Despite their digital prowess, Google, Amazon, Meta and Apple have made relatively limited in-roads with video gaming. This opinion piece examines the opportunities and challenges for the US tech giants to make further progress.

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Summary

Despite playing major roles in the transformation of the music, TV, retail, and advertising industries, Google, Amazon, Meta, and Apple's (GAMA) share of the video games industry remains low. Growing their roles is likely to get harder rather than easier, with Apple’s and Google’s app stores coming under renewed pressure, Microsoft and Sony taking the lead with cloud and subscription gaming, and the accelerated consolidation of the games industry from within.

The games industry is in little need of US Big Tech’s “help”

“We’re challenged in a lot of ways, but we’re not waiting for this white knight to come racing in the way music was.”

I thought of this quote first as reports emerged in August that Amazon was about to buy video games behemoth, EA, and later in September, when Google announced that it would close its Stadia cloud gaming service early next year.

The quote is from a TV executive cited in a 2016 Wall Street Journal article about Apple’s apparent failure to launch a video service. According to the exec and several others, the iPhone maker asked for too much and brought too little to the negotiating table. Ultimately, the TV companies just weren’t as desperate for Big Tech’s help as the once piracy-ravaged music industry was.

If that was true of TV then, it’s even more apt for games now.

Few industries have been so successful at monetizing online services. Last year, digital revenues accounted for 88%, or $236 billion, of the games sector’s total. That’s more than the entire cinema and music industries combined and second only to TV and online video in terms of media and entertainment revenues.

Yet, for all their tech prowess, Google, Apple, Meta, and Amazon’s share of digital revenue for games was relatively low at 19%, compared to 37% for video, 47% for music, and 61% for advertising, as highlighted in Figure 1.

Figure 1: Digital media revenue totals and share for GAMA companies by market, 2021 Figure 1: Digital media revenue totals and share for GAMA companies by market, 2021 Source: Omdia

Now the Amazon-EA takeover rumors have been quashed and, with Stadia set to close, our forecast remains the same: while GAMA’s total revenues from games will grow with the industry, their share will decline slightly to 17% in 2026.

So, much opportunity remains, but so does that fundamental question: what could Amazon, Apple, Google, and Meta bring to the table that games companies couldn’t?

The greatest opportunity: Making in-roads beyond mobile

Of course, Apple and Google have already created a huge amount of value for the industry. Their app ecosystems laid the foundations for a mobile games market spanning billions of consumers worldwide, worth $125 billion in 2021 and equal to 53% of the industry total.

But with mobile gaming slowing post peak-COVID-19 and regulators threatening to force Google and Apple to allow third-party billing, the pair could see their combined share of revenue from app store games fall by a massive 46% in 2023, according to Omdia’s most severe forecast scenario shown in Figure 2.

Figure 2: Medium impact scenario: total and year-on-year change in app store revenue share of Apple App Store and Google Play, 2017-26 Figure 2: Medium impact scenario: total and year-on-year change in app store revenue share of Apple App Store and Google Play, 2017-26 Source: Omdia

Whatever the outcome, there’s the bigger question of how GAMA can tap into demand for gaming experiences beyond mobile. Though console and PC games delivered a massive $72 billion in revenue in 2021, Omdia believes they offer only a glimpse of the potential of so-called “big screen” games.

Cloud gaming has been one answer from US Big Tech, as embodied by Google Stadia and Amazon Luna. In theory, such services promise to have an app store-like effect of making high-end gaming available to an unprecedented number of people, by removing the need for expensive home hardware.

Combined with subscriptions, cloud gaming could make gaming in general more available to more people than ever before, like Netflix has done with video. Advertising could spread gaming even further, through lower-cost subscription tiers for high-end games and entirely “free” access to casual games.

Generally, advertising is under-used in gaming, and there are no more successful players in that market than Google, Meta, and increasingly Amazon. Given the potential of the opportunity, Omdia will soon publish a forecast sizing the in-game advertising market via its recently launched Games Tech Intelligence Service (IS).

More generally, GAMA could bring unrivalled investment, cutting-edge cloud and AI technology, and understanding of consumer behavior that could enable new levels of creativity, as seen in the online video market.

