Traditional gaming shrinks to 26.7% of game and esports revenue as overall U.S. sales head to $72B by 2027 | PwC

Total video games and esports revenue in the U.S. was $54.1 billion in 2022 and is forecast to reach $72.0 billion by $27 billion, according to a report by PwC.

That represents a 5.9% compound annual growth rate (CAGR) from 2022 to 2027. Year-on-year growth in 2022 was 2.4%, representing the lowest growth rate the video games and esports market in the U.S. has experienced in five years.

Those numbers by themselves aren’t surprising, but I gained some interesting insight in an interview with CJ Bangah, a market research leader who worked on the PwC Global Entertainment & Media Outlook. It’s worth noting that traditional games are only 26.7% of total U.S. game and esports revenues now, and there are different drivers pushing gaming forward than there used to be. But first, let’s look at details.

The details

A post-COVID-19 pandemic market correction likely played a role in this, because consumers returning to regular working life had less free time and disposable income to spend on video games. The growth rate is expected to increase to 5.1% in 2023, and oscillate between 6.6% and 5.6% for the remainder of the forecast period, said Bangah.

The composition of the video games market in the U.S. typifies that of a modern Western nation, with a rapidly growing social and casual gaming sector and a robust traditional gaming sector that exhibits slower overall growth as it transitions away from physical media to digital sales and microtransactions, PwC said.

Previously the largest video games market in the world, the U.S. was overtaken in 2021 by China’s rapidly
growing appetite for games. Nonetheless, the U.S. will remain one of the most significant presences in the
global video games market, with U.S.-based companies like Apple, Google and Microsoft holding substantial influence over the future trajectory of video gaming.

The drivers

I asked Bangah about whether Hollywood was lifting the games industry with blockbusters like the Super Mario Bros. Movie and shows like The Last of Us on HBO. She said, “I don’t know that we see Hollywood lifting the games industry. I think we see the games industry growing increasingly mature, and starting to have a lot more in common with the other parts of the entertainment and media ecosystem than it did in the past.”

She added, “Take esports as an example. In the esports breakdown, you have streaming rights, you have sponsorships, you have live experience, and ticket sales. That looks a lot more like traditional sports, right? If you look at the video game advertising revenue forecasts that we have, this is absolutely starting to skew towards advertising representing more from a monetization perspective for the sector than it ever has before.”

And she said, “And, we’re forecasting advertising like doubling and growth in the forecast period, in terms of revenues. The Hollywood influence there, or the bigger, more traditional market players paying more attention to video gaming, is coming from (multiple) drivers.”

Hollywood is looking to video games to find growth. And consumers are going deep into video game experiences of all kinds — something she calls omnichannel consumer experiences.

“If I can interact with the game, and a theme park experience, and I can watch the television show or the movie, and I can listen to the podcast, and I can play the game,” Bangah said. “And I connect with an online community and I can watch the esports, it’s just rounding out a more complete view of a customer entertainment experience that really puts the player at the center and puts the customer experience at the center.”

Another driver for gaming growth is packaging and bundling.

“We’re very much seeing particularly for the OTT (over-the-top streaming) providers, the need to have a more complete test for how they drive relevance and warrant the subscription that fuels so much of their business. And video games have been a really attractive acquisition target for some of the big streaming providers for that reason,” she said. “They can then build that more comprehensive content catalog and bring more relevant offerings to consumer suppliers.”

Gamers are getting access to much deeper content. The companies are providing much more content to satisfy the demands of that gaming community.

“From a corporate perspective, the companies have additional ways to monetize the consumer. I can make money on the gaming subscription, I can make money on video game ads. I can make money creating live experiences for them to interact with. I can make money doing a rev share with a major studio or Hollywood company. I can make money selling them hoodies, sweatshirts, hats, stress balls, you name it. From a console player experience or from a consumer experience,” she said.

Bangah added, “They can interact with characters they love through more [minutes of] their day, through form factors. Video games are one of the best use cases that we have for entertainment that truly transcends other categories. They provide an immersive experience that takes consumers into new worlds and allows them to deeply, deeply explore things.”

And she said, “I think all we’re seeing is a continued maturity that’s going down that trajectory of something that humans like to interact with things that we love, and we love video games, and so interacting with the concept of all of that through more form factors is an attractive value proposition.”

In other words, there is no limit to video game fandom.

“A few years ago, we recommended the rest of the entertainment and media ecosystem do a better job at connecting with their fans, right? So we were looking at what you see in video games and having conversations with some of the traditional media companies. And we pointed to it as fans will become the greatest advocate you could ever ask for,” Bangah said. “It allows you [as a company] to then spend more of your money as a video game publisher, creating a great player experience investing in world building.”

