By Trey Price, American Consumer Institute
As game manufacturers have become a major pillar of entertainment, they are receiving many of the same criticisms levied against other industries. Specifically, critics argue that gaming incumbents are too big, making it nearly impossible for new studios to break into the market. However, history paints a different picture.
When you look beyond any single moment in time, it becomes clear that companies once considered too big have faded away in the face of new competition. The recent success of Belgian game developer Larian Studios’ Baldur’s Gate 3 and Japanese game developer Pocketpair’sPalworld is a case in point.
Concerns about major companies’ impact on competition in the gaming industry go back decades. In a 1984 Play Meter letter to the editor, a man familiar with the coin-op industry (arcades) wrote about the damage that then gaming juggernaut Atari was doing to the coin-op industry. The letter argued that the licensing of arcade games to home consoles was costing arcade operators money and called for arcade companies to boycott this practice.
Ironically, this letter was written amidst a major market crash in the video game industry. The letter itself mentions Atari losing money and having to sell off major parts of the company, making it unlikely that such a struggling industry was undermining small business owners like arcades.
Today, the video game industry is unrecognizable from what it was in 1984, having evolved to become one of the biggest entertainment industries in the world. In fact. it is too big according to some critics, who contend that the dominance of certain companies makes it nearly impossible for newcomers to break into the industry. In turn, they argue that quality has stagnated as developers become more risk averse and the quality of games suffers from lack of meaningful competition.
While established video game companies undoubtedly enjoy advantages over new market entrants when it comes to resources, the idea that they are the only relevant industry players is false. The recent successes of Larian Studios’ Baldur’s Gate 3 and Pocketpair’s Palworld serve as useful examples and challenge the alleged hegemony of AAA game developers, a term used to categorize developers with the highest budgets and marketing support.
Larian Studio’s Dungeons and Dragons role-playing game (RPG) Baldur’s Gate 3 became an unexpected hit when it was released in 2023, selling over 20 million copies on the PC gaming platform Steam. Larian is now far from the small developer it once was, having recently expanded to around 400 employees in order to make Baldur’s Gate 3. That is roughly ten times as many employees as the company had on hand when it developed one of its previous games, Divinity: Original Sin.
However, it is still small compared to other competitors in the space. To put that in perspective, Microsoft has around 22,000 staff working in its gaming division, though it is currently in the process of layoffs.
Larian’s size hasn’t impacted the quality it puts forth. The level of attention Larian put into the development of Baldur’s Gate 3 actually prompted many game developers to caution gamers against accepting the game as a new standard for RPGs.
Palworld became another unexpected major hit when it was released earlier this year. With 19 million players across Xbox and Steam, Palworld is the biggest non-Microsoft launch in Xbox Game Pass history.
By all accounts, this was not the likeliest outcome. Palworld took a very unconventional approach to game development that was seen by many as risky, since the team didn’t have a budget and no one knew how to do 3D animation.
The success of Palworld led to new challenges related to the relatively small size of their company as they have had difficulty keeping up with server demand and are in the process of expanding their workforce to continue developing the game. While there have been accusations that Palworld borrowed heavily from Pokémon and relies on AI-generated art, it can’t be denied that Palworld has found a remarkably successful niche within the gaming industry.
The problem with looking at any single point in time, whether it be in the state of coin-op in the 1980s or AAA gaming in the 2020s, is that you fail to capture the constant evolution of the industry. If major game companies are risk-averse and less creative, then new alternatives can and will arise to challenge their dominance. As regulators seek to reign in large companies, they should remember that companies like Atari were also once considered a threat, but they were brought down by competition, not government action.
Trey Price is a policy analyst with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org .