The Metamorphosis of the Gaming Industry: Adapting Operating Models for Sustainable Growth

As the video game industry prepares for its next wave of expansion, executives are realizing that the operating models that propelled them to this point may no longer suffice for the future. This challenge applies to gaming companies of all sizes, from small, single-game developers to multi-billion-dollar publishers of blockbuster franchises.

Navigating the Complexities of a Rapidly Evolving Industry

Adapting to Changing Consumer Demands

Over the past decade, the video game industry has experienced significant growth and increased complexity. Gamers now demand more immersive, multiplayer experiences with enhanced social features, spanning multiple platforms. Furthermore, the convergence of media types has led to a surge in feature film and television adaptations of popular video game titles, attracting large audiences.To meet these evolving consumer expectations, video game companies have expanded both in size and geographic reach. According to Bain's analysis of Aura Intelligence data, the top eight gaming companies now operate in 28% more countries than they did a decade ago, with an average increase of 13 countries each.The capabilities required by these companies have also undergone a transformation. The five fastest-growing functions – privacy and security, data analytics, live operations, animation and effects, and game operations and strategy – have seen their headcount grow at approximately twice the average rate of other business functions over the past decade.

Navigating the Post-Pandemic Landscape

The video game industry has reached a critical juncture. The explosive growth experienced during the COVID-19 pandemic has now subsided, leading many companies to manage costs by reducing their workforce. However, industry forecasts indicate that the video game market is poised for a robust return to growth in the coming years.This dynamic presents video game companies with a unique challenge. They must adapt to the industry's increased complexity, manage growth effectively when it returns, and do so with more constrained resources. Failure to revamp their operating models quickly could jeopardize their ability to capitalize on the next phase of expansion.

Lessons from the Evolving Film and TV Industry

The situation facing the video game industry is akin to the transformation experienced by the traditional film and television industry over the past two decades. As studios merged with broader entertainment conglomerates, they were forced to rethink their operating models to leverage intellectual property across multiple media and gain efficiencies from formerly independent studios.Similarly, video game companies must now adapt their operating models to address the industry's growing complexity and capitalize on the synergies that scale can provide.

Bridging the Gap Between Strategy and Execution

An effective operating model serves as the bridge between a company's strategic vision and its successful execution. It encompasses the organizational structure, processes, governance, technology, culture, and ways of working that enable a company to deliver on its goals.Many video game companies are struggling to adapt their operating models and unlock the benefits of scale as their organizations grow. Bain's analysis of the top video game developers reveals that while their average workforce size has grown by 7% annually over the past decade, their revenue has only increased by 6% each year – indicating minimal efficiency gains despite their expanded scale.

Addressing Common Challenges

In their work with video game companies worldwide, Bain consultants have consistently encountered several key challenges:1. Leveraging greater scale while maintaining close connections with players: How can companies build blockbuster games with massive player bases while efficiently incorporating individual player feedback?2. Attracting and retaining top creative talent: As companies grow larger and more complex, how can they remain appealing to the industry's most sought-after talent?3. Centralizing versus decentralizing capabilities: Which functions can be standardized across the organization, and which should be tailored to individual game teams and studios?4. Rethinking work processes for live-service games: As the number of products grows, how can companies redesign their processes to deliver the best experiences for players throughout a game's lifecycle?5. Prioritizing innovation and investment: Where should companies focus their efforts to drive the most significant impact, such as deploying AI tools or maintaining the status quo?6. Balancing in-house development and outsourcing: Should certain capabilities, such as quality assurance and testing, be built internally or outsourced to external vendors?

Principles for Adapting the Operating Model

Tackling these challenges may seem daunting, but the success stories of leading companies across industries have shown that it is possible to scale a business while maintaining an entrepreneurial mindset and agility. The most effective gaming companies adhere to several key principles as they adapt their operating models:1. Embrace continuous evolution: Operating model redesign is not a one-time overhaul, but rather an ongoing process of incremental and iterative improvements to support rapidly evolving strategic imperatives.2. Rethink where work is done: Leading companies dynamically adjust the allocation of key activities across the organization to avoid duplication, leverage expertise, and ensure the work is performed by the functions best positioned to deliver.3. Redesign processes for simplicity and accountability: Emerging leaders are not afraid to radically overhaul their processes to streamline how work gets done and clarify roles and responsibilities.4. Invest in a comprehensive talent model: To thrive in the next phase of growth, video game companies must recognize that they are competing for talent against the entire tech industry, not just other gaming companies. They need to offer a compelling value proposition that goes beyond the passion for gaming.5. Empower talent with technology and tools: Defining and mobilizing an AI strategy has become a critical priority, as companies seek to embed these powerful capabilities within their operating models to drive efficiency and innovation.

The Pressure to Adapt

The video game industry is facing a period of both exciting opportunities and significant turbulence. The pressure on video game companies to modernize their operating models has never been greater. However, those that embrace the challenge and effectively adapt their operating models will be well-positioned to capitalize on the industry's next stage of growth.