Dive into the mobile gaming market

Inderes published extensive company report on Rovio on September 6, 2022. Here is the summary of report's section about gaming industry.

The size and growth of the global games market

Newzoo estimates the global games market to grow by around 2% to USD 197 billion in 2022. The projected stable performance would be good given that the gaming market got a huge boost in 2020- 2021 as a result of the COVID pandemic. Newzoo expects the market to continue to grow at around 5% in the coming years, driven in the big picture by growth in both the number of players and the amount of money spent on games.

Geographically, the biggest market is formed by Asia-Pacific that covers some 49% of the market of which China’s market forms around one-half. The second and third largest geographical areas are North America (26%) and Europe (17%).

Mobile devices (smartphones and tablets), which are relevant for Rovio, together account for just over half of the total global games market with a projected value of around USD 104 billion (+5% growth). Newzoo forecasts that the mobile games market will continue to grow at 4.3% between 2021 and 2025, making mobile gaming the fastest growing gaming segment. Rovio's key target markets are North America and Europe, and the company's strategy is to grow revenue faster than the Western market growth (~4.6%).

Newzoo's forecast for mobile games growth this year seems quite optimistic when compared to the data collected by Sensor Tower on the development of the market. According to Sensor Tower, the amount of money spent on mobile games in the US fell by around 9.6% in H1'22. In the Puzzle (-8.8%) and Hyper-casual (-2.2%) genres, which are relevant for Rovio, the decline was slightly smaller. Additionally, according to data.ai, the global mobile games market fell by 3.8% in H1'22. This development is driven not only by the post-COVID digestion but also by Apple's IDFA change and its impact on user acquisition of mobile games. Moreover, accelerating inflation and a weakening economic outlook are contributing to discouraging some consumers from spending money on games. Despite the short-term challenges, we share the belief of Rovio and market research companies that the market will return to growth in the coming years.

Mobile games market

The current mobile games market was virtually born only in 2007 with the release of the first iPhone and has grown exponentially since then. The growth has been driven by factors such as the increased number of smart phones, the continued rise in popularity of gaming and the increase in the amount of money spent on games. Today, especially in more mature western markets, growth is primarily driven by the increase in the amount of money spent on games.

A fast-growing market with a low entry barriers has historically attracted a lot of competition. The number of mobile game companies, and therefore the number of games published, grew rapidly in the last decade. In 2016, a record 280,000 new mobile games were released on Apple's App Store. Since then, the number of games released has dropped significantly, as game companies have prioritized keeping their existing live games as viable as possible for as long as possible. On average, player retention in mobile games is very low. According to Liftoff’s report, on average around 3% of players open a game after 30 days of downloading it.

According to PocketGamer, there were around one million active mobile games on the App Store at the end of 2021. Although the pace of new games entering the market has slowed in recent years, it’s still very challenging to stand out in the market. Increased competition over the years has led to a significant increase in user acquisition costs as more and more games compete for the attention of the same mass of players. Standing out in today's market requires either the creation of a unique and successful game concept and/or large resources for large-scale user acquisition and marketing. This favors the big gaming companies with strong resources.

What makes the mobile games market and the F2P business model attractive is that digital distribution platforms have the potential to very quickly attract a large global player base. If a game release is successful, it can generate hundreds of millions or even billions of euros in revenue over its lifetime. This requires the game to enter the top 100 list of the top-grossing games in the major markets and stay there as long as possible. To reach billions in revenue, the game needs to be near the top of the list and stay there for several years.

However, creating long-term success in the mobile games market is very difficult and competition is fierce. According to analytics firm Sensor Tower, in 2020, 65% of the mobile games revenue in the US market was generated by games in the top 100. This contributes to the fragility of the mobile games industry, where the odds of widespread success are very low, and in the end a relatively small number of successful games capture most of the industry's revenues.

Market trends

The mobile games industry is evolving rapidly, and success requires companies to be adaptable and quick to respond to the right trends. In the following sections, let’s take a brief look at some of the trends in the mobile games industry.

Consolidation accelerates in mature Western markets

The mobile games market remains rather fragmented, but in recent years there has been a marked acceleration in the consolidation of the market. Particularly, the Western market has already reached a fairly mature stage and the growth rate of the market has slowed down. As a result, we believe that increased competition and increased reliance on user acquisition are the key trends driving market consolidation.

Consolidation is supported by the fact that the large game portfolios of the major game companies reduce the risks associated with individual games. This also makes cross-promotion of games within your own games effective. In addition, sufficient scale and strong financial resources facilitate game development and user acquisition. With increased economies of scale, more and more games companies have made M&A a more central part of their strategy. Rovio is also actively exploring potential acquisition targets and we believe the company will continue to play a buyer's role in the consolidation of the market.

