Data & Dimensions | Ep. 6 - An Investment Insider's Look at Gaming in 2026

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Neil Barbour   00:00:03 

Welcome to Data Dimension, podcast at the intersection of Entertainment, industry and interactivity. I'm Neil Barbour, Industry analyst with S&P Global Market Intelligence, Kagan. And today, our guest is Matthew Ball, CEO of Epyllion, a venture and advisory firm. Ball is also a venture partner at the Makers Fund, Senior Adviser to KKR and author of the International bestseller, the Metaverse. 
 

Matthew Ball   00:00:26 

Well, thanks for having me on 
 

Neil Barbour   00:00:28 

so when you released a document as definitive as the state of video gaming 2026, the industry tends to pay attention. You had a big hit in your hands last year. It seems like you're creating just as much buzz this time around. So let's walk through some of the big takeaways. The thing that really pops out to me, and this is a story we've been telling our clients as well is that gaming's top line has resumed growth after a post-pandemic slump, but private equity has not returned and the established publishers are still cutting headcount. Help us tease out some of the underlying dynamics at play there. 
 

Matthew Ball   00:00:58 

So that's quite right. The fundamental premise of this year's report is that we have to look far beyond the headlines. Of course, investors are familiar with that. Your clients are familiar with that. But I had been fascinated by the extent to which an industry that was beaten down for about 3 to 4 years started to look at back-to-back years of 5 or 6. Some estimates are as much as 7% year-over-year growth in '24 and then again in '25, that there was a severe disconnect between those headlines and what publishers and indeed private equity were feeling. We could see this in margin compression, which I know that you've covered as well. And you could see this in turmoil in the cuts, studio closures, layoffs, the challenges of every game maker to really greenlight new titles or even realize their current pipelines. And so the focus was to understand 2 things. Where is the money going if it's not going to publishers or at least not the publishers we can see -- and then why isn't more money coming in? And you find in both of those threads very different stories. In the former category, we find that the vast majority of growth is going to 1 of 3 parties. One is Chinese entities, which explains why shareholders see so little of it. The second is the console platforms, Sony, Nintendo, Microsoft, their software and services lines. And then the third is Roblox. When you account for each of those 3 parties, growth is de minimis. And even that is perhaps aggressive. And yet at the same time, of course, we see significant cost increases. When it comes to why isn't growth happening or more of it, we should note that there is still ample growth across all subcategories, independent publishers, ecosystem publishers in much of the world. But in about half of it, as much as 70% for AAA titles, PC, console, what we typically think of as video gaming backyard, the U.S., U.K., Japan, Korea, -- there has been a very severe contraction in stall in some markets. 
 

Neil Barbour   00:02:53 

I think a lot of people would look at mature markets and maybe from 30,000 feet say, "Oh, well, consumer patterns are just drifting back to pre-pandemic standards." It sounds like you think it's a little more complicated than that. 
 

Matthew Ball   00:03:05 

I in fact think that, that has become a fairly pernicious narrative. It gives some excuse or it leads people to believe that this was not something that could have been predicted that it was navigable at the same point. Yes, those are 2 paradoxical explanations. But my point here is that COVID has been the perfect denial opportunity. The truth is we see across multiple different major markets that the share of the population that plays video games is sub 2018, 2019. That's one for tell. Yes, the contraction from '21 is bad. Of course, there's no real reason to believe that a secular category like video gaming should have lost material percentage points of players since 2021. That should have been a user acquisition opportunity. A reduction in time was intuitive, but we shouldn't have seen a player reduction, not least to this degree and of course, not sub 2018, 2019, but we have seen that. When we take a look at analogous industries or other media industries, consumer book sales are up. We're out of the house, but we're buying more books. Music sales, of course, up, not as tethered to the home, of course, but nor our mobile games. All across media in categories old and new, we do see new spend. It just mostly seems to not be in gaming. Let's double-click on that first pillar you were talking about throughout the report, you sort of referred to emerging markets fueling a big part of gaming's post-pandemic growth story. Just how important is China to gaming right now? China is both essential and inessential. It's essential in the sense that when we take a look at global growth, it is now roughly 38% to 39% per annum. This is in terms of consumer spend on video games. When you remove China, the fundamental growth trajectory of the industry looks very different. At the same point, we have another problem, which is that about 5/6 of total expenditures in China by consumers goes to Chinese developers. Now that's not even just Chinese-owned developer. Riot Games, which is based in Santa Monica, owns League of Legends and Valorant, Supercell in the Nordics, Clash of Clans, those are excluded, and they are very popular in China. And so just 5/6 of total revenue in China goes to Chinese developers and a larger share when including Chinese-owned developers. In addition, we see that China's share of the non-China market is growing by about 0.5 percentage point or point per annum. So you have a market of roughly $195 billion, about $48 billion of that is in China and 5, 6 billion of that goes to Chinese developers. And outside of China, pre-pandemic, it was about 9% of 150 million went to Chinese developers. Now it's 14% of that 150. And so when you take a look at just those 2 cuts, the share of revenue that exists in China, but that foreign companies participate in and then the fact that net of growth outside of China, you then need to account for China's share of that incremental growth, curbing it farther. In total, about 50% to 55% of all growth since 2019 has gone to China, even though the market is only 20% of consumer spend. 
 

Neil Barbour   00:06:24 

And you can see that story pulling out a bit, too, as China reinvests, I think, to your point, in more developers and getting at the ground floor of standing up games and... 
 

Matthew Ball   00:06:33 

Absolutely. 
 

Neil Barbour   00:06:34 

Talk more about emerging markets, not necessarily China, but I like that you call out Free Fire in your report, which is a game that maybe isn't all that well known in the U.S., but is largely responsible for dragging several emerging markets into the online era. By our count, the publisher Sea is the 14th largest gaming company by revenue, not too far behind Bandai Namco. I mean what else is the secret to that success there? What is Free Fire doing correctly that other games haven't been able to do? 
 

Matthew Ball   00:06:58 

So it's a great area of focus. We should keep into consideration the enormity of the company. And you've outlined that it's one of the largest globally, but I think it's helpful to put it into context. They have roughly $3 billion a year in bookings. That exceeds the revenues of most of the publishing ecosystem that most people know of, right? Obviously, there are some that are larger, but we're talking about a single title. We're not talking about an entire ecosystem. 
 

Neil Barbour   00:07:25 

It's not a platform. It's one game. 
 

Matthew Ball   00:07:27 

Garena reports under Sea 700 or so million quarterly active users. Now that's a strange disclosure. Most of the industry reports DAUs and MAUs, but we should keep into consideration -- they have 700 or so million quarterly active users every quarter. There's not so many people on earth that, that can be an ever-changing group. And it is also hard to believe that there are 750 million people who for years choose to log in once a quarter or even once a month. That behavior is senseless. And so it's clear that we have very high degrees of engagement. Sensor Tower estimates between 200 million and 250 million MAUs. That actually mathematically doesn't make sense unless every month you have a new user base, but we know that Southeast Asian measurement is thin. So we should just think that this is probably a platform with around 300 million to 400 million MAUs, each day, 100 million and 150 million, maybe even more. When you're talking about why does the rest of the world not really know and what makes them so defensible, it's a few things. First, just general ARPU is very low. 10% of their players spend money. That's not bad. But those players are spending about, I think, $11 per quarter. The average user is spending $4 per year. Most of the markets that Garena is serving, active gamers spend dozens of dollars a year. The West is used to monetizing players who spend $150 at lowest and $600 as most. Having the actual incentive structure and investment case to prioritize users of that value is unusual. The other thing is device performance. It is a Battle Royale like Call of Duty Warzone like Fortnite, but it is designed very much to run on every device on the planet. They even run 2 different SKUs of Free Fire to ensure that everyone can play well. One version runs on 2 gigabyte RAM. It used to be 0.5 gigabyte of RAM. So that's part of it. They are actually designing and optimizing down. They are leaving experiences off the table because they know that it would worsen their network effects. And then last is the most visible and probably hardest for much of the West, which is they invest in cultural integrations that, frankly, I didn't even know, and I'm a big anime and global IP consumer, but they have brands and franchises that are totally unfamiliar to Western audiences. And so just to isolate in there, if you want to go after those audiences, you have to do 3 things in parallel, especially now from a laggard position. Number one is you have to target economics of users that is a shred of your typical LTV and your typical customer. Two, you probably have to make technical and creative concessions to do so. And third, you have to make prioritizations of intellectual property that will not satisfy your existing base and instead try to acquire a base that you don't have that doesn't even monetize very well. And that has proven really defensible for Garena. 
 

Neil Barbour   00:10:42 

Right. Yes, that story when Garena goes into a new market, they figure out what makes that market tick. Switch back to mature markets here. Your report seems to indicate that the console gaming kind of saturated. We've sort of been pointing in that direction as well. And a lot of the growth is coming from subscription services. So talking about Game Pass, PlayStation plus. And if you look at Game Pass, it doesn't seem like there's a lot of momentum there. Are we going to be able to say in 2027 that subscriptions are still the tip of the spear for revenue growth? Or is that story metabolized at this point? 
 

Matthew Ball   00:11:15 

At least so far, we see continued evidence that at least the incremental expenditure, again, we're talking about a market that is, by and large, flat to down. And so we need relatively little lift for that to still maintain. When you take a look at some of the early reporting from Circana in the United States, as an example, every month, they report and they are always clear that PC console was led by subscriptions. And so at least as of today, in March of 2026, it does still seem like that's the forefront. I would also expect that this is going to become more essential, not less as we see some of the console manufacturers working to manage DRAM. Sony has talked about the fact that they have been surprised by the uptake of their new higher-priced SKUs of PlayStation plus their subscription service and surprised by how low the churn is. That was a tell even before DRAM that they were planning a further price increase. That was a business worth about $3.4 billion in 2021. It's now $5 billion per annum. And so clearly, that's eclipsing the entire market and leading all of Sony's business. And of course, that's the best revenue they can sell. There's almost no COGS, and they share very little of it overall. But when you take a look at Nintendo and Nintendo was obviously struggling with what to do with rising DRAM prices for the switch, Nintendo Switch online is cheap. It's $20 per year. It's quite plausible that they could say it's now going to be $30 per year. They would be adding 50% to a roughly $1.2 billion, $1.3 billion business and allowing them to pass on some of the DRAM to recurring revenue as opposed to upfront from the consumer. So yes, I expect that to continue. 
 

Neil Barbour   00:12:59 

Do you see looking at DRAM prices pushing hardware prices higher to the consumer? Is this an opportunity for cloud gaming to come in and take a little more market share in the near term? Does that story accelerate? 
 

Matthew Ball   00:13:11 

I'm not a particular believer in cloud. However, I think it is unquestionably true that the DRAM shortage will accelerate growth. It can't decelerate it. We are going to have situations where there are customers who just can't afford to upgrade or more likely replace some of their broken units, be that a PlayStation 5 or an Nintendo Switch that's dropped. There are going to be customers who can't afford a high-end NVIDIA GPU, but really want to experience some of the games in their fullest. A big problem for cloud historically has been, yes, it obviates the need for dedicated local hardware, but the monthly fees tend to be still high. Well, ideally, you take the cost of service down. And of course, we do see evidence that the service costs are falling across the industry. However, there's still a little bit of a negative arb, so to speak. And so certainly, to the extent in which the wrong side of that still gets better for cloud, they should benefit. But I wouldn't expect that it's going to be a real catalyst for the industry. 
 

Neil Barbour   00:14:14 

Now on a related note, what role is PC gaming playing in this space? Do you get the sense that console gamers are starting to gravitate toward PC or the gamers that might otherwise have picked up a console are opting for PC. We've seen a growth trajectory a little stronger on the PC side post pandemic. 
 

