MediaTalk | Season 3 | Ep. 8 - How AI is Reshaping Gaming and Consumer Tech

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Mike Reynolds: Hi, I'm Mike Reynolds, a senior reporter covering the media industry with S&P Global Market Intelligence's tech, media and telecom news team. Welcome to "MediaTalk," a podcast hosted by S&P Global, where the news and research staff explore issues in the ever-evolving media landscape. Today, I'm joined by S&P Global Market Intelligence Kagan analyst Neil Barbour, who is part of the consumer technology team. He keeps watchful eyes on video games and connected devices, among other things. How are you doing today, Neil?

Neil Barbour: I'm super good, Mike. Thanks for having me on.

Reynolds: Today we're going to touch base on a number of topics, perhaps a bit of a revisit to Las Vegas for Neil, glance at a new gaming industry conference, and assessments and projections around gaming industry M&A, investments in the metaverse, and some realities around the world of augmented, virtual, mixed, and extended realities. Let's do it.

Neil, when we spoke last on "MediaTalk" in early January, you had just returned from CES. I think your fifth trip to Vegas for the event? Given the benefit of some time and distance, are there a couple, maybe three takeaways from the show that you'll be keeping close tabs on for the balance of '25 and beyond?

Barbour: Yeah, I'm going to play it safe here and talk about AI. There's a sense that many of the consumer electronics that didn't really break through in a big way over the past five to ten years are getting another look by virtue of being linked to these large language models. I'm thinking specifically of smart glasses. Some smart home stuff, maybe even the last couple of generations of smartphones. In previous iterations of these products, there was a big promise of connectivity and interlinking data that just wasn't happening in a big way. Vendors are hoping that giving consumers the ability to talk to these devices in natural language will unlock substantively more value for consumers. So that's one. The second thing I would touch on quickly is that the smartphone guys really seem to recognize that things are getting stale from a hardware perspective. Looking at the TCL Electronics Holdings Ltd. booth, they were showing a smartphone that would turn into an e-ink display at the touch of a button, effectively making it an E-reader. Samsung Electronics Co. Ltd. showed some trifold concepts, taking the foldable a step forward. Does any of this change the paradigm? No, not really, but maybe it gives the marketing department something to work with, tell consumers, "Sure. You could wait another year or two until your battery is dead or your screen breaks, but wouldn't it be nice to have something cool right now?"

Reynolds: Okay. Fair enough. That's how the world of products works for the most part. Innovation. Then you just roll with it till you come up with something better.

Let's talk about the E3 show. It used to be the gaming world's equivalent of CES, but it's been gone for how long, Neil, and that's why gaming has had a bigger presence at CES in Vegas in more recent years?

Barbour: Yeah. So E3 started as a response to gaming feeling a little disrespected by CES in the nineties, or at least feeling that it had outgrown what CES could offer. So, they started their own thing in '95. They had a pretty good run with that. They had their last show right before the pandemic in 2019. They shut it down for the pandemic in 2020, tried to start it back up for 2021, but it looked like the interest just wasn't there.

Reynolds: Okay.

Barbour: The issue is that publishers were having a lot of success just posting their press conferences to YouTube. If the goal was to get their message to the public, the increasing viability of streaming video made it easier to go directly to those consumers. CES had picked up some gaming stuff in the past few years, particularly around AR/VR, and Sony Corp.'s always there, so you saw some PlayStation hardware. But it's not like Electronic Arts Inc. or Take-Two Interactive Software Inc. ever showed up with a big press conference, announcing their fall slate.

Reynolds: Okay, so the Entertainment Software Association, those are the folks behind E3, but they've got some news now on a new conference, right?

Barbour: Yeah, so the ESA, they're taking a different approach to a games-focused conference with what's called iicon. They're trying to think big picture where gaming intersects with broader cultural touchstones. They point to virtual worlds training healthcare professionals, astronauts, those kinds of big picture goals. A lot of it is what we might consider part of the metaverse, though they're not using that language right now.

Reynolds: Now this is going to happen in April 2026. Have they come up with a venue yet?

Barbour: Right. They're thinking about Vegas.

