For the third consecutive year, global console game revenues have grown. According to data provided by our data partner Newzoo, the global console gaming market generated $33.3bn in revenue last year – up from $32.1bn in 2016.

The US remains the biggest console market in the world by revenue, with $13.9bn generated in the territory alone, with revenues in Europe hitting $11.3bn and in the rest of the world hitting $11.9bn.

Furthermore, this number is set to grow in the coming years. Newzoo forecasts that global console revenues will increase by over $3bn in the coming years, hitting an estimated $36.6bn in 2020.

So, what’s been driving this growth? While the success of the Nintendo Switch looms large in the mind at the moment, the real driver of console game revenues has been the growth of digital spend within the sector.

And while a number of factors are contributing to this – including a growing install base and improving digital distribution infrastructure for console games – the biggest factor is the growth of games as a service across the sector: something that will likely get bigger in the coming years.

Growing Revenues Across The Console Space

Before we begin exploring why console revenues are growing rapidly now, it’s worth taking a step back and looking at where their growth is coming from.

A few years ago, console game revenues were briefly in decline. Between 2013 and 2014, the amount of money generated through console games dropped from $29.9bn to $29.4bn.

CONSOLE GAME REVENUES

The driver for this was almost certainly the fact that a long-lived console generation came to an end.

The PS4 and the Xbox One both launched in November 2013, roughly eight years after the previous generation started. This meant that 2014 was a transition year, where revenues briefly tapered off as consumers invested in new devices before recovering to $30.1bn globally in 2015.

But from 2015 onwards, console revenues began to accelerate rapidly. Between the start of 2015 and the end of 2016, the global revenue figure jumped up by nearly 7% to $32.1bn.

This was then followed by an additional leap of 4% between 2016 and 2017, taking console revenues for last year to $33.3bn worldwide. Overall, this meant that game revenues in the sector grew over 13% in the period 2014-2017.

Why The Console Install Base Isn’T The Driver Of Growth Alone

So, why have console revenues grown consistently since the launch of the new generation in 2014? Part of it will, undoubtedly, be down to the increase in the global console install base over the past three years.

According to The Verge, the PS4 has now sold over 70m units since it first launched. The Xbox One has sold fewer units, but estimates from VGChartz suggest that over 30m have hit the market.

Additionally, reports suggest that the Nintendo Switch has shipped roughly 10m units in the nine months since its March 2017 launch. This increased user base will almost certainly have played its part in driving revenues upwards.

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However, despite these increases, the number of units on the market in this generation remains much lower than the previous generation. The Xbox 360 and the PS3 each sold over 80m units, with the Nintendo Wii reportedly shipping over 100m devices during its lifespan.

Ultimately, this means that fewer players are responsible for driving console revenues to new heights. And drawing upon what we know from the mobile and PC space, it is strongly likely that the main reason behind that is the rise of games as service on console.

How Games As A Service Has Quietly Taken Over The Sector

We can start seeing the impact of games as a service on the console market through the impact of digital revenue on the overall console sector figures.

While there was a decline in boxed console game revenues in the period 2015-2017, digital revenues across the world didn’t just hold up the market against that loss; they actually drove the expansion of the global console game revenue figure.

DIGITAL REVENUES ARE INCREASINGLY IMPORTANT TO THE FUTURE OF CONSOLE REVENUES

This change will, undoubtedly, have been driven by a smarter strategy from console companies in relation to their digital storefronts. For example, integrating popular local payment methods into storefronts such as PSN has helped reduce friction in the console payment process.

Equally, platform holders have become bolder with their online sales strategies in response to the declining influence of boxed sale. With less emphasis placed on maintaining a margin to keep physical retailers happy, companies like Microsoft have been actively pursuing sales and discounts – such as its Xbox Black Friday offer – to increase digital revenue.

However, the increase in digital revenue also came as the first console games with active service based business models began to generate meaningful revenues. While single player titles such as The Legend of Zelda: Breath of the Wild have sold well online, games featuring micro transactions and in game purchases have arguably played a larger role in boosting the sector’s revenues.

Top amongst them is Grand Theft Auto V’s online mode, which launched in 2013 and has become a multi-billion dollar offering. Additionally, games such as FIFA now generate the majority of their billion dollar annual revenue through its Ultimate Team mode. And games like Rocket League and Rainbow Six: Siege, both of which launched in 2015, have entered 2018 with thriving competitive scenes and impressively large user bases.

This has had a knock on effect in terms of how much revenue major publishers are generating through their console games, with the platform coming back to prominence for many major companies.

CONSOLE REVENUES IN US DOLLARS (M)

According to Newzoo’s figures, EA now generates 73% of its income through console – up from 53% in 2014. Ubisoft generates less of its income on console in 2017 in comparison to 2013, but it has recovered to forming nearly three quarters of the company’s income.

In fact, the only company to see a notable decline in the percentage of its business coming from console is Activision Blizzard.

It became significantly less reliant on console incomings after the company acquired mobile gaming giant King. But between 2014 and 2016, the amount of revenue it generated on console each year did increase – suggesting it’s still a growing part of its business.

Conclusion: Console Games As A Service Are Primed For Future Growth

The main driver for the growth of console game revenues across the world is the rise of games as a service. While a larger install base and smarter digital storefronts have helped play their part, the arrival of service based models on console has provided a boost that allows the sector to thrive beyond the one off cost of a boxed game.

However, the question is whether console digital revenues will continue to grow or whether it’ll taper off. According to Newzoo’s figures, the answer is that it isn’t just likely to grow – they could grow significantly.

This could happen because games as a service model are only just starting to be pursued aggressively by publishers. While some games have courted controversy for the execution of their models – specifically Star Wars Battlefront 2 – games such as Call of Duty: World War II, Overwatch and even PlayerUnknown’s Battlegrounds have each bolted service elements into their games and successfully retained their integrity.

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Additionally, other central precepts to the games as a service model are becoming commonplace on console. For example, games like Fortnite Battle Royale and Square Enix’s forthcoming Battalion 1944 are each offering their services for free to broaden their player base in the manner of free to play PC and mobile releases. And with service based monetisation tactics already sparking debate, they seem here to stay.

In short, console revenues will continue to grow because of the rise of service based games. The question for developers is how to adapt their release strategies to either allow their premium games to find a market within the space or to begin to pivot their core console businesses towards the practices and habits of a service based game development company.

And for service providers, the question must be how to cater for this shift. As console developers move towards games as a service, there is the potential for great rewards for companies able to offer the likes of in game advertising, attribution, analytics and other supplementary services to support this burgeoning market.

Newzoo’s Peter Warman will be speaking on the first day of Gamesforum London on the 24th January. Don’t miss out on his session by signing up for a Gamesforum London pass now.