Matthew Ball   00:14:30 

PC content spend has been really strong post-pandemic. It never retreated and it has grown faster and faster over the last few years. And there are a few reasons that we can observe for that. Number one is many players are shifting out of the console ecosystem. We know that early on in what we call Gen 9, this is the Xbox Series S and X and the PlayStation 5. There was a little bit of softness in migration from the prior Gen 8. Some of those players were migrating to PC. We also see some evidence that publishers will talk about where even where there isn't customer loss, a customer who might have played destiny on console has moved to Destiny on PC, a GTA player and so on and so forth. There are a few different reasons for that. First and foremost, the player graph is larger. There are more people playing on steam than either of the console platforms. And so any game that is driving around Metcalf's Law, whether that's in active play or broader social signaling, you have the availability of trophies and achievements. That's all stronger on PC. A second element is the libraries are much larger. There are many, many titles on PC that are pretty popular that you can play that you can't get on console. And some of them you can play earlier in early access before they hit console. The prices tend to be on the whole cheaper, partly because it's a more competitive platform. And then lastly, we just see that there seems to be, especially around some of these key genres like shooters, a general perspective that the experience is better. That can be because mouse and controller is more accurate. We see that from professional athletes. But it's also advantaged for those who like to also use Discord or Reddit, also live stream, go on YouTube. And so to some extent, it self-selects to the most avid gamers. But the most important thing that I would say that wraps this together is we can think of a company like Capcom very much in the news because of Resident Evil 9, which just came out, seems to be one of their biggest hits. We know from their disclosures that Steam used to be about 20% of their business. I think last year, it was up to 45%. Some of that is denominator growth, which is to say they're just shipping more units than ever and a growing share of those new units are on Steam, but it also seems like some of that is unit shifting. Units that used to sell on Xbox or PlayStation or Switch are now migrating to PC. And so that's a good example of a publisher traditionally strong on console comes from Japan, which is not a PC-centric market that is strongly shifting towards Steam. 
 

Neil Barbour   00:17:05 

When you look a t Valve trying to have another go at the steam machine building a console-like PC, perhaps rumors swirling around that Microsoft would be leaning into a PC-like framework for its next console. 
 

Matthew Ball   00:17:19 

Well, so I think there's a few different ways to unpack this by party. Steam has long had ambitions for the living room. They know that for many customers, they want a slightly more closed feeling machine. It doesn't need to be closed at the OS level, but something that's a little bit more just plug and play out of the box. The fact that you have a Windows style device that isn't running tons of different software that isn't multipurpose, but just boots up games on your TV screen. Lots of consumers do want that. And so I think they're mindful of that consumer opportunity. They've always been a customer value proposition focused company. They launched the first swing at this category a decade ago. It was very different, very flawed, but steam was a shred of what it is today in market impact and PC gaming was less valuable. Another part of that is Steam's ecosystem is obviously strong. But one thing that we have seen in recent years is this growth of entitlements. It used to be that every console generation, you would buy new games and you would basically leave your old games behind. It was a little bit like you just buy a new CD to replace a cassette. The analogy fails in the sense that we still listen to the beetles, but very few people are still playing a Super Nintendo game in the N64 era. You might have wanted to, but you kind of understood that you were leaving that behind. But more recently, there is the idea of backwards compatibility and you're building a library. And so Steam has probably $70 billion to $80 billion in lifetime entitlements just of packaged games. There's then DLC or downloadable expansion. There's other gated content for micro transactions. But let's say there's between $80 billion and $100 billion that consumers have spent in GMV. That is accessible through Steam. And so it's not just that they're able to say, we can bring our player graph, we can bring our library, which again is much larger than the consoles and our pricing to the living room. They're able to say through the Steam deck, their handheld console and Decker or their deck, VR alternative, you can bring a massive library that you have invested in for, in my case, a few decades. 
 

Neil Barbour   00:19:38 

Yes. If you bought Half-Life 2 in 2004, you're going to be able to play that out of the box... 
 

Matthew Ball   00:19:42 

Right. And so that's a really powerful advantage. How many consumers will buy it is a different question. However, what we see firmly in gaming, like most industries, but it's particularly outsized in gaming, is that these are the most valuable customers. And so it's totally believable that there is 25 million people who -- and I'm one of them, for whom if they can price this right, which is a DRAM challenge, clearly, they've pulled their shipping date. They haven't announced the price. It's clearly going to go up. They're suggesting that. But if you're able to say, here's a few hundred bucks, we're going to have everything that console has, but also everything else that you've invested elsewhere. strong value proposition in my view. 
 

