In March 2020, COVID-19 lockdowns came into effect in the UK. It was the start of a very long story, which in many ways is still being written, and it had a seismic impact on industries across the globe. Now, over two years later, most of the developed world finds itself gripped by a financial crisis - sparked by COVID costs, war, and an increasing transfer of wealth away from every day people and towards the ultra-rich.
Heavy stuff.
This week on the blog, we wanted to examine the entire state of the games industry. Where we've been, where we are, and where we're going. To do so, we have to look at the impacts of the pandemic on games, and whether our businesses really were "pandemic proof" as some claimed. We have to evaluate how the output of our industry is landing right now, and whether development teams are delivering what consumers really demand. And we have to look ahead, to how tightening purse-strings and possible recession may pose further challenges.
Just a few short weeks from now, gaming will move into it's traditionally lucrative fourth financial quarter. So what do we need to know, and what should we do next?
We've assembled some of the brightest minds at Etch Play, including Dan Thomas, Ben Joy, Taya B and Adam Burt for comment. Let's get started, shall we?
Pandemic Resistance
During the pandemic, news outlets (ourselves included) touted the resilience of gaming as sector, particularly during lockdowns which kept many indoors. Games kept us connected, kept us entertained, and gave us something to do inside. And the spending we saw during this time reflected that - while brick and mortar businesses struggled, gaming thrived - at least where profit and turnover are concerned.
For many people, in many countries, the pandemic is not over. It may never be truly over, as the illness may now be with us in some form for the foreseeable future. But it is fair to say that in terms of consumer behaviours, we're moving into a post-pandemic era, in which the market is more influenced by new or traditional factors rather than pandemic restrictions being a driver of growth.
Now, as we're beginning to emerge from that growth, spending is starting to taper off. Big players like Microsoft and Sony are revising estimates amid declining sales, with Sony, arguably the current kingpin of consoles, posting a 15% year on year drop in PlayStation purchases.
That said, it's not all doom and gloom. The industry may not be able to sustain the meteoric statistics that it could during worldwide lockdowns, but it is overall, still growing at similar levels, or more, when compared to other times in recent history.
Players spending less now that they can go outside again is also not the only explanation for some of the downturns we're seeing. Nvidia, who reported that their revenue fell in the second quarter by 44 per cent compared to the previous, are also impacted by other global trends - such as the crypto crash, which means that lucrative graphics cards are no longer attracting such incredible demand. Unity, who provide tooling to developers, also revised their sales projections for this year, and noted "recent negative macroeconomic factors", without elaborating on exactly what those were. But they have had a relatively turbulent year - marked by scandals based on CEO comments and purchase offers from other companies - which has made their customers feel uneasy.
"Many games companies were optimistic that the pandemic boost on spending would be a gateway for many new players, who would stay hooked, and spend at similar levels when the pandemic subsided. That has turned out to be relatively wishful thinking. The COVID gold rush is waning."
- Dan Thomas
And as many months passed, we began to understand another impact that COVID was having on the games industry. Everyone had to work from home, which is harder than you might think for a technology-focused industry like gaming. Games started getting delayed. Dozens of them. And what's more, when those games finally hit store shelves, it often felt like the development had been especially troubled, and that trouble was reflected in the quality of the final product. Let's talk about delivery.
Delivery
One of the many companies currently experiencing lower than expected sales is Electronic Arts. With costs rising (more on that later), consumers have become, for lack of a better word, more picky - and largely rejected titles that were previously forecast to sell very well. Battlefield 2042, from EA, is a prime example - a game that failed to meet the expectations of players, and as such, went on to disappoint investors. It was riddled with bugs, and design decisions players didn't agree with, and often felt like it needed longer in development to reach it's true potential.
One game missing the mark isn't uncommon - every year the industry sees a mix of hits and misses, and every publisher simply tries to launch more winners than losers. But perhaps inspired by the working from home, and the delays, it has become noticeable how much this balance has shifted in the last couple of years. