Master the Meta's 2019 Annual Review

Let's take a look at the biggest gaming trends of 2019... and look forward to 2020 (and beyond)

Welcome to Master the Meta, a newsletter focused on the business of video games.

Hi everyone,

I hope you’re all having a wonderful holiday season. It’s been a nice respite on my end, but I’m already eager to start digging back into more topics and businesses. And if you’re a new subscriber, welcome!

As much as I hate to admit bandwagoning, I’m a total sucker for “20XX in Review” and “Predictions for 20XX” articles… so I wrote my own version of sorts. Master the Meta only began in June, so this is still all quite new, but thank you for making my work in 2019 such a rewarding experience.

This annual review is longer than my usual posts, but I hope you enjoy it. Check it out…

Looking Back at 2019

In most ways, 2019 was a transitional and anticipatory year for the video game industry. While, yes, the industry churned out numerous successes and hit plenty of new milestones, there wasn’t much in terms of astronomical rises, blow-ups, or tectonic shifts. It was mostly consistent with the past, with a rising number of hints for what’s to come. Let’s cover the big topics with some context on why it’s important and where things are heading.

Mobile Dominates

Let’s start with what’s likely the most important chart of the industry:

Mobile gaming continues to be the largest and fastest growing segment of the video game industry — and it’s only going to capture further market share. In fact, mobile is pretty much the only reason the industry continues to grow. If the future of gaming is anything, it’s mobile.

Of course, “mobile” doesn’t mean any one genre. Yes, the Candy Crushes and Words with Friends of the world are holding strong, and even the hypercasual gold rush hasn’t sputtered out yet. While there’s always new games being produced, many of the top brands and play-styles continue to serve that same core audience.

That said, 2019 saw the rise of (or greater hints at) two key emerging mobile trends. One is the success of live action, multiplayer games like PUBG Mobile and Free Fire. These games — with 600+ million and 450+ million registered users, respectively — are proving a new type of genre and scale is possible. And the rewards are worth it; Sea Limited, Free Fire’s parent company, saw its stock nearly quadruple this year. These successes are occurring in mobile-first regions (Asia & Latin America) and will continue to grow player counts, monetization, and esports ecosystems. This genre will continue to help mobile gaming capture even greater market share in the years to come.

A second trend: Western publishers are slowly trying to take their top franchises to mobile. Activision Blizzard’s Call of Duty: Mobile is an early so-so success; despite weak monetization it’s captured approximately 180 million downloads since launching in October (multiples higher than recent Modern Warfare unit sales). Activision is probably the most successful mobile contender out of the main western publishers, but it still has significant room to grow and improve. The others — like Electronic Arts, Take-Two Interactive, and Ubisoft — haven’t built systems and partnerships for sustainable, scalable mobile success yet, but as the bar chart above turns increasingly green, they’ll all be compelled to better prioritize mobile and adapt. One leading theme of the 2020s will be all of these companies leveraging their best brands for mobile games.

Lastly, I’d be remiss if I didn’t mention Apple Arcade, which debuted in September. App Stores — which own both the customer and supplier relationships — are well positioned to test new business models. Testing a subscription model for mobile games makes a ton of sense for Apple, since the majority of App Store revenue comes from games. Despite an imperfect start, Apple Arcade could become a high margin recurring revenue business that Apple primarily supports because it allows the company to set the terms in a way that’s advantageous for its own bottom line. Most games have fixed costs, which means margins scale as new subscribers sign up. I still think Apple Arcade could be one of Apple’s most profitable services, but so far the company hasn’t operated as best as it can. There aren’t enough tentpole franchises, the game quality is hit-and-miss, it doesn’t target enough types of gamers, and it probably isn’t compelling for larger companies. Hopefully Apple learns and adapts over the next couple years.

PC Holds Steady; Console Players Prepare for 2020

It was another year of great console and PC games but little meaningful change.

On the console front, this is unsurprising. PS4 and Xbox One console sales are significantly down since we’re at the tail end of the current console generation, and only now are we starting to see what Xbox and Sony have planned for 2020’s new console launches. Nintendo continues to perform admirably; the Switch — and now the Switch Lite — are selling well, and 2020 may bring us the “Switch Pro.” On the flip-side, services and subscription revenues are hitting all time highs, but there’s still plenty of runway for all platforms.

