A new report from DFC Intelligence forecasts that sales revenue from games distributed online will surpass physical retail sales in 2013.
Global sales of online games - including PC, console, mobile and tablet online games - are expected to rise from $19.3 billion in 2010 to $37.9 billion by 2016.
"On a global basis it looks like retail delivery of physical software peaked in 2008," said DFC analyst David Cole. "We expect a slow, steady decline for physical game sales, with a steady increase for online delivery of games and new business models such as subscriptions and virtual item sales."
The rise of online games will counterbalance the decline in physical retail, driving growth in total industry value from $66 billion in 2010 to $81 billion in 2016. The key drivers of that growth will be PC games and games for smartphones and tablets.
The report also predicts that the current generation of consoles marks a peak in the popularity of physical platforms.
"The dedicated console business is still the major driver of industry growth, but we feel overall it has peaked with the current console systems," Cole adds.
In a separate report, summarised by VentureBeat, DFC forecasts growth in game advertising, rising from $3.1 billion in 2010 to $7.2 billion in 2016. Advertising spend in North America alone will double from $1 billion in 2010 to $2 billion in 2014.
"Video games have reached beyond adolescent males into a mainstream entertainment medium that touches every segment of the population," said DFC's Michael Goodman. "Despite this, advertisers continue to under utilise video games as an advertising vehicle. This is slowly changing as more games go online."
DFC expects key growth areas to be advergames and "around-game" ads - much like advertising in Facebook games. These forms of advertising will comprise 78 per cent of of the total market by 2016.