Video games aren’t experiencing a Netflix or Spotify moment after all. At least not at anywhere near the pace that other forms of media adopted subscriptions and streaming over the last decade.
While subscription gaming services have been on the rise for the past few years, thanks largely to the growth of Microsoft’s Xbox Game Pass platform, the shift in consumer spending and consumption hasn’t followed. Instead, subscription platforms and the smaller cloud gaming services often bolted onto them make up a tiny slice of the overall global games market.
It may take years or perhaps even decades, alongside major advances in internet speeds and coverage as well as streaming technology, before these distribution methods supplant the traditional retail model in gaming. And for many popular titles that are given away for free and monetize entirely through in-game purchases, these models may never mesh well.
“I don't believe that subscriptions will become the dominant monetization of the game sector as it has done progressively within the video and music sectors,” said Ampere Analysis researcher Piers Harding-Rolls at the Game Developers Conference last month. “79% of the total market opportunity in 2021, in terms of consumer spending, was based on in-game monetization. That means I think it's very unlikely that we're going to see a wholesale shift to subscription monetization.”
Subscription and cloud gaming represents just 4% of North America and Europe game markets, or roughly $3.7 billion, according to a recent study Harding-Rolls published at Ampere. Of the available services, only 5% are streaming-only offerings, while a majority (60%) use Xbox Game Pass.
The study found that most Game Pass users download their games and do not stream them at all. Harding-Rolls said he expects the combined subscription and cloud gaming market to grow to about 8.4% of the U.S. and European game markets by 2027, a far cry from the adoption of subscription services and streaming in the music and video markets.
This tendency to compare games with music and video makes sense. Games are a relatively new form of media, compared with film and recorded music, and yet all three simultaneously underwent the same forms of disruption caused by widespread internet access, digital distribution and the advent of streaming.
Yet only games lag far behind in shifting away from traditional retail models and downloading toward subscription services and streaming. That's largely because of the complex economics of how games are funded, sold and monetized and the variety of styles, file sizes and length in entertainment hours they provide.
The move to subscriptions
The music industry, due to complex factors involving piracy, digital distribution and the technical sophistication of streaming music files, embraced Spotify and other subscription platforms at much more rapid clip than other forms of media. After all, most songs are around the same length, and streaming an MP3 is a much lighter lift than a video or an interactive video game stream.
About 83% of all U.S. music revenue now comes from streaming services, according to the Recording Industry Association of America, and industry leader Spotify has more than 400 million monthly users and a 31% market share of the more than 500 million paying subscribers worldwide.
TV lags behind much further, in part because of the tangled knot of economic relationships at the heart of TV production and distribution. Streaming platforms like Netflix and Hulu account for only 26% of time spent watching TV, according to a report last year from research firm Nielsen, while most of America (64%) still spends a majority of their time watching cable and network TV.
The film industry, which suffered severe drops in theater attendance due to the pandemic, has long since shifted to predominantly digital distribution, according to the Motion Picture Association of America’s 2021 report. But the share of viewing is evenly split among cable and satellite providers and subscription services, the report said.
Meanwhile, many of Hollywood's most powerful incumbents are also incentivized to maintain the traditional theater model. When some media conglomerates tried releasing films they funded directly onto the streaming services they owned, a number of directors and theater chains aggressively pushed back, turning the trend into a short-lived experiment in trying to sidestep the economic impact of COVID restrictions.
Now, viewers are forced to either pony up if they want to see new films outside the theater or wait about 45 days for it to land on a streaming service. (Granted, 45 days is much shorter than the standard 75-, 90- or 120-day windows of the pre-pandemic years, and being able to pay even $20 or $30 for a film still running in theaters, as Amazon and Disney now allow, is a substantial shift in the film distribution market.)
And then there are video games, which only saw the scales tip in favor of buying digital in 2020, thanks to the pandemic. Prior to that, most consumers bought video games on Blu-ray discs from big-box stores like Best Buy, Walmart and GameStop and ecommerce retailers like Amazon.
