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Who could have predicted that a free game would make more money than any other video game in a single year? That’s exactly what Fortnite did in 2018, when it brought in about $2.4B. It is a prominent example of how in-game spending has revolutionized the video game ecosystem.
In the traditional business model, known as “game as a product” (GAAP), a game publisher develops a game and then sells it to the consumer for a single, revenue-generating fee. After the consumer buys the game, the video game publisher has to develop another video game or add-on to generate additional revenues from that consumer.
In the mid-2000s, video game publishers began testing the “game as a service” model. In this model, the consumer may bypass the initial cost of purchasing the game, and then pay ongoing fees to continue playing the game and accessing content. There are a number of different ways the game publisher can generate revenues under this model, including game subscriptions, microtransactions and season passes. While transactions in the service model may entail smaller amounts, the publisher opens the door to an indefinite purchasing lifespan from each consumer, which can increase the total revenues generated from a single game.
This business model serves three key purposes from the publisher’s perspective. It extends the lifecycle of games being played by consumers, increases the maximum revenue potential from a single consumer and lowers the hurdle for new potential paying customers to try the game before deciding to spend. Publishers are embracing this new model as a way to drive revenue growth. However, different publishers are tailoring their in-game spending strategy depending on their specific product lineup. Activision Blizzard and Take-Two Interactive have each adopted very different approaches to implementing this business model.
Infographic has been simplified for illustrative purposes.
Blizzard Entertainment (now a division of Activision Blizzard) was one of the pioneers of this new revenue model. It released World of Warcraft in 2004, an MMORPG (Massively Multiplayer Online Role-Playing Game) that allowed players the option to buy a monthly, ongoing subscription to access the full, unlocked game. Currently, Activision Blizzard is employing the in-game revenue model across a number of different games and platforms.
Call of Duty: Warzone is a free-to-play game that has been downloaded and played by at least 75 million people around the world since its release in Q1 2020.
Take-Two Interactive coined the phrase “recurrent consumer spending” and defines it as revenue generated from ongoing consumer engagement, including virtual currency, add-on content and in-game purchases. These revenue streams are specifically grouped to exclude the initial game purchase.
According to Take-Two, recurrent consumer spending increased 52% and accounted for 58% of total GAAP net revenue as of the fiscal Q1 2021 quarterly earnings report.2 “The largest contributors to GAAP net revenue in fiscal first quarter 2021 were Grand Theft Auto® Online and Grand Theft Auto V; NBA® 2K20; Red Dead Redemption 2 and Red Dead Online.”3
Activision and Take-Two have essentially adopted reverse approaches to the game as a service model. Activision’s release of a free-to-play game is helping drive consumers to purchase a traditional game, while Take-Two requires an upfront game purchase before consumers are able to spending more on in-game items.
Recurrent in-game spending is among the trends that are driving the growth of the video gaming industry and making this space, in our view, a compelling investment opportunity.
1Source: Activision Blizzard Q2 2020 Earnings Report
2Take-Two Interactive Software, Q1 2021 Earnings Report
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