AI's Unlock in Interactive Content and Gaming

The Current State of Gaming

In 2024, the global video game market revenue reached $184 billion (US comprising $50B), a 2.1% increase YoY with future projections reaching $266B in 2028. Video gaming revenue soared over the last decade from 2011 to 2021, with spending growing by over 150% of annual revenues. During the pandemic, the global market saw significant growth from 2020 to 2021 with revenues increasing by 13%. However, in recent years, worldwide consumer spending on games has slowed in growth since the height of prior growth levels.

Players shifted to other forms of entertainment like TikTok, the industry was stagnant in new player growth, and profitability fell for large game developers alongside an industry pull back in funding for game studios. The broader developer faces headwinds in rising acquisition costs, game development costs, a decline in economics, fueling the need for new growth engines. 

As a consequence of this broader macro trend, the gaming sector saw an increase in layoffs, a 40% increase from 2023. Companies have shifted from broad cost-cutting measures to more targeted, project-specific restructuring. Gaming studios are looking to manage risk by reducing cost, with almost 70% of the devs surveyed are looking to do more with less by harnessing productivity and efficiency tools (Unity).

With higher development costs, more competition, and few net new players, break-even titles have become rarer in the industry. However, with these challenges and headwinds, we’re more excited than ever about a reshaping of the gaming sector through new AI infrastructure and platforms that can change the development cost structure and create novel experiences versus the incumbents today.

Industry Challenges and Backdrop

1. Stagnant, Existing Growth Channels – In the US gaming market, mobile gaming remains the most popular, followed by PC and console gaming. Mobile gaming worldwide has become 55% of the total market with smartphone adoption leading to billions of new players and hours. Growth relies on population growth and smartphone adoption in low ARPU markets, with emerging markets like Mexico, India, and Thailand seeing double digit growth in consumer spending. Despite the number of unique mobile games on the iOS app store at a decade low, there are still brighth spots in mobile gaming including esports and social/multiplayer mobile games.  
2. Rising AAA Game costs and profitability challenges – The biggest new game since 2020, Monopoly Go! Hit $2B Revenue in 11 months while spending $500M on user acquisition. Game improvements in fidelity, scale, and capability have led to massive increase in resources to build such games and large R&D spend, with franchises like Final Fantasy XIII that cost $50M to develop in 2009 and steadily increasing to $225M for Final Fantasy XVI in 2023. At the same time, inflation adjusted prices of game purchases have risen slowly, as developers rely on discounting for new user acquisition. Looking forward into opportunities, we’re excited about how AI can expedite the speed of game development at certain stages of the pipeline.
3. The Top Franchises Continue to Perform – The top five franchises on PC worldwide (COD, Counter Strike, Fortnite, LOL, Minecraft) comprise almost 40% of PC engagement despite being 6-22 years old. These top titles continue to take a lion's share of time players spend on PC gaming. Each of these games took about three to six years to develop. On Steam, only 15% of Steam playtime in 2024 was dedicated to new games, a slight increase from 2023. The dominance of established franchises and concentration in player attention makes it challenging for new games to gain traction alongside market saturation. New game development engines can help lower the barrier to entry and make smaller teams able to crate hit games, alongside consumer’s draw to more novel gameplay experiences in indie and AA games.

Macro Opportunities and Trends

• Social and Multiplayer Interactions for Younger Generations – As evidenced by current gaming trends, titles need to replace a user’s existing weekly to daily habit. Using Roblox as an example, during COVID, millions of children flocked to socialize with their friends while making online friends. While gaming contracted after the pandemic, Roblox continued to grow consistently. Unlike traditional gaming objectives, Roblox does not focus on traditional defeating/scoring type games, but taps into expression and social connection (sharing, creating, expressing, identity). Such online, social, and multiplayer experiences will continue to create new genres of games outside of typical goal-oriented RPG or FPS games. 
• Global Acceleration via Emerging Markets and Developers – China alone accounted for over 31% of global mobile gaming revenue in 2024. While only 20% of China’s domestic spend goes to foreign titles, the Chinese gaming industry's revenue projected to grow from $66B in 2024 to USD $9.B by 2029. Looking at Steam’s PC gaming data, Steam’s APAC player base has exceeded all other regions in its MAUs, with Chinese surpassing English as the default language. This rapid growth opens up vast opportunities for game developers and publishers to tap into this lucrative market and other developing markets. There is also growing interest from studios to pursue opportunities in Latin America, where they are seeing early successes. With AI, we’re excited about the increasingly global reach through the localization of games tailored towards different cultures.
• Building an Ecosystem and Community through UGC – Although video gaming faces declining players and playtime, Roblox’s growth is accelerating, now reaching ~350M monthly active users and benefiting from 140M new kids turning 8-10 years old annually with diversified growth. Over 60% of its users are over 13 years old and play time is split almost evenly across major regions around the world (NAMER, Europe, APAC, and Rest of World). Roblox has paid over $3B to UGC developers since 2006 with over $1B in annual run rate payments. Their successful model paves way for future developers to build their own ecosystem, allowing users to create new content and experiences while monetizing through microtransactions.

AI’s Impact in Gaming - Ideas We’re Excited About

As developers continue to invest in technology and tools, we are excited about how generative AI can fundamentally improve the underlying cost structure of game development, making it possible for new titles and experiences to be born outside of AAA studios. Underlying infrastructure such as new physical foundation models, democratization of content/3D, and faster rendering and computation will push towards creating high fidelity experiences at scale. While not exhaustive of all the opportunities we’re most excited about, below are a few big ideas and threads which we would love to partner with founders on. 

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Infinite Simulation and Dynamic Gameplay

AI is poised to revolutionize storytelling and gameplay, with the rise of interactive stories, narratives, and experiences to virtually infinite possibilities and content. Through dynamic narrative generation and choose-your-own-adventure,  AI can dynamically generate story elements such as plotlines, character backgrounds, dialogues, and quests. These systems use a set of rules, themes, and player choices to create unique narratives on the fly. AI can also help populate game worlds with dynamic events based on player actions and choices. 

One example is GameNGen, developed by researchers at Google, which uses a neural game engine that acts as a “living” development platform, adapting game elements in real time and expanding the environment via stable diffusion. Other recent examples include Decart’s Oasis, which creates a Minecraft like world that allows users to reshape its environment in real time. 

The AI-Generated Gaming Studio

AI will dramatically reduce game development time, allowing studios to create high-quality games faster than ever before. While incumbent gaming engines like Unity will be incorporating AI driven workflows to accelerate development, novel AI generated studios in the future can split game automation into scenes, integrating asset generation, world generation, and code generation to render games. With more interactive and indie games developed, LLMs can help create low code developer options, with complete engine features such as animation, fx, audio, and debugging features. 

While we are currently seeing platforms built for each use case (i.e. AI generated assets or QA agents to debug code), we expect to see the quality and synchronization of AI agents working together to produce more complex games from years down to weeks. There are many limitations today such as memory that are needed to support high fidelity, interactive game worlds that will need to be solved on this path.

Democratization of 3D and Asset Generation

AI is starting to foray into 3D generation, with Text-to-3D AI tools are becoming more sophisticated, allowing designers to transform text inputs directly into 3D model outputs or 2D images into 3D. However, providing users with further customization and control over AI generated 3D models has yet to be fully solved. In addition to 3D, new models that understand the physical world are quickly being developed with applications in animation, FX, and world generations. 

Recent examples include World Labs, which transforms 2D photos into 3D environments with real time player controls. Another example includes startups like Inworld, which provide autonomous behavior with AI agents and Non-Player Character (NPC) behaviors and dialogues. The open democratization of generating and leveraging 3D assets, characters, and world models will not only have a major impact on gaming, but also media, entertainment, and broader creator economy. 

Multiplayer Infrastructure and New Genres

Multiplayer games provide a platform for social interaction, allowing players to connect with friends and make new ones from around the world. This aspect has become particularly important in an increasingly digital age, where online communities play a significant role in people's social lives. Many multiplayer games adopt a "games as a service" model, providing regular updates, new content, and events. This approach keeps the games fresh and engaging for long periods, encouraging player retention. Popular examples include Fortnite, World of Warcraft, and Minecraft. 

Multiplayer development is often considered more complex, and many think it requires the targeted expertise that can only be found in larger teams. However,  there is growing momentum of teams of all sizes are facing the challenges of building multiplayer games head-on. AI is helping with the real time environment management, monitoring player actions, predicting potential issues, and making adjustments on the fly to ensure a smooth experience. Underlying scale challenges include server infrastructure, managing servers that can handle thousands or millions of concurrent players; network latency (managing latency across all geos), and community management in moderating interactions and feedback. 

Seamless Monetization and Microtransactions

Game developers have been exploring various strategies to mitigate or bypass Meta and Apple's app store fees, which can be as high as 30% of revenue. Developers are increasingly turning to webshops to offer alternative payment options outside of app stores. This allows players to pay using their preferred methods, including digital wallets like PayPal, local payment services, and other alternative payment methods (APMs). The purchasing of virtual currencies purchased outside the app, such as a web browser, can then used for in-app transactions. We’re excited about new payments infrastructure that can seamlessly enable both fiat and crypto payments to purchase virtual goods and packs. As many payment processors Stripe take high fees with regulatory requirements, new platforms will be built to facilitate high volumes, lower transactions through more effective processing through a seamless, embedded experience.

A Callout for Founders

The gaming industry stands at the precipice of a transformative era, with artificial intelligence poised to fundamentally reshape game development, player experiences, and business models.

If you’re building in any of these areas, we would love to chat with you! Please reach out to connie@montageventures.com

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