The PC world is more of a mixed bag, but here are some top-of-mind highlights:

  • Tons of great games (Sekiro, Control, Outer Wilds, Disco Elysium, etc.)

  • Apex Legends innovated on how games can be marketed. Respawn/EA orchestrated a surprise launch that used a number of top streamers to gain instant, viral attention.

  • Electronic Arts is back to selling games on Steam (potentially on better terms?).

  • The storefront wars accelerated between Steam and the Epic Games Store, primarily driven by Valve and Epic striking deals for exclusives. I admire Epic’s strategy — more competition is better, and challenging the 30% take-rate is good for the industry — but the battle is far from over. In reality, there can be more than one winner.

  • Nvidia’s gaming business is starting to rebound, but ray tracing remains underutilized. It also makes sense to wonder how Nvidia will adapt as cloud gaming gains traction. Partnering with Tencent is a positive development, but as demand for high cost hardware declines Nvidia could still be put in a tough spot. 

  • Discord, with over 50 million MAUs, continues to grow its impressive community, but I still want to see the company nail its business model, which it’s continued to struggle with. 

In general, there’s plenty of money to be made on console and PC, even if growth is limited. Although little changed from the publisher/developer angle in 2019, the most change took place at the point of purchase and community. Old and new platforms continue to fight for gamers’ attention and dollars.

Cloud Gaming Isn’t Ready Yet

One of the hottest topics of 2019 was cloud gaming — playing a game anywhere on any device because it’s streamed from a server in the cloud, not from your personal hardware.

So far, not so good. The headlines were dominated by Stadia… first by intrigue and anticipation, and then by profound disappointment. Even if Google tries to frame it as a beta test, this was a classic case of overpromising and underdelivering. The team must work hard to improve its technology, content library, business model, feature set, and reputation. Stadia isn’t dead yet, but the team better get its act together.

Cloud gaming is easier said than done, and only a handful of companies even have the infrastructural capabilities to power global usage. Alphabet is one; Microsoft and Amazon are the others (and Tencent will dominate in China). 2020 will show more of what Microsoft and Amazon have planned, but the timing is still a bit too soon for mainstream adoption. Microsoft is the best positioned, and the company’s initial angle will be to frame cloud gaming up as an enhancement to the current Xbox console, not a complete console replacement.

In general, 2019 teased what cloud gaming could be and unfortunately proved why it’s hard to get right. 2020 should show us what other companies have planned, but it will take a few more years for cloud gaming to make a major dent in how gamers actually play their games.

Live Streaming’s Paradigm Shift

Fortnite’s live viewership may have steeply declined in 2019, but the video game live streaming market continues to healthily grow. In fact, the global live streaming industry is poised to expand ~20% annually over the next few years.

Live streaming — or more particularly, where personalities stream gameplay — was one of the industry’s largest pockets of change in 2019. Ninja’s move to Mixer was the shot heard around the gaming world, completely shattering the old paradigm. Since then dozens of popular streamers have struck exclusive deals with a range of platforms, namely Twitch, Mixer, YouTube Gaming, and Facebook Gaming. Now it’s a fight for market share:

(source: StreamElements)

Competition is good, but it’s really only a win for the personalities themselves, who lock in killer contracts and attain more freedom over their time. It creates a minor inconvenience for consumers, who now must juggle multiple apps. And it’s terrible news for Twitch most of all. Even if the company finds a way to maintain its market share — which it likely won’t — it must maintain that share for a much higher cost. Content that was once free now demands significant payment.

The broader lesson here is that the emergence of competition can completely transform the nature of business models. We saw this first play out in China, where (primarily) Huya, Douyu, and now Bilibili are competing for market share.

In the West, Twitch failed to hit escape velocity (like YouTube once did), and now it’s decreasingly a platform business and increasingly a content business. It’s not the worst thing in the world — businesses who pay for content can obviously still succeed at scale — but it worsens the margin profile and puts Twitch in a tough spot. Twitch’s core business is just a fragment of everyone else’s, and all those other companies have unique customer acquisition advantages due to their broader ecosystems. Twitch will likely be fine — capturing meaningful market share takes more than poaching a handful of top streamers — but the streaming world will never be the same again.