Reynolds: And the idea is again, maybe as different worlds work together, collide, intersect, whichever word you want to use, but the big players are still going to be in the room, right?

Barbour: Amazon.com Inc., Walt Disney Co., Warner Bros. Discovery Inc., Sony, Microsoft Corp. — they were all referenced in the announcement. In addition to pure-plays like EA, Take-Two, Epic Games Inc., and those are some of the companies that were drifting away from E3 in its twilight years.

Reynolds: But this is not going to be like the free-for-all in the past where the press are like locusts and there's all kinds of folks, right? This is going to be a little bit more closed doors, if you will?

Barbour: The big thing here is that it's invitation only. Like you say, E3 was really casting a wide net to the point where they were selling passes to the general public in the last few years. The idea there was that they were trying to get the generalist press to take notice and to get rank-and-file gamers to rally around new releases. This is about developing a dialogue with industry leaders on the long-term roadmap.

Reynolds: Now, are you working on your invite or are you going to have to go the back channel route here?

Barbour: Yeah. A little early to say. I'd certainly like to see what all the fuss is about.

Reynolds: Okay, iicon is still 14, 15 months out. So, let's talk about the interactive home entertainment media acquisitions in 2024. It's a pretty broad group as far as Kagan's concerned. Neil, can you talk about what we're looking at here?

Barbour: Yeah, this is mostly a video games-focused data set. There are some edutainment, online gambling, digital fitness applications in the stack. While the revenue model isn't always exactly the same, although very similar across these different companies, there's a lot of similarity in the way these businesses operate. So we tend to look at them holistically.

Reynolds: Given those parameters, as you look at this group en masse, there was a downturn in aggregate gross transaction value in 2024. Why so?

Barbour: Not a complicated story here. A lot of tech M&A was bottled up over the past year due to high borrowing rates, a general trend toward balance sheet austerity, and then there's a pretty sizable regulatory overhang as well.

Reynolds: You're not surprised by the decline or maybe the severity of it?

Barbour: I think it's a little surprising if you look at gaming from 30,000 feet, you'd see a lot of friction for user acquisition and revenue growth over the past year. So, usually, that would mean this is a good time for consolidation. But again, there were those macro challenges that kept a lot of potential acquirers on the sidelines.

Reynolds: That being said, a lot of small deals last year, maybe more than on the mega front?

Barbour: Right. So the M&A that we did see was mostly mobile or aspiring mobile publishers looking to build a portfolio in the casual space and hoping to scale that up quickly.

Reynolds: But yet there were still a couple of big transactions from some of the bigger names here.

Barbour: Yeah. The bigger transactions still pale in comparison to the mega deals of the past few years. We're still looking at Playtika Holding Corp. buying Dice Streams-developer SUPERPLAY Ltd. for about $2 billion. Savvy Games Group bought up Monopoly Go-developer Scopely Inc. for just under $5 billion. Both of these are blockbuster games in the relatively casual mobile game space. Sometimes they're called clicker games. It's comfort food being served inside one of the biggest revenue segments in gaming

Reynolds: I think a lot of industries are looking to this, under the new Trump administration, maybe it's an environment that's more conducive to deal-making. Does this apply here as well, Neil, your sense for what may occur with the new administration and maybe it doesn't happen so much in '25, but maybe as we get further out?

Barbour: I think it would be easy to overstate this, but there's certainly been a chilling impact on the market after Microsoft's deal for Activision Blizzard Inc. took 22 months to close while stuck in regulatory limbo. The FTC blocked Meta Platforms Inc. from buying a VR developer in 2023. The thinking here is that if acquirers feel like they won't take such a drubbing at the FTC, maybe they're more likely to come to the deal table. Microsoft has signaled that it would be open to more deals should it find the right fit. We would expect other publishers at that level to keep pace where possible. And maybe there's opportunities for emerging players like Amazon and Netflix Inc. to make big moves into the gaming space.

Reynolds: Let's go over to the metaverse. If video game transaction values retreated in ‘24, that wasn't certainly the case with investment in the metaverse. But before we go there, Neil, one man's metaverse is another man's enhanced internet. How does Kagan look at this?

