Sponsored By

Should You Get a Job in Video Games?

Video gaming may seem like a great industry to work in. The industry is growing faster than the US economy, and there have been tons of M&A activity in the news. But it's also incredibly competitive and not very profitable for lots of industry players...

Paul Wu, Blogger

December 15, 2014

11 Min Read

Video gaming may seem like a great industry to work in, after all, market trends seem positive. From 2009 - 2012, the U.S. video game industry increased in size by more than 9% – four times the growth rate of the U.S. economy during the same period. Gaming related acquisitions have driven the 2014 M&A landscape. Stats also indicate that the average gamer is now 31 years old and 48% female, meaning audiences are diversifying, and buying/playing games becoming more widely accepted.

However fast industry growth can be misleading. For example, industries with fast growth and low barriers to entry tend to draw in new competitors. Fast growth also generally puts suppliers in powerful position, which can decrease an industry’s overall profitability.

So the question remains: is video games an attractive industry to work in?

In this post I’ll try to answer this question by using the porters 5 forces framework. This framework draws on concepts from industrial organization economics to derive five forces that evaluate the competitive intensity and therefore “attractiveness” of a market. Attractiveness in this context refers to an industry’s potential for profits.


The five forces are categorized as follows - three forces from vertical competition: threat of substitute products/services, threat of established rivals, threat of new entrants, and two forces from horizontal competition: bargaining power of suppliers and bargaining power of customers.

Threat of substitutes

Substitute products refer to any other product that performs a similar function. For example, email as substitute for letter mail. These alternate products can limit profit potential by placing a ceiling on prices. Early warnings signs usually include:

  • An attractive price to performance trade off. Eg video rental compared to online rental services like youtube.

  • Low buyer switching cost

In my opinion, video game substitutes include a diverse range of recreational activities such as watching movies, playing outside, etc. However the industry has continued to proliferate despite these substitutes because of differences in performance. Gaming is interactive and continues to provide a unique, differentiated experience. Threat of substitutes – low.

Threat of established rivals

High rivalry limits profitability of an industry through price discounting, new products, advertising campaigns etc. This is typically dependent on two factors: (1) intensity of competition, and (2) basis of competition.

Intensity of rivalry is high when:

  • Competitors are numerous or roughly equal in size and power.

  • Industry growth is slow because slow growth encourages fights for market share.

Basis of competition:

  • Price competition is bad since it reduces profitability for entire industry. Other dimensions of competition, such as features, support, delivery time, brand image are better for an industry.

At first glance, intensity of rivalry within video games may seem high due to the numerous game developers in the industry.  Market research firms estimate the current number of game developers to be in the range of 90,000 (including small indie teams). But rivalry is dependent on game genre. For example a first person shooter developer doesn’t really compete for the same audience as an educational puzzle developer.

When we look at basis of competition, the good news is that price does not appear to be a huge factor. Segmenting by platform - console game prices appear to have reached parity across developers. Furthermore PC/mobile games have already raced to the bottom by embracing freemium, so price is not a distinguishing characteristic at all.

The video games industry has a ton of genre specific rivals but qualitatively it appears that rivals compete primarily on features, quality, and brand. Therefore threat of this force essentially boils down to the genre you’re competing if. Depending on if you’re developing a game in a crowded space, I’d say the threat of established rivals can be either high or low.

Threat of new entrants

New entrants puts a cap on profit potential of an industry. When threat is high, incumbents must lower prices or increase investment to deter new competitors. The threat of entrants generally depends on two factors: (1) entry barriers and (2) the reaction from incumbents.

Main contributors to barriers to entry:

  1. Supply side economies of scale. Firms that produce bigger volumes realize lower costs per unit because they can spread fixed costs over more units. This is the old game publisher model, when the business revolved around producing consumer-packaged goods. Large game publishers such as Activision and EA could force new entrants to either seek large-scale investment or accept a cost disadvantage.

  2. Demand side benefits of scale. Buyers show higher willingness to pay for a company’s product as a company increases its customer base, with the classic example being a telephone company.

  3. Customer switching costs. The higher the switching cost, the harder it will be for new entrant to gain customers. Vendor management system and infrastructure companies generally have high switching costs.

  4. Capital requirements. Financial resources required to compete at parity. Use to build credit, stock inventory, fund initial losses.

  5. Advantages independent of size. Eg. Proprietary technology, access to raw materials, brand identities, cumulative experience.

  6. Access to distribution channels.

  7. Restrictive government policy. This can heighten entry barriers through regulation or make entry easier through subsidies.

