S02E17 - Profit - Bridging the knowledge gap on Gaming or: Why gaming is the new and improved entertainment industry? (Edited Transcript)

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Daniel: Welcome to the Supply Chain Dialogues season two, episode 17. I'm Daniel Helmig. This is the final instalment of season two. While season three will focus more on supply chain sustainability, we thought we would end this episode with a bang. In the last episode, we discussed some of the best functional books we recommend.

 One of the books was a fiction novel called Tomorrow and Tomorrow and Tomorrow by Gabriel Zevin, named by both Amazon and the New York Times as book number one of the year. The book is, if you remember about gaming and the gaming industry, it's called The I mentioned that after reading the book, I had a much better understanding and appreciation about this industry, and that it is dwarfing the entertainment industry of the Netflix and Walt Disney's of the world.

We got a lot of feedback after the episode, and many wrote that they either had no idea that there could be a good book about this topic or just shared sentiments similar to mine. We thought then, let's [00:01:00] do in the last session in this season, another interview, peeling the onion of gaming and gaming industry a bit further, providing the older listeners with a different view into the topic and hopefully, how about a few facts that you can use at dinner conversation.

And for the younger listeners, as always, an opportunity to agree, disagree, or correct our statements. I asked an expert with 20 years of experience in gaming and an academic focus on gaming and computer science to join me for the show. He did not have to come from far since his final year at St.

He attends St.Gallen University to obtain his master's in computer science, but he spends the weekends in our house. Noah, welcome again to the show.

Noah Helmig: For sure, thanks for having me.

Daniel: You have been with us since the beginning of our advisory. It started with the design and redesign later of the webpage and content development of some of the training sessions that we use with our clients. You're the person as well behind the production of this podcast and its publication.[00:02:00]

When you're not working here, you are very involved in gaming and knowledgeable about gaming industry trends. So, I thought we could use the 10-question format as well for you and start with something that is right up your alley. So, if you're ready, here's the first question.

Noah: Go for it.

Daniel: What elements are crucial in making a game engaging for players?

Noah: It depends. More broadly speaking, there are elements that can be applied to every type of game. For example, how the user interface or UI is built, how smooth it is, and how intuitive it is. Another thing that's very important is movement. Allowing the players to express themselves in the way that they would like to with the character allows the players to be more engaged.

Daniel: Can you elaborate a little bit more on this UI thing?

Noah: Of course, the UI has a lot of information that tells you many different things. For example, how many lives you have or where [00:03:00] you are on the map. It's the elements outside of the game that you still need to move around. Uh, coming back to what makes games engaging, there are also many different genres of games, so you also have to understand where your market is.

You have to look at pre-existing games that have been praised and maybe apply new ways to engage with your game, clearly without any Copyright infringement. Since games are evolving very fast, you need to be on your toes and need to be able to adapt to significant changes, even in the middle of your design and development process.

Daniel: Wow. There's some hyper-competition going on there. From my experience in the automotive industry, changes in the midstream of R&D or production processes are frowned upon since they open the doors to quality issues.

Noah: Unfortunately, that is the same in the gaming industry. So many games are what you call bananas, shipped early, and then they are left to ripen with the customers. The number of quality issues in new game launches, to the extent that they break whole companies, is [00:04:00] huge.

Daniel: Mmh, but there are solutions for this. But before we go any further, can you shed light on the most profitable sectors within the gaming industry globally and why they stand out?

Noah: The elephant in the gaming industry is mobile gaming. Mobile gaming is by far the most profitable sector in gaming. People like having things on the go.

Many gamers, or the average Joe, seek to play for short periods on the train or during a break. Now, this isn't to write off console gaming or PC gaming, but mobile gaming is a market that has been designed in a very specific way that makes it very profitable and keeps players coming back every week, day, or hour.

Daniel: So that's the Candy Crush thing, right?

Noah: Exactly. Candy Crush is definitely one of the frontrunners for that. But it's also important to look at other things. Other types of mobile games in that respect, like the very popular genre of gacha games, which [00:05:00] comes from the Japanese gacha system, where you put a quarter into a machine and receive a small plastic ball, and in that ball, there's a randomized prize.

Each of these balls has a different percentage of a unique prize inside of it, and players seek the prizes, which are usually at a percentage of 0. 01%, which incentivizes a lot of spending.

Daniel: I have known the analogue version well since childhood. The machines were at the fuel stations near the Autobahn in Germany, in restaurants and supermarkets, and a major attraction for us kids. So, I get the draw of concepts like this.

Well, I know they are called gotcha, even in English, quite revealing…

Noah: Yeah, it's one of the most popular systems you'll find. You'll see another word used for it being a loot box system, where you can pay for a box of some kind, and the prizes inside are generally more cosmetic. However, for games, let's just take a popular one here of Honkai Star Rail that came out quite [00:06:00] recently.

 You can roll for a character or, and the character itself is quite important and has very unique gameplay attributes that are sought after by players.

Daniel: It's interesting that the loot box prices are for cosmetics like armor, weapons, or clothing, besides potions, spells, and what have you. This is clearly not something that you can expect in a ball at an Autobahn fueling station. Okay, let's go to question number three. Could you discuss some of the more popular games right now, regarding player base and revenue, and what makes them stand out in your opinion?

Noah: Let's look at the game I just mentioned, Honkai Star Rail. Honkai Star Rail is a mobile game. Technically, it's both a PC console and mobile game, so it covers a lot of bases, but it mainly focuses on the mobile aspect, where it is a live service game. And those games are updated quite regularly, which keeps players coming back to them.

With new content coming out, the game incentivizes players to return after [00:07:00] they've finished the pre-existing content.

They will either spend money on the Gacha system or just play for free. Other live service games also have a system known as a Battle Pass. I'm sure you've heard of Fortnite before. Fortnite was one of the first players to really bring this into the light. It's the idea that you have this progression system where you level up, and at each level, you gain a reward, and there are two different sides to that.

There's a free variant where players don't have to spend any money for it, but they only get select rewards from that battle pass. You also have the option to spend money on the battle pass, which allows you to receive rewards every single level, and each level has rewards that you can show off to your friends.

Daniel: And that makes a lot of money?

Noah: Oh, unbelievable amounts of money. It hinges on a sense of fear of missing out or FOMO because these battle passes don't stay around for a long period of time. They generally only stay for the season that the game is being played in. And people generally want to get the skins, items, or whatever it is that [00:08:00] might be gone in one to two weeks.

Daniel: And skins are clothing and different character features, right?

Noah: Exactly. It's a weird way to say it, but it's an established term.

Daniel: Okay. Tell us a little bit more about the overall setup of the gaming market. What are the main areas of revenue?

Noah: I recommend listeners Google this and look at some of the infographics. The growth is pretty interesting. Mobile gaming is definitely the frontrunner, with around 100 billion in revenue, followed by PCs at 45 billion and consoles at around 30 billion.

And it's quite interesting to see how mobile dwarves both of these two. Back in the day when I was younger, no one was mobile gaming, it was just generally console or PC. But these massive changes in preferences happen regularly in the gaming industry. Just think about arcade games. They used to be massive; nowadays, no one uses them as much.

Daniel: Yeah, I still remember Pong and the games that you could play on [00:09:00] the Atari station. I spent most of my pocket money on Donkey Kong in shady game halls. And even then, some of my friends could not stop and sank all their money into becoming the saviour of the princes. I saw a similar graphic as well recently in preparation for the show, which completely floored me. About 54 per cent of all global players are in Asia Pacific, and that's where most mobile games are happening, right?

Noah: Yeah, mobile gaming is really big in Asia. The one thing that I've looked into personally is the Japanese mobile gaming industry. It's as large as it is because of commuters and being able to have a few minutes of downtime that you can use for something that you enjoy.

Besides Switzerland, the public transportation system in Europe and the US is not of similar quality. So people take cars, which is not conducive to gaming. And that's really what a lot of the mobile gaming market is trying to tap into.

It's these little periods that people have.

Daniel: Okay, so [00:10:00] let's talk a little bit more about the different players in the market and what is particular about this kind of industry.

Noah: One of the leading players in this market is Tencent, a publicly traded Chinese company. This shows the size of the mobile gaming market in Asia. Then you go on to Sony, which includes their hardware revenue and the many studios underneath them that are making AAA games. Then you have Microsoft, NetEase, another Chinese company, Electronic Arts, or EA. Activision Blizzard and Nintendo are some of the main publicly traded companies.

However, many gaming companies with significant revenues are actually privately owned. For example, 343 Industries, the development studio currently working on the Halo series, is privately traded. Atlus, a privately owned company in Japan, is the company that made my favourite game series, Persona. And FromSoft is the game studio that made one of the biggest games in 2022, Elden Ring.