Barbour: Good point. We have a fairly complex definition of a shared, immersive 3D virtual space where humans and machines interact with one another and with data. But there's an easier way to look at that, and that's what you're saying. It's just the 3D layer of the internet.

Reynolds: '24 was a big year. I think your research indicated up better than 40%.

Barbour: Yeah, big bounce back for the metaverse investment scene in 2024, after two years of contraction, investment funding up 42.9% to $14 billion across debt and capital markets, shelf offerings, rounds of funding. And there were a lot of different narratives at play: wearables, e-commerce, and of course, AI. And to really zero in on that AI story, which includes things like putting AI agents into virtual spaces and developing low-friction content generation tools, the metaverse is supposed to be this big place where people get to define their environment, but doing that takes a lot of time and expertise, and so the promise of simplifying the path to building your own virtual world, that's been a compelling entry point for investors so far.

Reynolds: And as you look back at the year again in '24, there was a lot of action down the stretch, which I guess may bode well for 2025.

Barbour: Yeah, and maybe just to hammer away at that AI theme again, we saw a $90 million round into Luma AI Inc. in the fourth quarter. They're developing a text-to-3D asset generation tool. And of course, all of this AI stuff is really taking shape in terms of functionality and costs. So we would anticipate there are still a lot of startups in that vein to come.

Reynolds: Meta Platforms, certainly not a startup, but they were at the forefront of action last year.

Barbour: They were more in the equity and debt markets, and they were the real ballast in the stack here. There was a series of bond offerings in the third quarter that totaled a little over $10 billion, taking up quite a bit of the overall total for 2024. And this was right before they announced their smart glasses project with Orion, which is the long-term goal of their work in AR, VR. Obviously, some of that new money will be flowing through AI as well, but even that work is partly in support of their AI wearables division. So, all of this is still circling around the Metaverse narrative in a big way.

Reynolds: Startups and private companies also engaged, and Disney was active too, right?

Barbour: Yeah, Disney made a $1.5 billion investment into Epic Games, which is the publisher of Fortnite. And in that move, Disney had specifically said they were looking to pull more of their goods and intellectual properties into virtual spaces, including e-commerce and streaming video.

Reynolds: Now, we've mentioned augmented reality a couple of times already, and Magic Leap Inc. had a big debt round, I think almost $600 million.

Barbour: Magic Leap is in this phase where they are transitioning from being a full hardware stack manufacturer. They started out trying to make a consumer AR headset, and then they transitioned into making a commercial or business-focused AR headset. Those efforts have faded in favor of developing what is known as waveguide technology. So they're looking to sell a technology to other headset manufacturers that can project a 3D image into a translucent set of lenses. So we're talking about smart glasses basically at this point. And that's probably going to be a big market down the road. And investors have taken note of that, and there was the $600 million round into that development.

Reynolds: And Infinite Reality Inc.. I think this is a company that you've got your eye on. What were they up to last year?

Barbour: Yeah, so they took a small round, a smaller, $1 million round, and somewhere in that range in 2024. But to start off 2025, they took a $3 billion round. And this is the key name to follow in the emerging e-commerce vertical inside the metaverse, which is tapping into a big part of what powers the flat internet, right? Which is people buying things online. So, Infinite Reality basically helps clients develop a retail strategy in virtual spaces. If you move those digital storefronts into 3D spaces, the idea is that you can get a better sense of dimensions of products, you get more interactive buying experiences, stuff like that. So they've got a lot of money now to help develop those solutions. They're going to deploy some of that powder and buying other companies to maybe develop one soup-to-nuts experience for a company like a Walmart or an Amazon coming into this space and saying, "Hey, we really want to move our retail presence into the metaverse or into a virtual space more generically. And can you help us do that?"

Reynolds: Let's finish our conversation up today with a little bit more on AR and VR. Kagan looks at these technologies as what, Neil?

