THERE IS NOTHING quite like a captive audience. When Sony, a Japanese electronics giant, reported its latest set of quarterly results on October 28th, the star performer was the firm’s video-gaming division, which makes the PlayStation line of consoles. Had it been a normal year, revenues would probably have been down, because Sony’s current model—the PlayStation 4—is coming to the end of its life.

But in a year marked by lockdowns and working from home, gaming revenue instead grew by 11.5% year-on-year (and operating profits by 61%) as housebound consumers reached for their controllers. Sony is not alone. Microsoft, its gaming arch-rival, released its own results the day before. Its Xbox One console is similarly superannuated, yet revenues jumped by 30%. The good times have been repeated across the industry (see chart).

Most forecasters expected covid-19 to boost the video-gaming business. The pandemic has given a filip to other forms of indoor entertainment, from board games to video-streaming to books. But the scale of the surge has caught industry-watchers by surprise. Tom Wijman at Newzoo, a games-industry analytics firm, says that when the pandemic began, his company predicted a boost of around $2bn to industry revenues on top of its existing forecasts. The latest figures, he says, suggest the real figure has been nearer $17bn. Newzoo now reckons industry revenues will reach $175bn this year, a rise of 20%. Even for an industry that had been growing by 9% annually, 2020 has been a barnstorming year.

It is not over yet. Amid a blitz of adverts, trailers and PR, Sony and Microsoft are gearing up to replace their existing consoles with new, more powerful machines. On November 10th Microsoft will release the Xbox Series X. Sony will respond two days later with the PlayStation 5. With a locked-down Christmas looming in many parts of the world, demand for both will be high. If industry rumours about pre-orders are correct, some consumers may have to go without.

At the same time, both firms will be keeping their eyes on several big new competitors. Amazon, Facebook and Google all think the time is right to try their luck in the gaming business. Over the past decade streaming has revolutionised music, television and films. The tech giants think cloud computing, fast broadband and 5G mobile networks mean the time is right to try the same thing with video games.

Start with the consoles themselves. Sony won the previous round of the console wars, selling over 100m PlayStation 4s and more than 1bn games. Microsoft does not provide official figures, but most analysts reckon that sales of the Xbox One (confusingly, the Xbox’s third iteration) were only half as high. Most expect Sony to outsell its rival this time, too. Piers Harding-Rolls at Ampere Analysis, a media-analysis firm, thinks 5m new PlayStations will be sold in the run-up to Christmas, compared with 3.9m Xboxes.

One reason is brand loyalty. “There’s very much a cult following when it comes to consoles,” says Michael Pachter, an analyst at Wedbush Securities. “PlayStation owners will mostly buy another PlayStation, and Xbox owners will get a new Xbox.” Another is Sony’s strategy, which focuses on existing gamers. Analysts think the firm is selling the machines at a loss—a common tactic for console-makers. Sony’s marketing has emphasised exclusive, big-budget games that are aimed at committed gamers and are not available elsewhere.

Sony’s executives will be hoping the analysts’ projections are right, because the PlayStation 5 is vital to its future. The firm’s gaming division is now its largest. Its recent success has cushioned the impact of problems elsewhere, such as in its imaging division, which has suffered from the troubles of Huawei, a Chinese tech giant that is one of its big customers (see Schumpeter).

Microsoft, for its part, professes itself unworried about precisely how many new Xboxes it sells. It is just as focused on expanding the market as on trying to win over existing gamers. More than 3bn people own smartphones, and mobile games—smaller and more casual than console titles—are the most popular sort of app. Phil Spencer, who runs Microsoft’s Xbox division, estimates that only around 200m households worldwide are willing—or able—to splash out on an expensive piece of gaming hardware like a console.

Microsoft is therefore trying to lower the barriers to adoption. It will offer hire-purchase deals for its new Xbox. It is heavily promoting “Game Pass”, a subscription service that offers access to an online library of hundreds of games for up to $15 per month (a quarter of the upfront cost of a typical high-end console game).

Cloud strife

The centrepiece of this strategy is a service called xCloud, which aims to remove the need to own a dedicated console at all, by running games in distant data-centres and streaming the results to smartphones, internet-connected TVs, or any screen that can be hooked up to the internet and a game controller.

In rich countries, streaming could let gamers play anywhere, not just at home—doing for games what Spotify and Netflix have done for music and films. In poorer countries, where smartphones are common and data plans are cheap, it could bring console gaming within the reach of millions of new players. “There are 1.2bn people in Africa and the average age is 20,” says Mr Spencer. “Many of them follow our games—they know the characters, the stories, even the release dates. They just lack devices on which to play them”.

Game-streaming is not a new idea. Previous attempts have been plagued by technical problems (streaming a game, which must react instantly to a player’s actions, is far harder than streaming a film or song to a passive viewer). And Microsoft is not the only firm that thinks the time is now ripe. Sony offers its own version, called “PSNow” (though it is limited to older games), as does Nvidia, a gaming-focused chipmaker, and several other firms. Other tech giants with little experience of video-gaming are also piling in. Google launched “Stadia” in 2019. Amazon announced its “Luna” service in September. On October 26th Facebook threw its hat into the ring with its own “Facebook Gaming” service.

Game-streaming sounds attractive on paper, but few expect it to transform the industry overnight. “I would describe the market as embryonic,” says Mr Harding-Rolls. Still, there is huge interest: Ampere tracks 60 firms whose offerings are either in public testing or available for use. And if streaming does take off, it is likely to prove just as disruptive as it has been in other media. “If you can make streaming work, you could grow the gaming market tenfold,” reckons Mr Pachter. The video-streaming wars have seen deep-pocketed tech giants and media companies spend billions on content. Similar jockeying may be under way in games. On September 21st Microsoft bought ZeniMax Media, which makes the best-selling “Fallout” and “Elder Scrolls” series of games, for $7.5bn.

It is too early to pick out winners and losers, but most analysts think Microsoft is well positioned. Its Azure cloud business is the world’s second-biggest, giving it a reach that many competitors lack. Last year Sony, which lacks cloud infrastructure of its own, said it was exploring the option of using Azure to power its own gaming services. And unlike Google or Amazon, its only real cloud rivals, Microsoft has decades of experience in the games business.

But its competitors have strong points, too. Amazon has 150m subscribers to its Prime service, which already includes streamed video and music. Google could leverage YouTube, where gaming videos are popular. Facebook plans to pitch its service at people who already play simpler, browser-based games on its existing platform, which boasts over 2bn users a month. And Sony’s success with the PlayStation has proved that size is not everything. There is all to play for. ■

Correction (November 6th 2020): An earlier version of this article erroneously quoted Tony Habschmidt at Newzoo, rather than Tom Wijman. We apologise for the error.

This article appeared in the Business section of the print edition under the headline “The games are only just beginning”