Instead of game companies having to attract people to their platforms, fans can do a lot of the heavy lifting for you, she said.

“And it completely changes the dynamics of what you’re able to do, and how compelling you’re able to make your offerings over time,” Bangah said. “Because you don’t have to use capital for acquisition. You can use capital to protect and grow those relationships with your fans, and they’ll help you drive the expansion to their friends, their family, so on and so forth.”

Social and casual gaming

Social and casual gaming contributes the largest amount of revenue to the US’ video games market. In 2022, social and casual gaming revenue in the U.S. was $37.1 billion, representing 68.6% of total video games and esports revenue. Year-on-year growth in social and casual gaming was 3.6% in 2022, falling from 9.3% in 2021. The growth rate is forecast to increase to a high of 8.3% in 2024 and remain above 7.0% thereafter.

In the next five years, social and casual gaming will increase its revenue share to 73.8%, reaching $53.2 billion by 2027 at a 7.4% CAGR.

The largest generator of social and casual revenue in the U.S. is in-app games advertising, having surpassed app-based social and casual gaming in 2022. In 2022 in-app games advertising revenue comprised 52% of social and casual gaming and totaled $19.3 billion. This will grow to $28.7 billion by 2027, increasing at a robust 8.3% CAGR. In-app games advertising also avoided the sharp drop in year-on-year growth exhibited by the broader U.S. games market in 2022, with the growth rate increasing from 8.0% to 11.4%.

It was a more-challenging year in 2022 for app-based social and casual gaming in the U.S. Year-on-year
revenue exhibited negative growth of -3.6%, falling from $18.3 billion in 2021 to $17.6 billion in 2022. The long-term forecast for app-based social and casual gaming is more positive, with revenue expected to exceed $24.3 billion by 2027 after increasing at a 6.7% CAGR. With a slower growth rate than in-app games advertising, app-based social and casual gaming will reduce its share of the sector from 47.4% in 2022 to 45.8% in 2027.

Mobile gaming

It was a significant year for the mobile gaming market in the U.S. in 2022 because Apple’s iPhone overtook Google Android to claim the largest number of users there. As reported by the Financial Times, Apple’s active installed base, which accounts for users on both new and second-hand devices, claimed 50% of the total market.

Apple has always enjoyed a larger presence in the U.S. mobile market than in other countries, but this
represents the first time iPhone has become the dominant installed base. Following this trend, Apple’s presence in the video games industry is forecast to grow. In June 2022 S&P Global reported that video games accounted for 70% of the App Store’s revenue, with most of this revenue stemming from free-to-play mobile titles.

This is where mobile games are offered for free in return for either watching/viewing regular advertisements or separating out parts of the game as in-app purchases, with the base layer being offered for free.

Alongside its substantial revenue from the App Store, Apple is also expected to expand its presence in mobile gaming through Apple Arcade, the company’s gaming subscription service, first launched in 2019. Apple Arcade provides access to over 200 curated mobile games for a monthly subscription fee. Although it has only a fraction of the App Store’s gaming revenue, Apple Arcade is expected to increase its user base to 70 million by 2025, and its year-on-year revenue to $1.2 billion.

Despite falling behind Apple in 2022, Alphabet’s Google Android still represents a substantial portion of the mobile installed base in the U.S., and it remains the leading mobile OS in most countries outside the U.S. Like Apple, Google makes most of its app revenue from commissions on the Google Play Store. Google also has a competitor to Apple’s gaming subscription service, named Google Play Pass.

But the last 12 months have been difficult for Alphabet. In September 2022, Google officially shut down
Google Stadia – its cloud-based gaming service – after failing to gain traction in the cloud gaming market.

The most-popular mobile games in the US are primarily free-to-play casual puzzlers, like Candy Crush Saga and Coin Master, as well as digital versions of classic physical games like Solitaire Grand Harvest and Bingo Blitz. Beyond these is a growing trend for cross-platform experiences that balance the depth of a traditional game with the accessibility of casual gaming. Roblox is by far the most popular of these, while other notable cross-platform games include Minecraft, Genshin Impact and Among Us. This trend will likely increase as traditional gaming publishers seek to expand their businesses by releasing games that appeal to both audiences, however they often have poorer graphics in comparison to today’s titles. A recent example was provided by Rockstar Games, which released several older Grand Theft Auto titles, like Grand Theft Auto: Vice City and Grand Theft Auto: San Andreas, onto mobile devices.

