard.

• I have a 3-part series on the economics of the game business that you can start reading with Game Economics, Part 1: the Attention Economy.

• My fireside chat with Alexander Brazie explored how game designs and business models have evolved over time.

• I spoke about “shots on goal” and building games like Star Trek Timelines in this podcast.