Games are still overwhelmingly downloaded locally on devices like consoles and PCs, rather than streamed over the internet through a cloud service like Xbox Cloud Gaming or Google Stadia. The transition toward these new distribution formats for gaming is not accelerating at anywhere near the rate it is with film and TV, which is seeing record highs in subscription sign-ups and shifts in viewing behavior.
Harding-Rolls found that less than 10% of Xbox Game Pass’ more than 25 million subscribers only stream games. This suggests that subscription services may play a larger role in helping bridge the gap between consoles and PCs and the markets in which gamers are mainly using mobile phones.
“Streaming distribution will gradually become more important to the games content subscription market over the next five years,” Harding-Rolls said. “While console users represent the core of Microsoft's service for example, its future growth will increasingly rely on converting non-console users through its streaming functionality.”
A shift is coming … eventually
Sony made arguably the most public rejection of a subscription-first future for the game industry when it rolled out an understated refresh of its PlayStation Plus platform. Instead of trying to compete directly with Microsoft’s Game Pass, Sony said it was uncertain about the long-term viability of releasing big-budget games onto a Netflix-style subscription platform that cost much less per month than the cost of a single game.
Sony’s new PlayStation Plus, coming later this year, now includes two more costly tiers that offer a mix of classic games and newer first-party games that had been on the market for at least a year or more, in addition to a cloud streaming component borrowed from the company’s PlayStation Now service for the priciest plan. Missing from any of the three tiers are first-party games the day they release to retail channels, as Microsoft does with Game Pass.
“It's not a road that we're going to go down with this new service,” PlayStation CEO Jim Ryan told Gamesindustry.biz last month, referring to releasing major first-party games like Horizon Forbidden West into its higher-ter subscription offerings. “We feel if we were to do that with the games that we make at PlayStation Studios, that virtuous cycle will be broken. The level of investment that we need to make in our studios would not be possible, and we think the knock-on effect on the quality of the games that we make would not be something that gamers want."
"Subscription has certainly grown in importance over the course of the last few years," Ryan added. "But the medium of gaming is so very different to music and to linear entertainment, that I don't think we'll see it go to the levels that we see with Spotify and Netflix.”
"It's very hard to launch a $120 million game on a subscription service charging $9.99 a month," Shawn Layden, a former PlayStation exec in charge of its internal studios, said last year. "You pencil it out, you're going to have to have 500 million subscribers before you start to recoup your investment. That's why right now you need to take a loss-leading position to try to grow that base. But still, if you have only 250 million consoles out there, you're not going to get to half a billion subscribers. So how do you circle that square? Nobody has figured that out yet."
Even Microsoft has gone out of its way in recent months to reassure developers that subscription gaming isn’t the one business model to rule them all, and that it does in fact believe in having a variety of different approaches to game distribution. That could be in part because Game Pass, while still growing, has failed to scale as fast as the company expected, adding just 7 million users from January 2021 to January 2022.
“For us at Xbox, there's not one business model that we think is going to win. I often get asked by developers, 'If I'm not in [Game Pass], am I just not viable on Xbox anymore?' And it's absolutely not true,” Microsoft Gaming CEO Phil Spencer said in an interview with Xbox executive Sarah Bond at GDC 2022.
“It's really about the diversity of business models, and this is where I sometimes contrast against other forms of media we get compared to whether it's music, whether it's video. Where, the models have really condensed down to maybe one or two business models that are working,” Spencer added. “I fundamentally believe a strength for us in the video game business is the diversity of business models and the strength of those."
Indeed, having a diversity of business models, with a variety of price points, is one reason why the gaming industry has ballooned into a much larger economic force than Hollywood and the music industry.
But it’s those same factors that make it difficult for new forms of distribution to catch on, at least not without significant investment from some of the most cash-flush companies in the tech and gaming space. Microsoft, thanks to its Office, Windows and Azure businesses, can afford it. Many other companies, including Nintendo and Sony, cannot, and we see that play out with how hesitant Microsoft’s competitors are to jump into the deep end of subscription gaming.
For now, however, it looks like the “Netflix for games” moniker may be applicable only to Game Pass, based on the scope of Microsoft’s ambitions. And it may take a very long time until we know just how early Xbox has been to gaming’s next big distribution shift.