Games companies turn to defence as recession looms

The beginning of 2023 has seen several games companies show prudent caution, highlighting warning signs as to what lies ahead.

Ubisoft cancelled three games in development. Wizards of the Coast reportedly cancelled five video games projects. Frontier Developments adjusted its financial expectations after disappointing sales of F1 Manager during the Christmas period and 100 Thieves also laid off a 30 staff, including its CRO. Additionally, several announcements were made at the tail end of 2022 that will take effect in 2023. CD Project Red’s The Witcher: Monster Slayer is shutting down in June 2023 (announced in December), Playtika is laying off 600 staff… You get the gist…

It is important to caveat that the tactical reasons for these decisions will vary. But the underlying thread is clear – 2023 is already seeing a significant shift away from the ‘heyday’ of easily financed revenue growth and heightened appetite for high-risk high-reward projects. Risk aversion and more thorough financial prudence will be the key traits of games companies in 2023.

Decline, or correcting over-allocation towards a healthier cost-revenue equilibrium?

The glass-half-empty read is: the games industry, typically accustomed to stellar growth over the past two decades, could face a bit of a perfect storm in 2023. I believe it is more nuanced than that.

During the era of low interest rates, appetite for higher risk investments and the momentum games have been enjoying as an industry (alongside financial institutions having the appetite to invest), it used to be a justifiable (if not the right) decision for games companies to invest heavily in revenue growth. Scale was the name of the game, with the profitability of each decision having often been given slightly lower priority.

As much of this excitement, bullishness, and cheap money evaporated over the last year, the strategic focus is now turning towards profit and commercially sustainable projects. An argument could be made that some of these companies, rather than necessarily planning for declines, are simply showing prudence and good judgement as they shift from over-focussing on growth towards what was perhaps the healthy equilibrium in the first place.

Not all layoffs or game cancellations are equal

While some companies will inevitably struggle, others posting announcements around layoffs or games cancellations are simply showing best-practice management to weather the macroeconomic storm.

So, who will hurt the most?

Broadly speaking, the games industry has two types of players in 2023. In one corner, we have companies whose existence fully depends on releasing and selling video games profitably (e.g., Ubisoft, EA, Take-Two). In the opposite corner, we have companies that are significant in the games market, but their life does not necessarily depend on driving profits from games sales alone. (e.g., Microsoft, Apple, Amazon, Hasbro, etc). The latter group is much better positioned to weather the storm than the former. It is because the more diversified companies will better able to:

a)     Compete with discount strategies as consumers look for value

b)    Sustain a higher level of investment into future projects and research & development

c)     Draw commercial synergies from across a number of revenue verticals (e.g., cloud, e-commerce, cross-entertainment)

d)    Take advantage of good deals on M&A as the former group (pure-play games companies) struggles

Creativity in big titles could suffer, presenting an opportunity for indies

Turning toward proven profit templates will be in vogue in 2023. This likely means more remakes, sequels, IP spin-offs, and generally less bold, creative bravery. As larger companies shift focus this way, it could be an opportunity for smaller indie developers to shine creatively. If large companies are less likely to present bold new concepts, lower-budget bold new concepts have a higher chance of navigating through the content overload jungle. Those who do well (in terms of profit), may also be quickly snapped up by larger companies looking to boost or cushion their bottom lines.

MIDiA Research is ready, are you?

At MIDiA we have been warning about a coming recession since the end of 2019. I am now grateful that it enabled us to get a head-start in thinking through potential  value chain implications, field and gather data on changes in consumer behaviour, and think about emerging opportunities and pitfalls in entertainment, in light of tightening disposable income.

So, to the entertainment landscape, I’d say: “Hold on to your hats folks, 2023 is going to be a crazy ride”. For those of you who are fortunate enough to be MIDiA clients, you are not just in good hands. You are in well-prepared hands. And we couldn’t be more excited to help you navigate through the challenges of 2023.

Bring it on!