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18 November, 2021updated 22 Nov 2021 09:49

The history of video gaming (and why investors cannot ignore it)

The video gaming industry is now worth many billions of dollars, but how did it get to the point where no investor can ignore it?

By Ruth Strachan

The gaming industry has seen a meteoric rise in correlation with rapid technology advancement and has become one of the most profitable and fastest-growing entertainment industries in the world. The sector not only cultivates pockets of talent, it has strong connections with popular culture and can hold lucrative opportunities for investors, businesses and the countries that host its big names.

Earnings for the top gaming companies sit comfortably in the hundreds of millions of dollars, and the industry only looks set to grow in the coming years, making it a potentially lucrative investment space.

The gaming industry has evolved from basic dots on a screen to addictive entertainment for the masses in a relatively short space of time. So where did video gaming begin and how did it develop into one of the biggest industries in the global economy?

In the beginning: Enter player one

In the early days of gaming, progress was slow, with most of the early examples of video games offering basic mathematical puzzles or challenges (such as Tic Tac Toe) and originating in computer labs or universities. The games were largely designed by engineers for engineers.

In 1940, at the New York World’s Fair, the Nimatron – which exclusively operated the mathematical game Nim – was presented by Dr Edward Uhler Condon. Despite the clunky nature of the machine and basic graphics, the Nimatron demonstrated an early appetite for video gaming. Nim was played by approximately 50,000 people across six months as it sat on display in New York.

This came at a time when television sets were becoming more commonplace in Western homes, and the beginnings of a cultural reset were under way.  

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However, it would be almost three decades until a gaming console would be released for home use. Ralph Baer – a German-American inventor widely known as 'the father of video games' – came from a background in television technology. He believed that more could be down to expand on the television’s entertainment offerings.

Baer created the Brown Box, which was released in 1967. The basic computer was clunky but could be connected to a television set to allow two players to play ping-pong, checkers and other sports games. It essentially operated glowing dots on the screen which players could control. Games would work by guiding the dots under colourful screen-overlays that attached to screens via static.

Atari versus Magnavox

The Brown Box went on to be licensed to Magnavox – an American home electronics company – and was rebranded with a snazzier title, the Odyssey, in 1972.

An add-on toy shotgun also meant that the Odyssey presented the first shooter video game, with none other than Frank Sinatra acting as a spokesmodel. It could be argued that Sinatra was the first gaming mascot, but despite his involvement the console didn’t achieve major commercial success.

It did, however, leave a lasting impression on the gaming community with its early iteration of a well-known arcade game, Pong. Baer was once quoted as saying: “Once we had that third ball on the screen, we knew we had something.”

Around the same time that Baer was building his Brown Box, Nolan Bushnell recognised that games could work well in an amusement park, so set about working out how to shrink down technology in order to make it work in an arcade setting; after all, in 1971, the micro processer had not yet been invented.

Bushnell’s initial arcade game launch of Computer Space was met with little excitement, with the game being thought too complex for the average person to grasp. Bushnell then set about making gaming more accessible for the masses, and in 1972 he borrowed $500 and started the gaming company Atari in Santa Clara, California, with his business partner Ted Dabney.

Atari engineer Al Alcorn developed a game similar to Baer’s ping-pong game, but with improvements including the addition of sound effects, scoring and a speeded-up ball. Under Atari, Pong was officially born, and it went on to become an immediate hit.

Despite the Odyssey technically beating others to the punch of releasing a home console, the Atari brand was considered to be the leading pioneer in gaming.

To keep up with consumer demand Atari began hiring at a rapid rate with many of the new employees coming with no background in engineering or technology. It was a time of rapid learning and signalled that although consumer demand was sky high, experience and talent was thin on the ground.

Atari was perhaps the birthplace of the original gaming den workplace stereotype. "Bonuses came in beer kegs and meetings were held in hot tubs," Bushnell told the 2004 documentary Video Game Invasion.

David Crane, a former game designer for Atari, expresses in the documentary that he believes this laid-back environment was important to cultivating a creative atmosphere, saying: “You can’t punch the clock and come up with something creative.”

This would prove to be an important and lasting dilemma for gaming businesses – the need to balance creativity and artful expression with business savvy and professionalism.

Atari’s rise to the top of the fast-developing gaming sector was shaken when it faced its first serious lawsuit at the hands of Magnavox. A dispute between Baer and Bushnell broke out over the origin of Pong and other patents.

Baer’s 1969 patent prohibited not just the general concept of a ball being volleyed back and forth, but that of moving objects on a video screen controlled by any user. This created a huge hurdle not just for Atari’s Pong, but for anybody hoping to develop video games.

Eventually, a settlement of just under $1m was reached between Atari and Magnavox, with the latter becoming a licensee of Atari.

The lawsuit highlighted the large sums that were already on the table in the gaming industry. What followed was a battle between Atari and various copycat developers that were continuously popping up with launches in a bid to gain a slice of the action.

Atari went on the defensive, plotting evasive moves such as purposefully mislabelling chips to throw off rival developers that were trying to copy builds. The competition for gaming dominance was well and truly on.

Balancing business and creativity

Soon Pong was developed for home use and Atari continued to solidify itself as the pre-eminent gaming developer. The industry continued to evolve at breakneck speed and Atari attracted talent in the form of Steve Jobs and Steve Wozniak. The two later broke away from Atari to create Apple, but not before offering Bushnell the opportunity to invest, an opportunity that Bushnell declined.

At that time in the early 1980s, Atari had most of its capital tied up in development of its new home console system, which would become known as the Atari 2600. This console set a new precedent because it was capable of offering different games through game cartridges.

In order to fund the console, Bushnell sold Atari to Warner Communications in 1976 for $28m but with the intention of staying on as chairman. However, the launch of the Atari 2600 was largely mishandled, with the console missing its projected Christmas launch. As a result, Bushnell was dropped by Warner Communications and replaced by Ray Kassar.

Kassar had a more corporate professional background, and this was a significant change for not just Atari but the gaming industry. Under Kassar, a valuable lesson was to be learned about valuing talent. During Kassar’s reign, there was little respect for the gaming den work ethic or the creative talents of the game designers. Although these designers were largely responsible for Atari’s success, developer salaries were low, which caused discontent to ripple through the workforce. Kassar is reported to have uttered that "game designers were no more important than the workers on the assembly line putting units together".

In retaliation, droves of Atari’s workforce left the company. This included four top designers who went on to begin their own company, Activision, a games developer still prevalent today. This was symbolic for the industry because it was the first independent publisher putting game creators at the forefront.

Across Activision’s first three years, it recorded revenues of $160m, releasing hits such as Pitfall, Kaboom and Freeway. This placed Activision as stiff competition to Atari and taught a valuable lesson to corporate heads in the gaming space: respect your designers. This message has frequently been ignored ever since.

In today’s gaming climate, the industry remains fast paced, to the detriment of the workers when not properly regulated. ‘Crunch culture’ – an ethos that employees in the gaming sector have to feel the pressure of delivery and expectation as a part of the creative process – is widely accepted. This has brought with it widespread criticism, with reports of 65–80-hour working weeks for designers – often uncompensated – being commonplace due to the competitive nature of the industry and for the jobs within it.

Back in the late 1970s and early 1980s, the beginnings of this highly competitive and pressure-filled workplace were being established.

Licensing, characters and more lawsuits

In 1977, Star Wars mania was in full force, which created consumer demand for all things space-themed. Enter the game Space Invaders. Developed by Japanese company Taito, Midway – a competitor of Atari’s – brought the game to the US and as a result, tapped into not only the power of fandom but the addictive nature of recording high scores.

