Augmented reality game market growth might be stalling

News of layoffs and cancelled game projects at Niantic this week stunned the game development world. For years, the Ingress and Pokémon Go developer has been acquiring companies, launching new games like Harry Potter: Wizards Unite and announcing new titles like Transformers Heavy Metal, Peridot, and NBA All-World.

But layoffs, cost cutting and game cancellation may show that the titanic success of Pokémon Go is slowing down, or at the very least, isn't easily translatable to other game brands. And if it's not working well for Niantic, how might the rest of the AR game world be holding up?

To get some context, we checked in with Omdia Analyst Guillermo Escofet (disclaimer: Omdia is a sibling organization of Game Developer). Escofet is regularly forecasting the augmented reality game market, and had just updated his report right as Niantic announced its cuts.

"Growth in mobile AR games revenue has stalled. It dipped slightly last year and, this year, and it is heading for a 20 percent drop, bringing it close to 2019 levels," Escofet explained in his updated forecasting. He noted that Pokémon Go's revenue appears to have dropped 45 percent in 2022, and Square Enix's Dragon Quest Walk saw a 32 percent year-over-year drop in revenue in the company's 2022 first-quarter results."

These drops have driven Escofest to update his forecast of the AR game market. He predicts that the market is now on track to earn $2.5 billion in revenue by 2026, down from $6.7 billion in projected revenue.

Escofet isn't all doom-and-gloom about the mobile games market though. He pointed out that a similar dip in revenue took place in 2017, and that these erratic shifts are partly driven by a market dominated where a handful of games bring in most of the revenue. 

It does appear that the AR games market isn't able to sustain more than one "super hit" like Pokémon Go, Escofet said, though that doesn't mean there still won't be growth in the industry's future. "There are enough compelling mobile AR gaming use cases, and there is enough impetus from leading platforms such as Apple, Google, Meta, Tencent, Unity and Unreal, to ensure continued growth going forward," he wrote. "Albeit at a significantly slower pace than previously forecast."

If you're the kind of developer looking to solve revenue challenges for augmented reality games, Escofet pointed out the two major weaknesses of the business that are in need of solving: first, AR games are not popular in China, a country that makes up a third of the global mobile game market's revenue. Pokémon Go and other Western real-world games are banned in the region, and Tencent's Let's Hunt Monsters does not generate much revenue.

Second, AR games are far less likely to have in-game advertising compared to regular mobile games. Figuring out how to integrate ads into these types of games may be a potent revenue stream that shifts the market's overall performance.

It is disappointing that the Pokémon Go model has propelled the game into a "sole super hit" status, rather than being a springboard for more games in the same genre. But it also highlights how the Pokémon brand helped elevate the game design in question. Not only is it about the pre-existing popularity and market interest in Pokémon, it's also a healthy overlap with the fantasy the game is selling.

The fantasy of being a Pokémon trainer in the real-world has been a part of the franchise's marketing since 1996. Randomized creature encounters, trainer battles, and dominance over gyms have been core mechanics since the very first game. It's a difficult pitch to compete against—hopefully Niantic (which just launched its AR game social media network Campfire) and other developers are able to find new angles on AR technology to help the market find new audiences.