Digital games to reach $53bn by 2016, but can telcos play too?

Ovum forecasts that digital game revenues will increase by 16% year-on-year in 2011 to reach $24bn. Revenues are expected to grow to $53bn by 2016 as the casualization of video games, new free-to-play (F2P) business models, and publisher strategies aimed at controlling distribution drive increased adoption. Telcos can benefit from this growth if they can provide fast, low-latency broadband connections with competitively priced usage tiers. With one hour of gaming using upwards of 3GB, demand for “gaming connections” is expected to grow. As a result, telcos will be able to benefit from growth in the gaming market by upselling users to attractive gaming and access bundles, and using these to reduce churn.

Casualization of the games market continues

The casualization of the video games market continues apace. This phenomenon is not only being driven by the expansion of the genre itself, but also by the casualization of hardcore games  making them more accessible to casual gamers. Xbox has benefited greatly from a casualization strategy, which has seen its user-friendly Kinect interface being used to expose a more casual audience to hardcore titles such as the Forza 4 racing game. This strategy helped to produce a strong digital performance, with Xbox Live revenues growing 19% against last year. With the addition of more casual gamers, the market is no longer the sole preserve of teenage, male hardcore gamers. Gaming is rapidly expanding to encompass a more mainstream audience, which will have serious ramifications for other rich media entertainment such as TV, video, and music. As casual games are often easier to learn and simpler to play, they are ideal for spontaneous gaming experiences that work well on mobile phones and tablets. Consequently, casual games are playing a critical role in driving mobile gaming revenues, which Ovum expects to grow at a compound annual growth rate of 26% between 2011 and 2016.

Publishers exploit free-to-play and network gaming

The F2P business model is increasingly popular in the video games market. It has lowered the barriers to entry and enabled the purchase of low-priced virtual goods, which has attracted many new gamers. Publishers’ strategies have evolved so that they now provide game services as well as game products. This enables them to extend product life with downloadable content that continually refreshes a title’s ability to engage the gamer. Publishers are also finding that digital distribution is delivering a number of significant benefits, not least the reduction of costs and boosting of margins from 20–30% on boxed games to 50–75% on digital games. The use of “online passes” that are increasingly required for network gaming are also reducing the threat posed by pre-owned games.

Digital games will generate new revenues for telcos

Digital games played on a network require stable broadband connections with low latency, and these will become increasingly bandwidth-intensive as HD and 3D services gain popularity. With some games using over 3GB per hour, the demand for higher data usage and reliable, fast broadband connections will be telcos’ main opportunity to benefit from the growth of the digital gaming market. As all types of cloud-delivered entertainment grow, gamers will want a connection that is relatively unaffected by contention and has guaranteed low latency. This makes the concept of a “gaming connection” an attractive proposition, and one that operators should position themselves to exploit.

As gamers are a growing customer segment, there is also an opportunity for telcos to bundle game subscriptions with broadband packages. In theUK, BT has already adopted this approach by partnering with Onlive to offer BT customers Onlive’s cloud gaming service. This adds value by bundling a gaming platform with a connection that is optimized for low latency. These types of partnerships will provide telcos with an excellent way to upsell broadband access and reduce churn.

Could the richness of cloud gaming also play to telcos’ strengths?

Incremental broadband revenues from specialist connections could be a considerable revenue opportunity for telcos and ISPs. However, as the gaming experience becomes richer, it is also becoming more reliant on the management of the network in other areas. The rapid growth of F2P business models is powering in-game purchases of virtual goods that are paid for by micro-transactions. This is an area that telcos could take advantage of through operator billing. Given that payment options are still a limiting factor for the digital games market in many countries, and with the recent security breach of the PlayStation Network fresh in consumers’ minds, telco payment services could be an option for both gaming platforms and consumers.

Socialization is also bringing a richer in-game experience. Social features such as chat and instant messaging are becoming standard, with gamers regularly using their gamertag as a contact point. In-app VoIP calls are also increasingly part of the gaming experience, which will have a negative impact on operators’ voice revenues. However, as social and gaming applications become richer and more creative, there could be an opportunity for operators to supply advanced VoIP services to social and gaming platforms such as HD voice, voice modification for gaming role-play, or in a few years even realtime translation.

“Gamification” is extending game design and mechanics into other commercial environments, which is putting even greater demands on the network’s quality of service, in-game communications, content management, monetization, and security. The greater sophistication and richness of games and game-like applications requires more complex handling, which should give operators the opportunity to provide valued interfaces to service providers to ensure the customer experience. As a result, a hands-off, over-the-top delivery strategy may no longer be as appealing as it once was for game and other media providers.