And they are also privately held.[00:11:00]

Daniel: It seems that these companies can scale significantly without needing outside money, which makes perfect sense based on the nature of the product they sell. Let's move on with our set of questions. In your experience, how are augmented reality and virtual reality enhancing the gaming experience?

Could you share any innovative uses of these technologies?

I would say that augmented reality and virtual reality have minimal current uses. VR relies heavily on gimmicks, and no one has yet found a path to making an engaging game for the masses. One example of a VR game that stands out is Beat Saber. In this game, you have two lightsabers attached to your hands, like in Star Wars, and you can slash through blocks in time with music.

Noah: So it's a rhythm game. Which I found to be a very unique way to use VR. Another example of a VR game that brings a more story-driven experience is Half Life Alyx. It came [00:12:00] out not too long ago by Valve Studios. It really showed how you would be able to create a triple-A VR game, but a lot of these games are definitely outliers, and there hasn't really been much innovation yet in the area.

However, with things like the Apple Vision Pro coming out, developers will have more accessibility to work with new emerging technologies, and these kinks will be ironed out over time. For example, with the Vision Pro, you can walk on stage during a live concert and experience what the artist sees, like recently with Alicia Keys and a few others. This ability is right out of the gaming world but is now transposed into a real-life experience. So, real-life gaming and entertainment are fusing through this new technology.

And this isn't new, but the speed of the change is on a completely different scale. The same thing applies to augmented reality as well, where a lot of the applications have unique additions, but they don't necessarily add much to the gameplay. [00:13:00] So, for example, if we take Pokemon Go, which is one of the biggest mobile games in the world, it has an augmented reality integration, allowing you to take pictures of your environment with your Pokemon or catch them in your environment.

However, Past that, there's no actual gameplay, but I'm very interested to see how that goes in the future.

Daniel: Yeah, I still remember a couple of years ago, when I think we were in Copenhagen. It was just the start of this craze, and suddenly, all the kids were running around with their mobile phones in front of them. They engaged with the environment through their mobile phones' cameras and screens, and then they bumped into each other and tried Pokemon one at a time.

Noah: Besides the gaming industry, there are many applications of augmented reality technology in the real world where it can spill over or be developed further.

Daniel: You worked on something like this in your studies, right?

Noah: Yeah, so in the second year of my master's, I created a mixed reality application where the user could put on these mixed reality glasses and move up to an ATM [00:14:00] where the screen would then be projected towards the person.

This was done to help wheelchair users access displays in their daily lives that they struggle to interact with. We chose ATMs because, from the research and interviews that we did,

it seemed like a place where wheelchair users required help.

Daniel: I liked that one. Now, let's talk a little bit more about the revenue side of the gaming industry. You taught me something about the concept of whales in gaming. Can you explain that and what their impact is on game development and revenue models?

Noah: Of course. Whales refer to players who spend significantly more than the average player on in-game purchases. They contribute quite a substantial portion of a game's revenue, between 50 and 90 per cent of the total revenue. This typically makes up a very small percentage of the game's player base, being around 2 per cent to 5 per cent of spenders, which translates to [00:15:00] around 0.1 per cent of all players playing the game. Whales are generally known for high engagement levels and many logins, and they spend a lot of time in the game. They are often crucial for the financial success of mobile games.

Daniel: Amazing. You mentioned that sometimes, even for mobile games, people spend tens of thousands of dollars on this kind of token, right?

Noah: Yeah, of course, it's pretty fascinating. I have a few friends who play a lot of mobile games, and seeing their spending habits and comparing them to people who have spent hundreds of thousands on these types of games is a very different—a highly profitable—ballgame.

Daniel: Yeah, I can see that. But why not? Is there something like a skill-based Teflon effect in gaming? So, do you see parallels between the skills or experiences gained in gaming and those that can be transferred into real life? And do you have a couple of examples for that? [00:16:00] Okay,

Noah: Team building is very important. It is important to work together as a team to complete an objective. Another one, if you're looking at single-player games, would be puzzle solving or just being able to figure out something from different angles. Personally, something that video games have taught me is Determination and stamina.

I played a game called Hollow Knight around two years ago. It's a very difficult game, and prior to the game, I was always very prone to giving up whenever I was met with any sort of resistance. However, I really liked this game, and it challenged me to try repeatedly until I could beat the boss.

Daniel: So, who is the boss, and why must you beat him?

