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There’ll be no extra lives or 1-ups for Google.

The search colossus announced in September that it is putting Stadia, its attempt at cracking the gaming market, in permadeath mode in January after just under three years of operation.

Stadia’s demise was not a huge surprise to gamers. Other Big Tech companies have made plays for the extremely lucrative gaming market and despite their historically bottomless wallets, they have only attained limited success.

For this week’s deep dive we’re going to be looking at what makes the gaming industry so seductive, why it’s such a tough nut to crack even for the world’s biggest companies, and where it’s headed.

So close the curtains, grab your controller, and let’s load up.

Gaming’s Origins
The first-ever commercial games system hit the shelves in 1967 with the “Brown Box” — a revolutionary console that came with a variety of adrenaline-spiking games including ping-pong and checkers.

Although the Brown Box itself didn’t live to see its tenth birthday, it wasn’t long until both the arcade and home gaming markets started to blossom. In the 1970’s Atari drove the plow that sowed the seeds for today’s mass market, with a slew of mega-hits like Pong and Pac-Man.

The gaming industry of 2022 is orders of magnitude bigger. Gaming analysis firm Newzoo estimates there are just over 3 billion gamers worldwide. To put that in perspective, the global population is around 8 billion.

(Credit: Newzoo Global Games Market Report 2022)

Covid lockdowns pushed people towards indoor hobbies and activities and by Q3 of 2021 gaming as a whole was worth an estimated $200 billion, more than Hollywood and the music industry combined.

Google Enters the Game
Google officially launched Google Stadia in 2019 to chase the Holy Grail of “cloud gaming,” a technology that allows gamers to play games on any device because the actual processing of the game is happening on multiple cloud servers powered by the company offering the service (vs. a console which only works locally). Think Netflix but for games.

Big Tech companies including Amazon have coveted this model, but Google made the biggest splash. It not only launched Stadia as a platform but announced it would hire developers to make high-end games. Stadia did not inspire confidence among gamers, however, with its library of games disappointingly slim.

“The gaming market is very specific, the audience knows what it’s looking for and it kind of has a sixth sense,” Newzoo gaming market consultant Guilherme Fernandes told The Daily Upside.

Just two years into the project Google shuttered its division responsible for making new games to put on Stadia. Fernandes said this displayed a fundamental misunderstanding of the industry, and how long it takes to cultivate a relationship with consumers.

“It seems like the expectations from leadership were not very aligned with what a development cycle is for a game,” he said, adding that good and particularly innovative games need at least three years to make.

Basically, games sell consoles, and Google gave up too quickly because it wasn’t seeing cash quickly enough.

Amazon For the Win (kinda): Amazon has had a bit more success in the gaming world. it already owns Twitch, a streaming platform akin to YouTube that is much-used by gamers, and it has produced some games from its development studios including last year’s New World, but it’s nowhere near achieving the kind of dominance it enjoys in cloud computing or e-commerce.

With the current macroeconomic bleakness, Big Tech has less cash to throw at gaming than it used to, although some FAANGs are still talking a big…game. Netflix CEO Reed Hastings said in an interview with Vox this week: “Talk to us after we’re a big leader in games. We have a lot of investment to do in games.” But despite the bravado, with rampant cost-cutting ravaging Big Tech, it’s now liable to fall even further behind the true giants of gaming.

Microsoft versus Sony
Although the gaming industry is a complex ecosystem, the rivalry between Microsoft and Sony sets the stage for the rest of the market. Microsoft owns Xbox and Sony owns PlayStation, the two preeminent gaming consoles. While Nintendo is also a major player in the console market, it’s aimed more at children, thus sidestepping the bloodiest marketplace battles.

The various bouts of the Xbox v PlayStation rumble are called generations, with the companies releasing new versions of their consoles more or less simultaneously. The last generation was won decisively by PlayStation, which sold twice as many PlayStation 4s as Xbox sold Xbox Ones.

PlayStation’s strategy during the last generation was to focus on producing high-quality exclusive games such as God of War and Spider-Man, which some gamers just couldn’t resist. Microsoft made up some ground by leaning into its subscription service ‘Xbox Game Pass,’ which gives players access to a library of games for a monthly fee. Documents made public by Brazilian regulators showed Game Pass made $2.9 billion in 2021 — almost 18% of Xbox’s total console-generated revenue for the year.

Smarting from defeat, Xbox is holding down the triggers for the current generation and Fernandes says it has now put PlayStation on the back foot — especially since even though the PS5 was released over two years ago (into the teeth of supply chain snarls) it’s still fiendishly difficult for consumers to get their hands on one for retail price.

Microsoft headed for an antitrust bossfight: As part of its efforts to catch up to PlayStation on games titles, Microsoft has been buying major studios so it can have its subscription cake and eat its game titles too:

• In March 2021 it completed a $7.5 billion acquisition of Zenimax Media, the parent company of well-known studio Bethesda Softworks, maker of beloved (if famously buggy) titles including Fallout and Skyrim — and that was just an amuse-bouche.
• In January it announced its intention to buy Activision Blizzard, the studio behind wildly popular titles including Call of Duty and World of Warcraft, for $68.7 billion.
• Activision Blizzard also owns King, the company behind the now decade-old mobile stalwart Candy Crush. With mobile games commanding a whopping 50% of the gaming market, this gives Microsoft a major new competitive edge beyond Xbox.

The Activision Blizzard deal is so massive it’s hoisted major antitrust flags, with regulators worried that hoovering up the studios that make many of the most popular titles will allow Microsoft to control access to those games. Politico reported last week the FTC is likely to try to stop the deal.

What’s Gaming’s Next Level?

Although early indications are that the gaming market is headed for its first-ever downturn with a potentially disappointing holiday season, Fernandes said this is not a serious cause for concern. He views the slowdown as a small correction to the pandemic-fueled boom.

(Credit: Newzoo Global Games Market Report 2022)

But competition is likely to heat up. Now that Beijing has tightened regulations, making it burdensome to release games, Chinese giants including Tencent, NetEase, and even TikTok-owner ByteDance are looking increasingly Westward, says Fernandes.

He added that Apple’s Ad-Tracking Transparency (ATT) changes this year are another headwind for mobile gaming, but he remains optimistic for 2023.

As the supply chain un-knots itself, he believes consoles will become more available. He also expects more games to be released next year than in 2022. The lockdowns had a delayed effect on releases, as games that were near finished came out as scheduled during 2020, but those that weren’t as far along stalled. This year only saw a handful of blockbuster games, many of which performed extremely well.

“People are so hungry for content, they centralize their spending in a reduced number of games,” he said.

So gamers, rejoice! Plenty more virtual escapism is on the way.

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