Video Games: Serious Business for America's Economy

This paper analyzes the contribution of the computer and video gaming industry (“entertainment software”) to the U.S. economy. In 2005, revenues for entertainment software products and directly related accessories were $10.5 billion. By definition, every dollar spent on entertainment software in the United States contributes directly to the gross domestic product (GDP). In 2004, U.S. sales of entertainment software reached $8.2 billion; total world sales reached $25.4 billion. The cumulative average rate of entertainment software sales in the United States is expected to remain at 15 percent per year through 2010. GDP also increases with exports of U.S. video games to foreign countries. According to the annual reports of some U.S.-based video game software firms, these exports totaled $2.1 billion in 2004. Hence, the direct, immediately identifiable contribution of entertainment software to the nation's output exceeded $10.3 billion in 2004 and is growing quickly.

The direct contribution to the nation’s output does not reflect the total contribution of the entertainment software industry. The purchase of video games triggers the purchase of a host of complementary products, and thus the sale of software contributes indirectly to the nation’s output. These complementary products can be placed in four categories: processors, content, devices, and broadband Internet access. By tracing the sales of these complementary products, we estimate that the direct sales of entertainment software stimulate additional purchases of roughly $6.1 billion each year in the United States. Some complementary sales, such as those of specialized gaming personal computers, can be claimed in their entirety. A portion of other sales, such as the sale of high definition televisions and broadband Internet access service, should also be allocated to the entertainment software industry. Not only does entertainment software trigger complementary sales, it triggers those complementary sales faster than they would otherwise occur. For example, but for the demand for video games, computer processing would not have developed as quickly. When one accounts for these complementary sales, the direct and indirect contribution of entertainment software to the nation’s output exceeded $16.4 billion in 2004

As impressive as this $16.4 billion is, the simple calculation of the direct contribution to GDP still understates the total economic contribution of the entertainment software industry because it does not consider two other important sources of economic value. First, the entertainment software industry invests significantly in specialized human capital and other specialized inputs, such as hardware and software, used to make a video game. The industry invests a large percentage of its sales into research and development (R&D) in an effort to generate even more innovative games for the next generation of players. Those investments in human capital and R&D create external benefits that are enjoyed by other sectors of the economy. Second, video games find other applications, sometimes intentionally and other times by accident, in other industries throughout the economy. Although these “technological spillovers”are not captured in the GDP numbers, they represent a significant contribution to the overall economy because increases in productivity caused by advances in entertainment software translate into a higher standard of living in the future.

Because it is difficult to quantify the benefits associated with technological transfers from the entertainment software industry to other industries in the economy, we do not attempt to do so. But it is likely that beyond the $11.2 billion in impacts described, the migration of video game industry technology to other sectors is having, and will continue to have, a material and positive impact that will ripple through the economy in countless ways. In sum, by focusing on direct sales of entertainment software (including exports) and complementary sales triggered by the demand for entertainment software, and not including any impact associated with this profoundly important effect on technology transfer, our estimate of the industry’s total contribution to the U.S. economy is highly conservative.

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