Barbour: Yeah. So AR and VR, right? Those are the headsets that rest on your head, usually with a strap. They have a rest on the nose and then it wraps around your head. Basically, it includes all of your sight. That's virtual reality, right? And then it projects a virtual image into your eyes. So you're being basically completely immersed inside a virtual world with that hardware. And then AR is similar. It has to rest on your head. But usually, you're seeing through translucent lenses, and you're seeing 3D images placed on the world around you. The big move that happened this year was into mixed reality, which is essentially adding pass-through visuals of the world around the user into the existing VR headset. There were also some big improvements in usability and wearability. But the downside is that all these extra features came with added cost. The Quest 3 now sells for $500, where the Quest 2 started at $200 and moved up to $300. And the Apple Inc. Vision Pro starts at $3,500. It just seems like consumers were not ready to spend that kind of money this year.

Reynolds: Bad pun here coming. So as the prices were extended, and do they extend more for something called extended reality?

Barbour: Yeah, that's exactly it. There've been some movements into trying to bring those prices down. The Quest 3S came out at the end of 2024 at the $300 price point, reestablishing that more average consumer-friendly entry level. But yeah, generally speaking, if you want to play in mixed reality, you got to pay for the pleasure.

Reynolds: It looks like not as many people are interested yet. It was really the lowest year, I think, going back to 2016 maybe?

Barbour: That's right. We started tracking this market in 2016, right. When HTC and Oculus started coming to market. And that was also the era of the snap-in headsets. So think of the Gear VR, which was sold for about $100. Those devices were popular at retail, did not have a long tail of usage. You could say they were underpowered. It's too hard to get the phone in and out of those things. They didn't last too long, but yeah, this is pretty much the worst year on record in terms of volumes. Revenue was a different story because of the increased average selling price, a lot more money was flowing through the top line. Not a lot of that money made it to the bottom line.

Reynolds: Given maybe that tepid environment, Neil, Samsung, they've been looking to do something with Google LLC and QUALCOMM Inc. for some time, I think go back to 2023. Has that materialized or will that materialize in 2025?

Barbour: Right. Samsung has been saying for years that it was working with Google and Qualcomm on XR, and it looked like 2024 was going to be the year where we saw what that was all about, but all we got was a look at a concept model and the promise that something would be out for sale in 2025. A couple of ways to look at this. One is that Samsung saw what Apple released in early 2024 and was worried that it was too far behind. Another way is that, and this is the direction I tend to lean, they saw how little Apple was able to move the needle and decided that their solution might need a little more time in the oven.

Reynolds: So that being said, the traditional VR experiences, they had an okay year in '24, right, Neil?

Barbour: It does look like VR gaming has a sticky audience, and they got some pretty good software this year. There was a Batman game. There was a game called Behemoth published by Skydance Productions LLC. The issue is that revenues are steady and not growing at a dramatic pace.

Reynolds: They have a fan base, but maybe not a growing fan base.

Barbour: I think that's one way to look at it. Yeah. And for the companies that put a lot of investment in, that's probably just not good enough.

Reynolds: I know we're only a couple of months in here into the new year. Your expectation for this space in 2025, Neil?

Barbour: That's a tough one. As I mentioned, the Quest 3S was out at the end of 2024, bringing the price down to a more reasonable level. So, that could have legs in the year ahead. It would be nice to know with some more specificity what Samsung is up to. We haven't heard much of anything from Apple. We talked about it last time. We saw some interesting AR smart glasses at CES; that form factor is probably still a few years away in terms of mass market. What the market really needs right now is a piece of software that catches the public imagination. Easier said than done. We've recently written about pro sports leagues embracing immersive video; maybe there's something there. Maybe there's a video game genre that hasn't been fully explored or even invented yet. Maybe AI integration is the key, but that's the missing component. The hardware is probably always going to be expensive. Sometimes you hear a smartphone is $500, $800, $1,200, and people have no problem paying that kind of money. If AR/VR wants to charge those prices, they'll need to prove it's worth the money. And so far, it hasn't.

Reynolds: All right. We will be keeping tabs this year and beyond. We'll see if something does catch the consumer zeitgeist, as it were.

That concludes this episode of "MediaTalk." I wanted to thank our guest, Neil Barbour, for jumping around a lot through the different gaming worlds.

Barbour: Thanks, Mike.

Reynolds: This is Mike Reynolds, and thanks to all of you for listening. We'll catch up soon on the next episode of "MediaTalk."