Emerging Ecosystem Wars

The next decade of video games will be largely influenced by multi-dimensional ecosystems that compete in lots of different ways. As a result, the industry may increasingly revolve around a handful of industry titans. 2019 provided a sneak peak.

I first touched on this in The Path to Titan.

Just look at Microsoft, which owns Xbox, as an example. The company’s video game business is about to start competing among more dimensions than ever before: powerful consoles, compelling exclusives, live operations, a cross-platform subscription service, xCloud (thanks to Azure), and streaming personalities (thanks to Mixer). Each piece reinforces the other pieces and altogether makes Xbox a tough ecosystem to compete against. Similar to Disney with Disney+, Microsoft can burn cash on something like Mixer if it means more gamers join and spend more money elsewhere in the Microsoft ecosystem.

That’s just one company. Think about some others:

  • Alphabet is working to grow YouTube Gaming, kickstart Stadia, manage an enormous app store, and has committed to a growing number of exclusive games.

  • Amazon sells games, owns Twitch, owns a game engine, is reportedly working on its own cloud gaming service, and will likely test a range of offerings.

  • Tencent achieves lower customer acquisition costs because it leverages its own social media platforms. The company is also partnering and acquiring liberally, building its own cloud gaming solutions, scaling esports infrastructure, and more.

  • Facebook, who could hold similar customer acquisition advantages as Tencent, is focusing more than ever on game streaming content, likely thinking about scaling its own games, and working to own the future of VR.

  • Epic Games is working to build compelling games, turn those games into platforms, scale a competitive commerce business, better support the Unreal game engine, and more.

I could go on and on (Apple, Nvidia, Valve, Sony, Nintendo, etc.). In essence, there will continue to be smaller players that succeed in their own ways, but as 2019 displayed, the intersection of technology, content, and reach means non-traditional titans will begin to enter the playing field, leaning into their unique strengths. In many instances, they’ll be well positioned to succeed.

China’s Emerging Influence

Noise around China and Hong Kong — particularly Blizzard’s mismanagement of the Blitzchung situation — was the most heated gaming topic of 2019. No matter your opinion, I thought Reed Hastings said it best: Netflix is in the entertainment business, not the “truth to power business.” It’s the same for video game companies. It’s totally within a company’s right to not make video games a platform for global political discussion.

The bulk of the noise is already (and predictably) in the past, but there’s real truth to China’s emerging influence. Western gaming companies must partner with Chinese companies to sell in China, which, let’s not forget, is the largest gaming market in the world:

(source: Koema)

Yes, there are political trade-offs, but working to sell into China has generally been worth it, and people who claim US companies should stop selling games in China have no sense of how intertwined things actually are. 

From another perspective, Chinese companies have mostly kept their games within China. In 2019, we saw this change more than ever. Tencent continues to scale up its global brands, NetEase is building new studios around the world, and Chinese companies are slowly starting to sell their games in new countries. This all occurred relatively quietly in 2019, but the 2020s will only see an acceleration of this trend, which raises important competitive and regulatory questions.

As for the Chinese gaming market itself, revenue is still recovering from last year’s game approvals freeze. The freeze hurt most gaming companies in the region, and although regulatory risks remain, the worst of it appears to be in the past.

Esports Expectations Must Recalibrate

Remember the hype cycle? It displays how expectations for new technologies and trends usually ebb and flow.

(source: Gartner)

In the West, we’re pretty close to the peak of inflated expectations. With a couple exceptions, independent esports orgs are still struggling to create compelling business models, and venture dollars are propping up high salaries and league buy-ins. It’s largely unsustainable.

2019 was filled with plenty of esports records — record viewers (League of Legends Worlds: 2.5 million), record prize pools (Dota 2: $34.3 million), record monetization, even our first pure esports IPO (Astralis) — but it was also filled with record costs. From my perspective, esports in general is short-term overvalued but long-term undervalued. The most money to be made is in Asia, we should all be paying more attention to mobile esports, but, most pressingly, we should be bracing for “esports winter.”