Neil Barbour   00:20:23 

Yes, it's interesting because you look at products that they put out in the past, their VR headset was not necessarily priced that competitively compared with some of the other solutions on the market. But then the steam deck kind of was. It was, I think, $400 or $500 at launch, and then it came down over time. That is before a lot of these DRAM problems started to really come on strong, but it will be interesting to see which valve we see once release date come around. Do we have one that is trying to take market share or maybe to your point, just trying to appeal to the faithful. So talk to me about the attention economy, which I think is a big piece of your report. As TikTok, online gambling, generative AI, crypto, as these past times become more prominent in the lives of consumers, there's a sense that it's taking away time that might otherwise be invested into games. That used to be something people would say about video games doing to cable or DBDs. Is it striking to you to think of gaming as the incumbent instead of the disruptor? 
 

Matthew Ball   00:21:24 

It's certainly unusual for sure. I think there's been a broad thesis that has been true that interactivity is ascendant. And investors have long talked about the idea that there was no category in consumer entertainment that rode Moore's Law the way that video gaming did. And so that was a huge benefit. And yet more recently, to your point, they have gone from insurgent to the assailed. And we see that in a few different areas. First and foremost, there's some evidence that one of the biggest challenges that's faced by video gaming is that when you think of an attention economy, a distracted one, we're all used to measures the American Time Use survey that shows how much time we spent multitasking. It's the only way that we can consume as much media as we do. And yet one of the challenges for video gaming is that it's actually very hard to multitask. You kind of have to pick 1 of the 2. It's actually hard to play Candy Crush while you're on TikTok. It's not hard to be on TikTok while you're watching the news or sports. When you're talking about Call of Duty or another high-fidelity action game, you're kind of in that zone or you're not. And so that is one area in which they've been assailed is we're just distracted. But the more important point is that there are many other new novel forms of interactivity that offer much of the feedback loop and fun that video games did. Now the industry gets a little bit sensitive around this because, of course, it is different. And in my view, it's often better -- but the truth is that video gaming is built on the idea of skill mastery. It's built on social value. It's built on progression. And then, of course, it's built on the positive dopamine loops that you get from doing each of those 3 things. All of these novel forms of interactivity or newly ascendant have those. Sports betting, yes, it has skill mastery. It doesn't mean that the house doesn't usually, if not always win, but it has skill mastery. Is there social value to your sports betting? Certainly, you can ask a 16- or 25-year-old boy there. Even pornography with only fans and other like services are offering forms of interactivity and expertise and increasingly social value, which is the strangest part that's novel. Crypto is the same thing. prediction markets is a whole other category. It is impossible to believe that, that is not impacting play time and player spend. It also happens to coincide with the aforementioned stagnation. And one of the things that I did as part of this year is commission a survey. I'm not a sole believer in stated preferences. We need revealed preferences first alongside and to complement. But when you take a look at all of these other forms of interactivity, they almost all over-index and over-index strongly with one of the strongest holes and most remunerative categories in the gaming industry, which is men 18 to 34. That category is 15% of all Americans over 18. They happen to be 30% of all gamers, but they're 45% to 50% of most of these other categories. And so yes, they're spending money. It's just not going to gaming. They're spending time, but it's increasingly not going to gaming. And lastly, -- we see corroborating evidence that, as I mentioned, the share of the U.S. population that's playing video games is down. And it just so happens that the category or the demo of the major gender binaries and age brackets that is most likely to be down and is also most numerous among gamers, you guessed it 18- to 34-year-old men. 
 