This presented Atari’s first real challenge for dominance in the gaming market and a year later the company launched a new arcade game, Asteroids, in a bid to keep up with consumer trends. This developed a pattern in gaming that still exists today, to trend forecast and adapt to consumer demand quickly in order to strike while the iron's hot.

Another hit came when Midway introduced Japanese game developer Namco’s Pac-Man to Western audiences. Pac-Man brought with him another important lesson in gaming – that characters sell. It was the first time that gamers really had a main character to champion, which not only drove the game’s popularity, but it allowed for licensing… a lot of licensing.

By 1982, Midway had approximately 105 Pac-Man licensees; including a cereal, music in the charts, an animated TV show and a Time magazine cover.

Dr Richard Wilson, CEO of TIGA, a non-profit trade association representing the UK’s gaming industry, says: “Video games were really taking off in the 1980s, namely in the UK, the US and Japan.”

Japan was about to step up a gear when it came to being the dominant force in the gaming industry.

In 1981 card game-maker Nintendo set itself an objective to break into the Western gaming industry. Game designer Shigeru Miyamoto recognised Pac-Man’s success as a marketable lead character in gaming and decided to introduce a roster of characters for Nintendo through storytelling in games.

Miyamoto decided to depict a love triangle between a woman, a carpenter and a gorilla – a tale as old as time. After some reiterations on the title of ‘Stubborn Gorilla’, Donkey Kong and shortly after, Donkey Kong Jr, saw huge success and arguably the most famous Italian plumbers of all time were coded into existence.

Arcade gaming was so popular around this time that by the end of 1982, Americans had spent approximately 20 billion quarters (or $5bn) on arcade gaming.

As characters grew in importance within the gaming community so did claims against game developers. In 1982, Universal filed a lawsuit against Donkey Kong because of a supposed likeness to King Kong. The lawsuit stalled when court papers revealed that the original copyright holder had let the rights fall into the public domain.

It did, however, plant the idea of crossovers with other forms of entertainment firmly within the minds of video game developers.

The 1983 gaming crash

The year 1982 saw the gaming industry reach new heights with an ever-increasing number of companies trying to make a name for themselves. New consoles including the Intellivision and the Colecovision were launched but failed to meaningfully compete with the big hitters.

For the creative side of industry, it was an exciting time to be working in gaming with many new titles and concepts being developed and talent in high demand. On the business side, the sector was extremely competitive, and the consumer market appeared to be volatile in terms of what it deemed a success.

Wilson says: “Like film or music, it is a hit-driven business. Sometimes it is hard to predict what will be the next big thing. There are failures that are very fabled in the gaming industry.”

Atari under Kassar’s leadership was looking for its next Pong-like hit. If trends were to be understood at the time, beloved characters such as Donkey Kong and Pac-Man spelled commercial success. With this in mind, Kassar took steps towards what would arguably become one of the biggest failures in gaming history – the game based on the hit move ET.

Atari paid $25m for the gaming rights to ET with the hopes that it would be able to absorb the fandom in a move that would mirror the success of Space Invaders. Tight deadlines to deliver for a Christmas release meant the game was developed at breakneck speed.

This impossible timeline, teamed with the well-documented disrespect felt by Atari’s gaming developers, resulted in a poorly made game that was panned by gamers and critics alike. Unsold copies of the game ended up being dumped in a landfill in New Mexico and the game remains a cautionary tale to developers.

It proved to be the kiss of death for Atari. Warner Communications dropped the gaming company and unceremoniously exited the sector. The one-time trailblazer of the gaming world had been felled by the world's most famous extraterrestrial.

More generally, this was a turbulent time for gaming companies. Talent was switching companies on a frequent basis, competition for consumers was fierce and the pressure to create the next hit created a tense environment.

Alongside this the ongoing console race was having an impact, according to Wilson, who says: “Consumer demand is essentially what drives the gaming industry and there was this demand for hardware. The drive to create new consoles inflated team sizes and inflated budgets.”