Expected retaliation:

If reaction is vigorous and protracted enough, the profit potential of participating in the industry can be less interesting. Newcomers should fear retaliation if:

  1. Incumbents have previously responded vigorously to new entrants

  2. Incumbents possess substantial resources to fight back, including excess cash or clout with partners

  3. Incumbents can cut prices to retain market share

  4. Industry growth is slow, so new entrants can only enter by taking market share from incumbents.

First looking at barriers to entry: supply side economies of scale don’t really exist anymore in the age of digital distribution. The capital requirements for indie game development are generally very low. And new services like Steam and the AppStore level the distribution playing field, lowering barriers of entry.

However demand side barriers of entry potentially exist if the genre provides a social experience, such as an MMO, MOBA, or even social casual game. Gamers can also exhibit high switching cost if they’ve invested substantial time and money in an existing game. Incumbents can increase barriers to entry by allowing things such as backwards compatibility or endowing existing customers with free items to incentivize downloading their latest product. Other advantages such as brand identity and experience also matter a lot, since talent (perceived or technical) is a huge driver of success in creative fields.

With respect to retaliation: large game publishers have historically been welcoming of Indies and the mod community. After all it’s impossible to compete on price when games are free to play. However it can get ugly on the marketing side, with huge spikes in CPI bids, particularly during the holiday season and for core genres.

My current read is that the threat of new entrants is high, mainly because barriers to entry are still low and the bigger developers have not mastered the use of social, increased switching cost, brands, talent etc to increase barriers to entry. Retaliation barriers can also be overcome, again, by competing in less competitive game genres.

Power of suppliers

Suppliers can capture more value for themselves by charging higher prices. Within gaming I consider suppliers to include the platforms such as Sony, Microsoft, Steam, Apple, Google. Also included are game service providers, such as: Twitch, Unity, SWRVE, Playhaven etc. Supplier power is characterized by a few traits.

  • Supplier industry is more concentrated then industry it sells to. Eg. Microsoft’s monopoly on operating systems vs fragmentation of PC assemblers.

  • If supplier does not depend heavily on the industry for its revenues.

  • Industry participants face high switching costs, eg learning a new programming system.

  • Suppliers offer differentiated products

  • Lack of substitutes in supplier group

  • Supplier can forward integrate into the industry

Of the suppliers I listed, the platform providers certainly check the boxes of most of the above listed traits. Fortunately each platform does not posses a complete monopoly and competition provides some measure of safety for game developers. The exception to this is Steam, which is estimated to account for ~70% of PC game distribution. Fortunately for now, Valve is heavily reliant on the gaming industry for revenues and may not exploit its monopoly. Regardless, the PC space needs more distribution platforms; alarm bells should sound if Valve ever diversifies into alternate revenue streams. A warning history lesson was when Facebook rose to prominence as a gaming platform several years earlier, and policy changes crippled gaming companies built on social. Facebook’s early dependence on Zynga for revenue didn’t stop policy changes as Facebook diversified its business into more traditional advertising.

Other game service providers have less power as they operate in fairly crowded environments, with the exception of Twitch. The market for live streaming games is also likely ripe with opportunity for a competitor.

I believe that power of suppliers is low for now, as the likelihood of abuse is unlikely due to the forces of competition within non-PC suppliers.

Power of buyers

Customers can capture value by forcing down prices, demanding better quality or service, playing participants against each other, at the expense of the industry profitability. This is characterized by a few traits:

  • Few buyers

  • Industry products are undifferentiated and buyers can find an equivalent product

  • Buyers have low switching cost in changing vendors

  • Buyers can integrate backwards and produce product themselves

  • Product represents significant fraction of buyer’s budget

  • Buyer is strapped for cash

  • Buyer’s care less about quality

Fortunately for the gaming industry, the buyer population is increasing and buyers are less price sensitive when they spend on entertainment goods. However increased competition from existing rivals and new entrants means products need to be further differentiated through quality, IP licensing, and feature development. Power of buyers can also be low or high depending on the genre of the game.

Final thoughts

Threat of substitutes => Low
Threat of established rivals => Depends on genre
Threat of new entrants => High
Power of suppliers => Low
Power of buyers => Depends on genre

With this framework in mind, gaming can be an attractive industry to work in, as long as you join the right player. My advice is to consider an established incumbent who can leverage core competencies (existing user base, cumulative experience, brands etc) to increase market share in a crowded genre, a nimble startup able to exploit untapped genres, or a supplier with monopolistic market advantages.

Read more about:


About the Author(s)

Daily news, dev blogs, and stories from Game Developer straight to your inbox

You May Also Like