Esports winter may hit in 2020 (not sure), but it will start when venture dollars dry up as investors realize the organizations they funded aren’t differentiated and are struggling to build large, monetizable audiences. Esports live streaming contracts may recalibrate downward, which will put margin pressures on everyone. A few teams will make it through tough times relatively unscathed, but many will be forced to close shop, take on new capital at worse terms, or restructure ownership. And like all drawdowns, the darkest of times will, in hindsight, end up the best times to invest. It’s also a sign that organizations should be thinking creatively about alternative ways to build, maintain, and monetize audiences.

To be clear, despite the natural pressures of the hype cycle, I believe there’s still upside for various parts of the value chain. 2019 indicated that esports are still a great way for publishers — who are best positioned, since they own the games — to further engage their player bases. There’s also tremendous potential on the infrastructure front, in terms of the technology itself but also in terms of building sub-pro leagues and systems. In 2019 we saw plenty of early stage developments, but scaling that out will take a few more years.

Emerging Technologies Show Small Signs of Life

Anytime you hear about some crazy new idea or technology, the question to ask isn’t “will this happen?” but rather “when will it happen”? It’s usually a matter of timing.

For example, the first VR headsets were patented in the 1960s:

(source: ResearchGate)

That’s just scratching the surface. Google Glass happened a decade too early. Digital currencies and in-game economies have been tried and failed multiple times over the past 2-3 decades. The intersection of games and social media was a fad over ten years ago, but it might make a comeback. Again, it’s all about timing.

2019 didn’t bring us any crazy new technology or paradigm at scale, but it was full of hints for what’s to come:

  • VR is still niche, but Oculus Quest sales have accelerated and Facebook’s struggled to maintain inventory. Plus, announcements like Half Life: Alyx help motivate consumers to buy headsets. In hype cycle terms, VR is successfully crawling out of the trough of disillusionment. Also, location-based VR (like Sandbox VR) is doing well in certain markets.

  • AR is even more nascent but probably the most exciting upcoming consumer tech innovation. The half-life of technology intimacy continues to turn sci-fi into sci-fact. Companies like Niantic are launching games and building out their platform capabilities. Game engines are slowly adding new capabilities, too. Also, Apple revealed their longer-term launch plans for AR hardware. AR will probably be interesting in 5 years.

  • Blockchain-based, player-owned economies have yet to scale for a multitude of reasons, but early games are attracting hopeful audiences. Again, give it a few more years.

  • Cloud gaming, which we touched on above, has much to prove, but once companies become fully capable it will help augment how gamers play, and eventually could change how the masses think about buying hardware.

  • Low-code game development has been around for a while, but there’s far more opportunity ahead of us than behind us. In-game platforms (like Roblox) have a place, but I’m convinced we’ll see new platforms that infuse user-generated content with social ecosystems. Everyone will be able to build fun games.

  • Epic Games said they’re looking to build a metaverse. Experiments within Fortnite (concerts, events, brand deals, etc.) are great early tests, but we should expect new platform capabilities to emerge in a year or two. Everyone follows what Fortnite does, but few are doing the work to compete with what Epic is trying to build next.

Fortnite broke the mold three main times this year.

First, with the Marshmello concert:

Then, with the Black Hole event, which led to a major reset and Chapter 2:

Lastly, with a major brand deal (live trailer unveiling) with Star Wars:

And that’s just scratching the surface. 2019’s tests hint at an even more exciting future. 

The Attention Gap Is Closing

It’s almost a meme now to say that the video game industry is bigger than the music and film industries combined (this data looks ambitious but is directionally correct):

(Source: lpesports)

It’s true, but what’s interesting to me is how gaming still receives far less mainstream attention than the other entertainment pillars.

That’s starting to change. Ninja has morphed into a celebrity. Brands like FaZe and 100 Thieves are influencing pop culture to a greater degree. The Game Awards pulled in record audiences (45 million viewers) with numerous notable guests. And, on the negative side, the Hong Kong / Blitzchung controversy made waves far beyond the video game industry.

The attention gap will continue closing, in ways both good and bad. More (bigger) personalities. More TV appearances. More controversies. More collaborations. More brand deals. 2019 was progress but still just the tip of the iceberg.

Looking Forward to 2020 (and Beyond)

In broad strokes — both obvious and non-obvious — here’s what we should expect to happen in 2020:

  • A new console generation will bring console gaming back into the broader discussion. Expect better graphics, faster loading times, better online and subscription options, great exclusives, and more.

  • Mobile will continue to drive industry growth and capture market share, although the mix of games that will drive that growth will change a bit. Expect more conversation around live, multiplayer action games to make its way westward.

  • Cloud gaming won’t go mainstream, but we’ll learn about everyone’s plans and know exactly what we have to look forward to.

  • We’ll likely better understand how Chinese gaming companies plan on launching their games in other countries. The threat will start to become more obvious, even if it’s not making a dent yet.

  • Big tech companies will begin to accelerate their gaming plans. Microsoft will continue to do what it does, Amazon will lean into Twitch and its infrastructure capabilities, Alphabet will lean more heavily into YouTube Gaming and try to save Stadia, Apple will reorient Apple Arcade, and Facebook will reprioritize gaming. It will be early signs of how they plan to broaden and deepen their gaming ecosystems.

  • Fortnite will continue to innovate on what’s possible with in-game live events, and others will try to mimic in their own ways (maybe Apex Legends first?).

  • Early signs of esports winter will show up and spark concern, putting pressure on most esports orgs and many leagues.

As for the next 5 years:

  • The attention gap will largely close. Gaming will be discussed nearly at the same level as music and movies, and mobile will be a major part of that discussion. Also, much like the movie industry, many of today’s leading franchises will still be the top franchises in 5 years (and increasingly supporting mobile and cross-play).

  • Emerging ecosystems will force greater industry consolidation in their quest for the best content and technology. This influx of titans will help cloud gaming become more relevant over the next console generation. Also, expect large technology companies to acquire major studios, game engines, and more. Consolidation will also make subscription models (like Game Pass) far more worthwhile and viable for more people across devices.

  • Traditional entertainment companies will also start acquiring gaming companies as they realize they completely lack one of the most important pillars of entertainment. Companies like Disney, Comcast, and AT&T will likely focus on acquiring the biggest and best brands first, and try to expand their “transmedia” capabilities.

  • VR and AR will make significant progress. VR will increasingly gain traction over the next five years, especially once an improved Oculus Quest 2.0 gets released. Then, from ~2023 onward AR will likely go mainstream. These technologies will complement today’s core devices (PC, consoles, smartphones), but will bring about multiple new use cases.

  • The metaverse will become a more popular idea. Ready Player One won’t occur anytime soon, but games/apps like Fortnite and Roblox will show the world how games can become an entirely new breed of platform.

  • Gaming and social media will become more interconnected at scale. Facebook could follow Tencent’s example, but we’ll also see new apps take new approaches to connecting both user-generated games and viral social mechanics.

  • Esports betting — following traditional sports betting — will evolve into a major industry, once the regulatory issues get worked out.

  • As major tech and media companies enter the picture and new types of platforms gain traction, many of today’s dominant companies — like Twitch and Steam — will lose significant market share.

As far as predictions, even though we don’t know the specifics, it’s fairly clear where the industry is moving at a high level. More people will spend more time and money playing (and watching) more games in more ways. There’s opportunity in each “more” for all companies — upstarts, longtime players, and tech/media titans — to innovate on today's practices and create superior gaming experiences for everyone around the world.

2019 might have been more of a transitional or anticipatory year than anything, but what it signals is ultimately outstanding for anyone with a love of playing games. It also means that business leaders need to be more diligent than ever if they wish to stay relevant. Competition is only going to accelerate, and the paradigm will continue to shift.

On my part, I feel blessed to know there are thousands of hardworking people creating experiences to make millions of us happy. If that’s you, thank you so much. As I continue to write and grow Master the Meta, I’m more excited than ever to dig in and share where the industry is heading. Thanks for following along.

Onward to 2020!

Aaron Bush (@aaronbush100)

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