The industry crashed in 1983 and it would take more than two years for it to recover.

At the same time, consumers were beginning to expect more from their electronics in a general sense. As gaming companies were forced to re-examine best practices and to re-evaluate what home audiences would be responsive to, personal computers (PCs) began to rise in popularity.

In 1985, consumer appetites were switching away from consoles and towards PCs. Here was a product that could not only satiate a desire to game at home, but could also prove useful for work and storing information. As a result, gaming revenue dropped from approximately $3.2bn in 1983 to approximately $100m in 1985.

PCs also offered would-be gamers more opportunities to get up close and personal with coding, as they had more powerful processors than gaming consoles offered at the time.

Wilson says: “Back in the 1980s, the Spectrum computer came out in the UK and that actually made video game development very accessible and cheap for a lot of people. In fact, I suppose at that point in time, you could have very small teams of people making games.”

With Basic coding, people could begin to create their own games at home. Even Bill Gates got in on the act, designing a game in which the participant drove a sports car while dodging donkeys (imaginatively named Donkey).

Wilson says: “The advent of cheap PCs actually began to fuel consumer demand for gaming.”

The NES and handheld gaming

It didn’t take long for the gaming industry to rebound, and in 1985 a console breakthrough in the form of the Nintendo Entertainment System (NES) was launched. With better graphics, sound and gameplay than home gamers were accustomed to, the NES became a rapid success. Gaming businesses were once again feeling optimistic about the future of the industry.

The NES ushered in a new era of home video gaming and this period saw the launch of a number of long-lasting gaming franchises including Super Mario Bros, The Legend of Zelda and Metroid.

In a move that revolutionised the industry, Nintendo developed regulations to allow third-party game developers to launch games on the Nintendo platform while still maintaining high gaming standards. This meant a steady stream of new releases and it expanded Nintendo’s gaming library, which was soon to include Capcom’s Mega Man, Konami’s Castlevania, Square’s Final Fantasy and Enix’s Dragon Quest.

Japan was continuing to establish itself as a gaming hub, with another Japanese company Sega also launching a console. Despite the fact that Sega’s initial launch of the Master System struggled to compete with the NES, it wasn’t long before the company came back swinging. In 1989, Sega released the 16-bit Genesis console. This launch, alongside the introduction of Sega’s iconic spiky blue mascot Sonic the Hedgehog in 1991, established Sega as a game developer heavyweight.

Meanwhile, Nintendo continued to push the gaming industry forward by offering the first handheld gaming device in the form of its 8-bit Gameboy in 1989. Gameboy launched with another hit game, Tetris, and successfully established handheld gaming devices as a new avenue for console play, a form of gaming that remains popular to this day.

In 2021, handheld gaming devices – such as the Nintendo Switch – continue to attract consumers and pull revenue, but the advent of smartphones has made handheld gaming accessible to the masses.

Wilson says: “When the iPhone was launched, this flipped the video games industry, because it became comparatively cheap to develop video games and to launch them. So, where you might have needed several million pounds to develop a console game, a mobile game can have quite small budgets and quite small teams. In some cases, even just one person.”

The 1990s, ratings and regulation

As technology continued to innovate at a rapid pace, the 1990s were a significant boom period for the video game sector.

As competition continued, Nintendo released its 16-bit offering in 1991, called the Super NES or SNES. This era saw a high volume of game launches that included more realistic and violent graphics, namely the likes of Street Fighter, Doom and Mortal Kombat. Gaming was growing up – graphics became more realistic and the gamer demographic widened; the industry was in need of regulation.

A rating system was put in place to rank video game content on level of age appropriateness. Yet this rating system did not persuade everyone that games were age and society appropriate.

Concerns about the impact upon children of the violence and sexism in video games are consistently being raised by parents and news outlets. This has even seen countries impose gaming bans – in China, under-18s are only permitted to game for three hours on weekends.