Neil Barbour   00:25:03 

Yes. So the moat that gaming built around itself is that this is the only place you can be deeply embedded in your particularly video-based entertainment. Those practices and those socialized learn skills have sort of spread out to other past times, and then that is coming back to sort of eat gaming lunch or they at least eat at the edges of gaming lunch. So let's talk about Roblox. -- major driver of revenue. We report on it constantly. We talk about the Roblox Renaissance over here, where Grow Garden came online in March and was followed by Steel A Brainrod, really was driving a ton of traffic -- in some cases, these experiences were racking up like 9 billion new visits a month. Some of that has burned off. But talk about what kind of role Roblox is playing in gaming's growth right now and what kind of runway it still has? 
 

Matthew Ball   00:25:56 

It's important to think of the entire gaming TAM or most importantly, how it is growing with and without Roblox. Outside of China, Roblox is about 60% of net growth in consumer spending since 2021. It's averaging about 40% per year. The delta there is because 2022 shrank in global consumer spend, but Roblox grew. And so if you're on Roblox, you're benefiting from massive growth. If you're off Roblox, a publisher outside of that ecosystem, the headlines again don't represent what you're feeling on the ground. To put some context here, Roblox is now as popular in users and certainly in hours as Steam, Fortnite, PlayStation combined. That's how big it is. In the third quarter, Roblox averaged 82.5% as many engagement hours as Netflix globally. And so we're seeing just extraordinary, extraordinary scale. It's true that we see some points in which it's a little bit softer and stronger. The most important question, though, is can they sustain this organic discovery of new genres or formats. Grow Garden took off in late Q1 of 2025. Shortly thereafter, we had Steel of Brainrot. Later, we had 99 nights in the forest. We see that as each of these new concepts or genres and formats emerges, the platform overall reaches a new high. Can they keep doing it? I think the burden of proof is that they can't at this point. It has just gone on for so long. Last year, they added 3x as many users as they did the entire first year of the pandemic, but in a single quarter. And so certainly, we seem to be hitting some Cambrian explosion where they have the requisite diversity of users globally, the requisite user developer platform and enough economics to those developers that enough keeps sparking off on that platform to sustain what is growth we've never seen in this industry before. 
 

Neil Barbour   00:27:56 

Yes. And you see the mandatory age verification adding some friction to onboarding or at least to getting into the chat portion, the communication features. And this is inherently a social platform. So the chat is very important, although it does open up child exploitation issues that need to be addressed. It will be interesting to see as those policies -- have cemented in the early part of 2026, how that impacts user growth. So let's bring this thing for landing. In one of the final slides of your report, you say that we have to acknowledge that there is no video game industry. There are many. Walk through that for us. 
 

Matthew Ball   00:28:34 

Sure. So I'm being a little cute there. Of course, there is a video game industry. And my ultimate point is that we have to look at its various different segments. And again, that's endemic to all industries, upstream and downstream oil and gas are very different, but we still call them the oil and gas industry. My point is that when we take a look at the various cuts of the industry, you can take a look by device, by platform, by geography, by business model, by genre, you see very different dynamics. And more importantly, we see some that are growing very rapidly, some that are contracting. -- some that see high levels of competitive intensity and low barriers to entry and some that show the reverse. And so the most important point is that when we take a look at the current trials and tribulations of the industry, it's unhelpful to aggregate them all together. That's one of the major themes of the report. We take a look at the headline, and we see strong growth, but the reality is actually very different from that, depending on who you are, where you sit and what you're prioritizing. And so in that, I break down those various cuts of the industry, and then I outline what is basically a caricature version of 2 different hypothetical publishers. One is primarily focused on North America and the EU, focused on console, focused on AAA titles, focused on package sales. Those are narrative games primarily that don't have micro transactions. And then another publisher that is basically the reverse. They're mobile-centric. They're focused on APAC and LatAm. They do live services. They have an ads exposure. the universes those companies live in, the growth, the new customers, the decisions that they need to make are just entirely different. And so it's not that they're not both video game companies, they are. It's that if we take a look at that broad strike and just say, here's the video gaming industry, we overlook how different it is for those 2 companies. And then as a result, what that means for getting out of this current rut and the choices that are required. 
 

Neil Barbour   00:30:35 

That's great stuff. thanks so much. It's been great. 
 

Matthew Ball   00:30:37 

Yes, my pleasure.