The critical challenge: Building links with an insular industry

As with online video, GAMA’s involvement could also come at the cost of transparency over user data and a ruthlessness to curtail or abandon beloved brands and projects. 

And the challenges to succeeding with in-game advertising should not be underestimated. The backlash from players against Facebook’s trial of virtual reality ads in Oculus Quest games in 2021 shows how badly tests can go. Breakthrough experiences that work for consumers and developers as well advertisers will need to be designed into games from the ground-up, with collaboration across the games industry.

Microsoft’s and Sony’s industry links means they may be better-placed than GAMA to deliver on in-game advertising’s promise, given the Xbox’s and PlayStation’s popularity and their extensive—and growing—in-house game development capabilities. Both are understood to be working on ad platforms for their consoles.

For now, it seems games developers and publishers see the downsides of working with GAMA, rather than the upsides. They’ve largely sided with “Big Games Tech,” Sony and Microsoft, which are embracing cloud gaming and subscriptions, but largely to evolve and strengthen their existing roles.

Arguably, Microsoft is set to do more than GAMA to “disrupt” gaming from within and by making all Xbox exclusives available from launch at no extra charge to subscribers of its Games Pass service, despite the considerable loss in full-game sales this will lead to.

Google Stadia highlights the challenges of trying to change the industry from the outside in. Due to the high costs and conditions associated with licensing third-party games, the service includes few titles and is priced in an unappealing way. In addition to a monthly subscription fee, customers need to pay full-game prices to play individual titles or take out a second subscription to access a limited library of games. 

Google says it remains “deeply committed to gaming” and plans to make Stadia’s underlying technology available to games developers and other third-parties. Omdia is a big believer in the burgeoning market for business-to-business (B2B) games technology and services, hence why we launched our Games Tech IS. But the reality is that B2B products will only net Google a fraction of the revenue and influence flowing through the consumer market.

Money may be no object, but even M&A won’t be easy

For now, major acquisitions may be the least challenging way GAMA can meaningfully grow their roles in the overall games ecosystem. But despite their huge cash reserves, even buying their way into the market may become increasingly difficult.

Sony, Microsoft, and China’s tech giants look set to continue investing heavily in games companies, as highlighted by Figure 3. China’s Bytedance, Netease, and Tencent have been involved in over 50 games-related mergers, acquisitions, and investments over the past five years, 21 of which targeted companies outside of China.

Figure 3: Number of games-related mergers, acquisitions, and investments by company type, 2010-1H22

 

Source: Omdia

Tencent has been particularly active, typically acquiring minority stakes in mobile games companies to offset regulatory challenges to growth in China. But the company is now looking to own majority or controlling stakes in larger games companies and assets related to the metaverse, according to a recent Reuters report. Bytedance, meanwhile, has already bought its way into direct competition with Meta, by acquiring VR headset maker Pico last year.

In any case, how to play a bigger role in gaming will become more and more of a burning question for US Big Tech, as the medium’s share of consumers’ attention and spend continues to grow.

  


Appendix

Further reading

Annie Palmer, “CNBC: Amazon not expected to bid for Electronic Arts” CNBC https://www.cnbc.com/2022/08/26/amazon-not-expected-to-bid-for-electronic-arts.html, retrieved October 2022

Shalini Ramachandran and Daisuke Wakabayashi, “Wall Street Journal: Apple’s Hard-Charging Tactics Hurt TV Expansion https://www.wsj.com/articles/apples-hard-charging-tactics-hurt-tv-expansion-1469721330, retrieved October 2022

Games Spotlight – Tableau Dashboard (August 2022)

App Ecosystems Forecast Report: 2021–26 (March 2022)

“Why games tech matters” (August 2022)

Games-Related Mergers, Acquisitions, & Investment Database (July 2022)

Julie Zhu and Josh Ye “Reuters: Tencent shifts focus to majority deals, overseas gaming assets for growth” https://www.reuters.com/markets/deals/tencent-shifts-focus-majority-deals-overseas-gaming-assets-growth-sources-2022-10-01/, retrieved October 2022

Author

Rob Gallagher, Research VP, Media & Entertainment

askananalyst@omdia.com