Back in the 1990s, consoles continued to fight for dominance in the gaming market as PCs encroached ever deeper into their territory. Computer gaming continued to allow for more connection between players with the wider uptake of the internet, and the introduction of the LAN connection, which made multiplayer gameplay more accessible.

However, in PC gaming a dominant games developer was emerging. EA Games – a floppy disk and CD-ROM-focused games company – cleverly captured the PC gamer market with mainly sports genre games. EA Games introduced the idea of seasonal sports games with the release of John Madden Football, which focused upon American football.

Like games that would follow – including FIFA (based on soccer) and NHL (ice hockey) – John Madden Football would re-release every season to mirror the real-life sport. This proved to be a highly lucrative and popular formula that once again was able to successfully connect game releases to existing fandoms.

How the gaming giants were born

CD-ROM technology continued to be an important development for the industry as it brought with it a rapid improvement in graphics. In 1995 Sega a launched new console, the Saturn, that operated exclusively through a CD-ROM drive. Always one to rise to a challenge, Nintendo quickly partnered with Sony in a bid to develop their own approach to a CD-ROM-based console and development on the first PlayStation was born.

Partnerships in the gaming world appeared to be fickle in the 1990s, however, and Nintendo backed out of its deal with Sony and instead joined forces with Philips.

Sony was quick to claim vengeance; the Nintendo/Philips endeavour slowly fell apart and Sony went on to launch the PlayStation on its own, putting itself firmly on the gaming industry map.

The PlayStation went on to become one of the most successful console launches of all time. This was aided in part by a blocky Lara Croft in Tomb Raider – the first prominent female game character (aside perhaps from Ms Pac-Man) – and Crash Bandicoot, which became PlayStation’s mascot in an attempt to compete with Nintendo’s Mario and Sega’s Sonic.

Another tech giant throwing its hat into the ring was a surprising one, when Microsoft announced its intentions to create a console in 2000. Up until this point, Microsoft had been focused on software – namely office software – so it initially had trouble edging the door open to the gaming industry. Despite this, the launch of the Xbox in 2001 was largely a success, in part thanks to hit game Halo, which created a blueprint for online shooter games.

Microsoft’s Xbox and Nintendo’s new Game Cube console were still chasing Sony’s new PlayStation 2 console, however. This would continue to be a pattern for the gaming industry: innovate, release, compete.

Wilson explains how this pattern has continued into modern day. “These spurts of growth in gaming are largely fuelled by the hardware," he says. "The consumers' desire to have the next Xbox or PlayStation drives bursts of revenue, which in turn drives investment into the sector.”

This era of console wars was not without casualties and Sega’s Dreamcast console was a commercial flop, despite receiving positive reviews. This failure spelled the end for Sega’s console efforts, with the company then resorting to third-party software development.

As the console race continued, the need for innovative and tech-defying game concepts and designers became more and more important, something that continues to the present day.

Nintendo, Microsoft and Sony remain at the top of the global gaming industry pyramid with console releases continuing to be met with enthusiasm from now-loyal fans. Mascot characters and popular game franchises have continued to deliver for their respective gaming companies and console hardware has kept on innovating, with notable releases including the Nintendo Wii and the PlayStation Move controller.

As these gaming companies have become more established as titans of the industry, the drivers informing the gaming economy and flow of investment have become more granularly defined; talent needed, graphics expected, online capabilities, ethical reputation and technology advancements.

What is the state of play in the gaming industry in 2021?

Accessibility to gaming has continued to evolve, with advancements in phones, laptops and tablets making gaming and coding far easier to gain access to. Even those who were unlikely to ever buy into gaming through a console or computer game likely carry around a smartphone with at least one gaming app.

Through this evolution the gaming market has never been so open demographically and has now expanded past the old ‘boys club’ and its beginning in arcades, bowling alleys and bars.

Today gaming has become an important part of pop culture with an industry that has boomed throughout the 21st century. In 2016, one-third of the world’s population (2.5 billion people) were gaming at some point.

In fact, the gaming industry is set to continue expanding until at least 2023, when the industry is estimated to reach a value of $200.8bn, according to TweakTown data. So which countries are set to take the largest slices of the pie when it comes to the gaming gold rush?

Despite having a gaming ban for under-18s, China is the largest market with regards to revenue for video games. This is largely due to the tech conglomerate Tencent, which has an extensive gaming division. In 2021, China’s estimated revenue for video games sits at $49.3bn.

The US has always had an important hand in developing the video games sector and the country continues to be an industry leader, coming second for revenue globally. In fact, in 2021 four out of five American houses contained a gaming console. In 2021, the US’s estimated revenue for video games is $30.4bn. Notable American games companies include Microsoft, Activision, EA Games and Take Two.

Third in revenue is Japan with $18.2bn in 2021. The country continues to be a hub for gaming development and is home to a number of high-profile companies including Nintendo, Sony, Sega, Square Enix, Bandai Namco and Konami.

South Korea, the UK and India are the next in the ranking, respectively, in terms gaming revenue, though the UK is experiencing an industry growth spurt.

Growing a gaming hub

The UK is a prime example of a country with roots in gaming looking to capitalise on the growth in gaming.

Between 2010 and 2019, UK gross value added for its gaming industry grew by £2.51bn. Wilson explains the value of the UK’s gaming industry. “[It has] been quite successful and has shown to the UK government that this is just the kind of industry a government should support because it provides highly skilled employment,” he says.

Wilson adds that the majority of those employed in gaming are educated to degree level or above, going on to say: “Unlike some industries, we are not so focused on London, we have clusters of activity, so it supports regional growth.”

The advent of a video games tax relief in the UK in 2014 has aided growth in the sector through the ability to reduce the cost of game development within the country. Wilson highlights Canada as a good example of a country that successfully deploys government support for the sector. “In Canada, they grew the video games industry almost from nothing to 25,000 development staff," he says. "That was aided by video games-based investment incentives. It has encouraged a great deal of investment into Canada, proving that this sector can drive all sorts of cross-sector growth.”

As technology has become more crucial to life and trickled through pretty much all other areas of the economy, gaming has been on the frontline of fast-developing technology, and has not only brought technological accessibility across the western world but also creating pockets of tech-savvy talent.

For countries and companies looking to follow gaming leaders, Wilson highlights travel as the key driver for investment and success.

He says: “[For countries looking to grow their gaming sector], you need a good further education sector, because you need to provide a large pool of talented staff to make games. You need myriad skills; people who can code, design, and have excellent art and audio skills, and of course, other more business-related skills as well. All of these skills are important and good education institutions are really critical for that.

“Governments around the world want a piece of the action and they want to create environments that are favourable to industries that are creative, highly skilled and productive. You will continue to see a lot of jurisdictions around the world creating environments that are favourable for game development.”

Game over? Not for a long time

While competition between the key gaming giants continues, other Big Tech names are entering the fray. Amazon has invested hundreds of millions of dollars into gaming and had its first hit with online game New World. Facebook is looking to utilise the metaverse that has risen to prominence in popular games such as Minecraft and Fortnite. Meanwhile, Netflix acquired game developer Night School Studio in September 2021 for an undisclosed fee. Netflix has previously stated that it competes just as much against video games as it does other streaming platforms due to the battle for the ‘attention economy’.

Wilson says: “There is every reason to expect that the video game sector, not just in the UK but globally, will carry on expanding its represented investment opportunity. Consumer demand continues to grow and it is hard to imagine [companies are] not going to continue providing further innovations that will help sustain game development.”

As video games are set to remain an integral part of the global entertainment industry, countries and companies alike are still fighting over the controls when it comes to gaming dominance. One thing is for sure, investors are set to play this game for a long time yet.

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