Apple's restrictions on sharing IDFA data make user acquisition difficult

Apple restricted the sharing of IDFA data in the April 2021 operating system update (iOS 14). IDFA is the information that identifies users and allows advertising services (e.g. Facebook) to offer advertisers the ability to precisely target their advertising. This change has made it more difficult for games companies to acquire players in the same targeted way as before.

With Apple's IDFA change, market-wide in-game revenue has declined this year, although downloads have continued to grow. This indicates that targeted advertising is more difficult than before and therefore user acquisition isn’t as effective as before. Rovio's portfolio, which focuses on casual games, has been well suited to the current market situation, with a very broad potential player base. In addition, the strong brand awareness of Angry Birds generates a lot of organic downloads for the games in the app stores.

The IDFA change will continue to create uncertainty in the short term, but we expect the major gaming companies to be best positioned to adapt. Large game portfolios and large player numbers make it easier to release new games to an existing audience. Large companies also tend to have strong capabilities in analytics. In turn, small game studios may find it increasingly difficult to gain visibility and publish new games. This may further accelerate market consolidation.

Pressure faced by app stores

In recent years, Apple and Google have faced increasing pressure to lower the 30% commission they charge on all in-app purchases of games downloaded from app stores. Last year, the issue was highlighted in the legal battle between Apple and Epic Games.

In September 2021, the lawsuit was granted at least a temporary injunction. Interestingly for game developers, this required Apple to allow the option to indicate alternative payment methods for ingame purchases. This would allow players to make payments via different method than directly ingame with Apple's payment service. If implemented, this would allow Rovio to make clear cost savings and at the same time strengthen the network effects between Rovio's games. Rovio could build a unified network and "loyalty program" between games, so that, for example, virtual currency purchased in one Rovio game would also work in other games. Rovio has a history of developing technology for a fan loyalty program, and as such we believe the company will be able to respond fairly quickly if and when Apple is forced to open its doors to alternative payment methods. However, this could take a long time as Apple is resisting the changes.

Increase in user acquisition costs

As the number of mobile games has grown and the time available to players has remained relatively constant, competition for players' screen time and money has increased significantly over the last 5 years. Standing out from the hundreds of thousands of games is challenging, and game companies can make a real difference through game quality and effective user acquisition. An increasing number of games companies have user acquisition budgets in the tens or even hundreds of millions of euros per year. Increased investment has been reflected in higher unit costs for user acquisition. In the long term, we expect user acquisition costs to continue to rise.

Rising quality standards

The strong growth of the mobile games market and the low entry barrier has historically led to a very variable quality of mobile games. The performance of today's mobile devices is practically on par with that of game consoles, and this has made it possible to bring higher quality and larger games to mobile. For example, Epic Games' hugely popular Fortnite can be played on consoles, PCs and mobile devices. Rovio is also working specifically on the development of multi-platform games at its new Montreal studio.

Recently, more and more game IPs originally developed for console/PC have started to be ported to mobile devices (e.g. Call of Duty). As the quality of games increases, so do players' expectations of them. Increasing quality requirements may lengthen mobile game development cycles and increase game production budgets.

The role of analytics is emphasized

Analytics plays a very important role in the mobile games business and is becoming increasingly important. Analytics allows fine-grained analysis and segmentation of the player population into very small groups. This allows developers to test different game experiences and monetization paths within games based on players' actions and solutions. Analytics can also help companies optimize and improve user acquisition. Rovio has invested heavily in its proprietary technology platform and the use of analytics is a key part of the company's business model.

Emphasis on social elements in games

As the cost of user acquisition rises, it’s important for mobile game companies to try to keep players engaged for as long as possible. The aim is to create social elements in games, giving players more reasons to return to the game. Today, more and more games have increasingly positioned themselves as social media platforms (e.g. Fortnite, Roblox), where you spend time with friends and other players in addition to playing the game itself. For example, there have been concerts within Fortnite by popular artists that have attracted audiences of over 10 million players. One long-term trend is metaverse, where more and more of people's interactions in the real world are transferred to the virtual worlds of games. One of the areas of research at Rovio's Montreal studio is the future of social gaming.

Augmented reality (AR), virtual reality (VR) and location-based games

With the huge popularity of Niantic's Pokémon GO, released in the summer of 2016, several game developers became interested in the potential of AR and location data in mobile games. Utilizing these enables not only completely new game concepts, but also, for example, location-based advertising. However, no other game has yet managed to replicate the success of Pokémon GO. Virtual reality (VR) has also been a trend in the games industry for a long time, but VR has not yet made a breakthrough on a large scale. So far, it seems that the VR market is still developing slowly in mobile games.