Gaming opportunities for investors in 2023: Generative AI, low-code, metaverse, and more

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The gaming landscape for VC firms encompasses five separate areas: development, operations, access, content, and experience. (PitchBook Image)

A new report from the Seattle-based venture capital firm PitchBook indicates that the international video game industry entered a period of contraction in 2022, but new opportunities for investment are opening in fields such as VR, AR, the metaverse, and the potential role of generative AI in game development.

The quarterly analyst report on the gaming sector covers trends and issues predictions for how VC investments in video games will proceed over the course of 2023. This is PitchBook’s first report on the games industry in general.

According to the report, the fourth quarter of 2022 saw a significant drop in games-industry VC, with 62% fewer deals at 82% lower growth year-over-year. Even after that drop, however, the overall 2022 market ($13.3 billion in deal value) is almost four times the size it was in 2019 ($3.9 billion).

The report credits “macroeconomic uncertainty and regulatory scrutiny,” such as the various amounts of pushback Microsoft has gotten over its Activision Blizzard deal, for the 2022 slowdown.

“VC activity in 2022 reflects a nuanced investment landscape,” writes PitchBook analyst Eric Bellomo. “2021 represented a step-function increase across the industry, increasing everything from server traffic to microtransactions, and VC activity was no different.”

A lot of money flowed into development of video game industry monetization in 2021. (PitchBook Image)

The decrease in investment in 2022 can be seen as a slight market correction, following a massive spike in VC gaming investment in 2021. Per PitchBook’s numbers, global VC deal activity in the video game sector more than doubled between 2020 and 2021, going from $7.4 billion in 2020 to $16.6 billion.

It also fits into an ongoing narrative of the video game industry’s perceived resilience to periods of economic turmoil. This goes back to 2008’s Great Recession, where the games industry didn’t seem to take as big of a hit as analysts thought it should have. One argument made at the time was that video games, despite a high initial cost of entry, can be a surprisingly efficient dollar-to-hour use of consumers’ entertainment budget.

That same reputation carried forward to the 2020 pandemic lockdowns, which shut down many other forms of entertainment, but didn’t make an immediate impact on the gaming release calendar. This was largely a statistical mirage, due to how video games’ production cycle works, but has led to a sustained period of audience growth. Naturally, VC firms followed.

That makes PitchBook’s look at the overall size of the games industry interesting, in that it encompasses five separate sectors: development (game creation), operations (monetization/optimization strategies), access (hardware and distribution platforms, i.e. digital storefronts like Steam), content (the games themselves), and experience (“ancillary products and services” such as streaming, in-game marketplaces, and social platforms).

Content, or actual game creation, typically makes up the bulk of deal value in the gaming sector, but there’s a growing market for innovations in development. (PitchBook Image)

Generally, market analysis for the games industry will measure the size of the market by focusing on overall consumer spending, such as Newzoo’s January report, which measured the global games market as a $92.2 billion industry.

PitchBook, by comparison, estimates the overall market for gaming to be $447.3 billion as of 2022, with a compound annual growth rate of 5.9%.

This is by virtue of touching on parts of the overall sector that most other market estimates don’t typically cover, such the growing field of online gambling sites like DraftKings. These are technically also gaming apps, even if they aren’t anything that’s usually be considered a video game.

PitchBook’s report highlights the following opportunities for VC firms in 2023’s games market:

  • Generative AI, though it’s still in early stages, could lower top games’ development costs through automating some of the coding process. With “AAA” video games possibly costing as much as $540 million to make (2018’s Red Dead Redemption 2), an AI coding “co-pilot” could knock off some man-hours in production.
  • “Low-code” development tools, such as GameMaker Studio, let developers without a technical background pursue game development. In an environment where dedicated technical game developers are reportedly getting harder to come by (related: a 2021 earnings call by Unity), there’s an opening for investors to help create engines and tool suites that help make up the difference, as well as open-ecosystem creative games such as Roblox, Minecraft, and Rec Room.
  • Free-to-play games’ audience share expanded rapidly in 2022, which has led to a new wave of interest and investment in in-game advertising methods.
  • “Indirect revenue” in the games industry is a $100 billion market, which encompasses esports, coaching services, IP licensing, and collaborations with brands outside video games, such as Rec Room’s recent crossover with Masters of the Universe.

At the same time, PitchBook lists several potential issues for would-be games-industry investors:

  • The tendency towards toxic workplace culture and “crunch” at all levels of the games industry makes employee retention a serious issue. According to the Game Developer Conference’s State of the Game report for 2023, well over half of professional game developers have been in the field for 10 years or less.
  • In the face of high inflation and the slow move toward higher base prices for physical AAA games, there’s a real risk that consumer spending will drop in 2023.
  • Blockchain/Web3 games have struggled to find an audience, particularly following the late-2022 crypto winter, and still don’t have a single “killer app” to drive adoption. A lot of game developers in the Web3 space are simply making Web2 games with a Web3 marketplace bolted onto them, rather than anything that really leverages the technology. It’s entirely possible that despite some true believers in the space and a handful of games that have found an audience, particularly in Southeast Asia, blockchain gaming may simply be dead on arrival.
  • “The attention economy is a zero-sum game,” Bellomo writes. At the end of the day, games will always be a highly competitive market, because every game is working against one another, as well as other forms of entertainment, for a finite amount of every consumer’s leisure time. This is an issue that’s only compounded by digital distribution networks, which make it cheap and easy for even small developers to get their games in front of a global audience.
  • Video games suffer more security issues, such as denial-of-service attacks, than any other industry, with a nearly 170% increase in cyberattacks since last year.
  • The games industry generates a lot of data on a daily basis, and struggles to find ways in which to use it. In the event of widespread Metaverse adoption, that data load could spike to as much as 3 to 4 petabytes annually, with few solutions yet for creating appropriate analytics tools.
  • Esports is traditionally an attractive field for would-be investors to create a beachhead in the games industry, but at the same time, has struggled for years with profitability. Last year saw the content platform FaZe Clan go public in July, only to face delisting by January. The audience for esports is there, with big games like Dota 2 attracting audiences in the millions, but the money’s harder to find.
  • Cloud gaming is projected to blow up in a big way in the near future, as mobile gaming continues to grow in popularity and 5G continues to gain availability, but it’ll be an uphill climb against current market forces like local play.


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