Noah: Oh, I'm not telling you to beat up a CEO or something to clarify that. No, so a boss, in this case, would be a general antagonist in the story that is being presented to you. And that learned skill of staying on course still helps me nowadays with games going forward.

I give up way less than I used to, and even in real [00:17:00] life, I give up way less easily than before playing this game.

Daniel: You already put a little bit of a personal touch on your answer. So, let's talk about your ideas regarding your upcoming dissertation on three-dimensional gaming theory. What inspired the focus on gaming technology instead of, for example, cyber security?

What impact do you hope to make?

Noah: I've been a fan of games since an early age, and I've always wanted to see how I could bridge my enjoyment of games to my academics. My project is about taking the explorative properties of big open-world games and applying them to real-life applications.

Daniel: So that's Google Maps, Apple Maps, Wayz, this kind of thing.

Noah: to explore the map and see if we can apply these to apps, and maybe [00:18:00] even down the line, find a way to monetize this as well.

Okay,

Daniel: Back to the larger gaming industry. What emerging trends do you believe will shape it over the next decade?

Noah: Well, I'm convinced that mobile will stay on top. I think that people are looking for a quick fix every once in a while through gaming, but I also think that the market will look into delivering bigger experiences on the platform. You can already see this with games such as Honkai Star Rail or Genshin Impact, which are more traditional than mobile games as we know them.

Trends for console and PC gaming are harder to predict as trends come and go quite quickly, but currently, there seems to be a larger push for interactive, cooperative games.

We see this recently with Helldivers 2 or Lethal Company, which have seen large success in the last few months.

Daniel: You mentioned that trends are difficult to predict from that perspective. [00:19:00] I remember that there was something about Warner Brothers, and we also discussed it in the same topic. What was it all about?

Noah: Yeah, they were talking about Hogwarts Legacy, which was released in 2023 and had quite a large success. You probably know; we gave it to you for Christmas. Warner Brothers was comparing that success to their most recent game, Suicide Squad, which was a live-service game.

Live service games generally have better monetization because they ask the player to come back regularly, and there's more opportunity for the player to spend time on the game. However, the success of Hogwarts Legacy over Suicide Squad shows an interest in creating bigger experiences that players can spend lots of time on rather than money on something they can play for just an hour a day.

But Warner also said that they're not just going to focus on these big experiences but also on the mobile gaming sector. That was very interesting to hear from a U. S. entertainment company, different than in the old entertainment [00:20:00] industries of movies.

In gaming, the intellectual and revenue dominance is not captured more or less in America. I think gaming is a multi-polar geographic market, which is good for competition and innovation.

Daniel: Now, coming to the last question, Noah, imagine a fairy godmother, who would grant you one wish regarding the future of gaming. What would it be?

Noah: Well, that's it. When it comes to the current gaming state, one thing that I noticed and thought about, and that I had talked about before, is how many games come out in an unfinished state. The “bananas” that we were talking about. Many games need multiple updates before they are playable. And I think one of the things that I learned here with you and our clients is that proven operations management techniques and good implementations of processes like Six Sigma, Lean, and TOC could lead to better game launches.

So I think that would be my wish for her then. Being able to implement these, and I'm sure this would lead to better game launches, and I'm sure, would [00:21:00] delight the customer base and, you know. In the end, me as well.

Daniel: So let's hope that some people in the gaming industry listen to that and eventually look at some of the former podcasts you helped produce. And we have done about how to revolutionize quality delivery and full operations in other industries, which also apply to the gaming industry. Thank you, Noah. I appreciate that you moved in front of the microphone this time and gave us an overview of the gaming industry from your perspective.

Noah: No problem. I'm always happy to be on.

Daniel: With that, I hope you enjoyed this episode of the Supply Chain Dialogues. If you did, please subscribe on any major podcast platform. If you'd like to get in contact with us, have suggestions or criticisms, send us an email to dialogues@helmigadvisory.com, one word.

You can help us by sharing this episode or podcast with a colleague, friend, or decision-maker. And for this episode, specifically, clearly a decision maker in the gaming [00:22:00] industry. We take a short break to develop the content and invite guests for the next season. We focus on supply chain redesign to curb greenhouse gas emissions and drive sustainability into the value chain.

Stay safe, be bold, and see you now in four weeks. These are the supply chain dialogues produced again by Noah Helmig and copyrighted by Helmig Advisory AG in 2024.