Traditional gaming

Traditional gaming in the U.S. has long been eclipsed by the rapid growth of social and casual gaming. In 2022, traditional gaming represented just 27.6% of the country’s total video games and esports revenue. Because growth in this sector is occurring at a much-slower rate that revenue share is expected to decline further in the next five years, falling to 22.8% by 2027.

Nonetheless, the U.S. traditional gaming sector still generates more revenue than the total video games
market of any other country apart from China and Japan. Traditional gaming revenue in the U.S. was $15 billion in 2022 and is forecast to reach $16.5 billion in 2027, increasing at a 1.9% CAGR. That’s a pretty slow rate.

Year-on-year growth in traditional gaming was -0.8% in 2022, the second year running that the sector has
exhibited negative growth, likely due to the post-COVID-19 pandemic market correction. But 2022 was also a quiet year for the traditional gaming market, with fewer keystone titles released than usual. This was due to development schedules having been disrupted by the pandemic, with many developers having had to adjust to “work-from-home” set-ups. With 2023 set to be a busier year, growth is forecast to resume at 2.5%, before falling steadily to 1.4% in 2027 at the end of the forecast period.

The Nintendo Switch was the biggest-selling console in the U.S. in 2022, followed by the PlayStation 5 and the Xbox Series X/S, which both have significantly higher price points than Nintendo’s six-year-old console. The biggest-selling game of the year was Call of Duty: Modern Warfare II, with other popular titles including Bandai Namco’s Elden Ring, Lego Star Wars: The Skywalker Saga and Pokémon Legends: Arceus.

These core game releases have been helped by the 2021 release of Unreal Engine 5, which is able to handle up to 10 billion polygons (the shapes that build meshes within the game), around 7 billion more than Unreal Engine 4, as well as an improved lighting system over its predecessor. There have also been technology improvements to these games including the proximity chat function.

Rumored releases for the PlayStation 6 are to be sometime after 2027, approximately 7 years after the launch of the PS5 which is a similar timeframe to the gap between previous PlayStation console generations. Similarly, rumor has it that Xbox’s next console will be released in 2028.

However, the rumors around Nintendo’s latest console are that we should expect it much sooner, possibly
even in 2023 as a sequel to the Switch, though it could potentially be launched in 2024 depending on the
global economic situation later this year, PwC said.

Console games

Console games generate the majority of traditional gaming revenue in the U.S., amounting to $9.5 billion in 2022. This is forecast to rise slightly to $10.1 billion by 2027, increasing at a 1.3% CAGR.

The sluggishness of console games is primarily due to the global reduction in sales of physical games. Physical sales generate the largest portion of console games revenue in the U.S. At $4.2 billion, these sales represented 44.2% of the sector in 2022. This share is forecast to shrink to 34.2% by 2027, as physical revenue drops to $3.5 billion at a -3.8% CAGR.

Yet the decline in physical sales is not the only factor at play. Digital console games revenue is also expected to exhibit flat growth, from $3.4 billion in 2022 to $3.5 billion in 2027 at a 0.5% CAGR. That console games has slight forecasted growth stems entirely from online/microtransaction revenue, which will grow from $1.9 billion 2022 to $3.2 billion, increasing at an impressive 11.0% CAGR, by the end of the forecast period.

Two other important factors are likely at play here. The first is free-to-play gaming, which is becoming
increasingly popular in the traditional gaming sector. Games like Fortnite, Apex Legends, Call of Duty: Warzone and Destiny 2 all allow players to invest significant time into their games at zero expense, with revenue generated through purchases of optional extras like cosmetic items, avatars, or additional downloadable content (i.e., DLC).

These games are also increasingly cross-pollinating between consoles, PCs and mobile phones, with games like Fortnite and Genshin Impact allowing gamers to play together on a wide range of devices. This enables these games to generate vast amounts of revenue, with Fortnite alone estimated to have accrued more than $21.0 billion in the last four years.

The other factor at play is gaming subscription services. Microsoft’s strategy for its current generation of
consoles revolved around Xbox Live (a software-as-a-service model which allows users to play against each other) and Xbox Game Pass, a Netflix-style subscription service that gives access to a large library of games on payment of a monthly fee.

This includes access to Microsoft’s existing library of published games, third-party titles selected by Microsoft and “Day One” access to new Microsoft published games. In response, Sony has reoriented its existing PlayStation Plus subscription service, which previously facilitated access to online services and a monthly selection of free games, to function instead as a PlayStation-oriented version of Game Pass.

These services will be pulling revenue previously generated by physical and digital sales into the orbit of online and microtransactions, as gamers turn away from individual purchases for more cost-effective subscriptions. This comes as the increasingly competitive games ecosystem is becoming more expensive to market popular games.

Whether these strategies will yield long-term success is yet to be determined. Sony’s approach is less focused on subscriptions, with the company still placing equally heavy emphasis on physical and digital releases of premium blockbuster titles like God of War: Ragnarök, alongside new hardware like PSVR2.

Meanwhile, speaking at WSJ Live in 2022, Microsoft’s Head of Games Phil Spencer revealed that Game Pass currently represents 15% of the company’s total gaming revenue, commenting, “I don’t think it gets bigger than that.”

Although Microsoft has some eye-catching titles coming to Game Pass in 2023, including Bethesda’s hotly
anticipated RPG Starfield, the ongoing FTC investigation into Microsoft’s acquisition of Activision Blizzard could hinder the company’s plans for Game Pass, which includes the launch of Diablo IV directly onto the service.

Many games have gone down the ‘pay to win’ route, where players can pay for extra features within the game that are normally unlocked later on, giving them an advantage, such games include Clash of Clans and Warframe.

Cloud gaming is also continuing to gain traction in the U.S. and across the globe. In February 2023, Microsoft partnered with Nvidia to bring expansion to Nvidia’s GeForce Now cloud games service to include many top-rated Xbox games such as Call of Duty and Minecraft.

PC games

PC games revenue in the U.S. was $5.5 billion in 2022 and is forecast to reach $6.3 billion in 2027, increasing at a 3.0% CAGR. Year-on-year growth of PC games in 2022 was -2.1%, with the sector exhibiting negative growth in all areas. Growth is expected to resume in 2023 at a respectable 3.5%, with the rate gradually slowing through to the end of the forecast period.

The PC games sector in the U.S. is overwhelmingly reliant on online/microtransaction revenue, which comprises 85.2% of the sector’s total revenue. As with console games and social and casual gaming, for the PC all the biggest games are free-to-play. This includes not only aforementioned multiplatform games like Fortnite, Apex Legends and Roblox, but also PC-exclusive titles like League of Legends, Valorant and Counter-Strike: Global Offensive.

In September 2022, Electronic Arts moved its long-running social simulation game The Sims 4 to a
free-to-play model, with the game reaching an estimated 30mn players. As a result, PC games
online/microtransaction revenue is forecast to approach $5.4 billion by 2027, after increasing at a 2.9% CAGR. Digital PC games sales generated $808 million in revenue in 2022, which is forecast to grow to $949 million by 2027, increasing at a 3.3% CAGR.

Most of this market is dominated by Valve’s Steam service, which is responsible for between 50% and 70% of all global PC games’ downloads. Yet Valve’s hold on the PC games market has been challenged in recent years, with Epic Games launching its own storefront in 2018 and Microsoft’s Game Pass service having gained traction on PCs more recently.

Twitch has risen in popularity since it was acquired by Amazon in 2014 and helps to provide the gaming ecosystem with exciting content, showing gamers how to play through games as well as speed-run attempts, this is enticing more gamers towards PC gaming, helping to drive the rise in sales.

Esports

Total esports revenue in the U.S. will grow from $455 million in 2022 to $662 million in 2027. This is equivalent to an increase at a 7.8% CAGR, which is below the global average of 10.9%, although this is likely due to the
esports ecosystem being well established in the US. Sponsorship will lose its position as the largest segment throughout the forecast period to the media rights category, with revenue reaching $230 million in 2027. the fastest-growing segment – at 12.7% CAGR – will be media rights as many new deals are agreed, like the 35 new Blast Premier deals to stream and broadcast esports events.

This is in contrast to many other countries where the fastest-growing segment is consumer ticket sales, which in the US will only increase at a 5.6% CAGR to reach $46 million in 2027. U.S. ticket sales recovered strongly in 2022, up from $13 million in 2021 to reach $35 million, as many events reopened to live audiences again.

The U.S. has one of the most active esports ecosystems, with many high-profile tournaments being staged in the country. From October 7 to November 5, 2022, the U.S. hosted the group and knockout stages of the League of Legends World Championship, after the play-in round was held in Mexico City.

The group stages and quarter-finals were held in the Hulu Theater in New York City, the semi-finals were staged at the State Farm Arena in Atlanta and the finals were in San Francisco at the Chase Center. The overall tournament was won by South Korea’s DRX, after they beat home rivals T1 in the final.

In February 2023, it was announced the U.S. and Denmark would play host to two Rainbow Six: Siege
tournaments. The U.S. event will be held in November 2023 and follows on from the Six Charlotte Major, held in Charlotte, North Carolina, in May 2022.