Remember when gaming was one of the hottest verticals for venture investment? Four years ago, you couldn’t visit TechCrunch without reading about the latest social-mobile studio or game with dizzying stats.
No more. Zynga has been battered, traditional publishers never recovered, and new super-casual studios struggle to get traction in the public markets. Even companies riding the freemium wave like King are trading at 3-5X EBITDA multiples, numbers on par with industries like facilities management and for-profit education. Multiples that would’ve been unthinkable in 2010.
But there’s something going on in gaming right now, and it centers around four inflection points:
1. Casual game distribution is getting more expensive… way more expensive. CPIs (cost per installs) have risen by 56% on iOS in the year with no signs of slowing. The app marketplace is an oligopoly, dominated by a few big players that leverage owned channels — their successful games — to push new releases to the top.
Getting in the top 25 free apps — a critical channel to reaching a mainstream player base — has gone from expensive to borderline-impossible in the past two years. There are over 2,000 new apps released every day, the majority of them games. And most of them will generate little to no interest or revenue.
Given this, it’s not surprising that…
2. Casual game monetization is a race to the bottom. Mobile has always been a cesspool of questionable tactics and sleazy marketing. But the increased cost of distribution has meant that games need to resort to increasingly aggressive monetization strategies to keep LTV in line with CPI. Those who don’t are locked out of distribution channels. It’s a classic race to the bottom, with little incentive to favor user experience over monetization when targeting casual players.
It’s started to get regulatory attention and will only be so long before many of these tactics go the way of $9.99/month ringtone subscriptions.
3. AAA-quality game development is cheaper… way cheaper. Unity is absolutely dominating indie game development, and for good reason: it’s a flexible tool that allows small development teams to build high-fidelity games with orders of magnitude smaller budgets than were required just five years ago.
Other tools like Corona are playing a part too, but Unity is the clear leader here and is changing the way immersive gaming experiences are built.
4. Niche core and hardcore game distribution is easier than ever. Steam Greenlight has enabled games that never would have gotten mainstream coverage — let alone made it onto a Gamestop shelf — get in front of the right gamers at a fraction of the cost of past distribution channels.
Furthermore, core and hardcore games will get unique opportunities on new platforms (Oculus) and are finding new ways to reach savvier players who know are sick of the race to the bottom on mobile.
There may not be a venture-fundable, Zynga-scale model here — most of the success has been confined to hit-driven indies to date — but the landscape is changing.