Are the ongoing layoffs in games indicative of a wider issue in the games industry?

The layoffs wildfire that struck the games industry at the start of 2023 does not seem to be stopping - the most recent being Epic Games last week. Firstly, on a personal level, it has been really sad and upsetting to see all these people being laid off in 2023 – especially when the reasons behind these layoffs are really not through any fault of their own. Luckily, there are a number of people out there actively trying to help (such as Amir Satvaton LinkedIn, see his info if you are looking for a new role in the games industry).

So, what is behind the barrage of games industry layoffs? Arguably, they are a symptom of a wider issue in the games industry. Actually, I am afraid it is not just one issue, but a combination of issues culminating in the ongoing consolidation of the landscape. Here are some of the most important contributing factors (some of them intertwine and some of them exist separately, but all contribute to what is going on):

• Inflation and heightened interest rates: Inflation has been pushing up interest rates, making debt more expensive to service and additional funding to fuel growth harder to come by. Companies (not just in games, but in wider tech and entertainment) have been focussed on growing revenues and user bases and less focussed on profitability. In the current macroeconomic climate, investors are increasingly income (profit) oriented. As a result, companies are being pressured into trimming down from having been arguably overstaffed for growth, towards finding a new equilibrium more focussed on efficiency and profitability

• The peak of the games industry’s growth rate: MIDiA’s global games forecast (to be published later this month) states that after a year of negative growth (decline) in 2022, the industry is coming back to a very modest growth (spoiler alert: low single-digit growth) in 2023. However, that growth is lower than the global rate of inflation. This means that even though the games industry will likely grow slightly in dollar terms in 2023, it will be worse off in reality. The pace of growth for the games industry has peaked. The industry will keep growing in dollar terms, but it is mostly going to be driven by increasing population and better global internet connectivity, rather than by strengthening fundamentals of the games business. While in-game spending will continue to grow, so will cloud gaming subscriptions. As cloud gaming subscriptions grow, there will be less of a need to buy high price point games. The games industry is about to see similar pressures as the music and video industries have seen when streaming subscriptions truly took off. There will be differences in how these dynamics play out in the games industry but the fact that the value of an individual game in consumers’ eyes will decline is inevitable. As such, there will less demand for new games (unfortunately for developers and publishers).

• Increasing number of engagement-dependent games chase the same 24-hours in a day: Although games revenue is barely growing (as explained above), the number of games keeps growing significantly. Take Steam as an example of this; tracking upward of 13,500 games released in 2023, up from just over 12,500 in 2022. The number of games out there is growing significantly faster than global games revenue. In other words, there are more and more mouths (projects) to feed, but the size of the lunch they all must share (global games revenue) is growing much slower in comparison. Besides this, some companies’ core business models are not necessarily dependent on games themselves (be it Netflix, Apple, Amazon, and others). This puts additional competitive pressures on companies whose business model is fully dependent on making a profit from games. As if those points were not enough, games business models (partially through the rise of free-to-play (F2P), but also on the premium side) are increasingly depending on in-game purchases. As such, they are directly dependent on time spent despite the 24-hours available in  day staying constant. 

To summarise; there are more games trying to share global games revenue (which is not growing fast enough to accommodate for this), more games are dependent on limited time spent, and there are more companies in games that do not live or die by making games profitable (they can offer more competitive pricing and value to customers)  - all at the same time.

The ‘how does the games industry address this’ part of the questionis more difficult to answer – there is no silver bullet. The games industry cannot realistically control all the aforementioned factors (e.g., inflation and interest rates, or subscriptions cannibalising individual games sales, etc.). The games industry had been staffed and invested in for overdrive success and is now correcting to a more natural and profitable equilibrium. Although much of the above sounds like doom and gloom, this industry is not going anywhere (spoiler alert: it will still be worth approximately $187 billion in 2023). For games companies thinking of future projects, carefully planning routes to profitability over user growth will become increasingly important. Also, we will see increasingly more success in the future for games that focus on capturing and serving enthusiastic niches (note: niches can significantly vary in size), rather than competing for mass audiences. Lastly, getting to really understand gamers beyond the game itself (i.e., their wider entertainment and consumption behaviours and preferences) will become more important than ever before to compete effectively.

Game on.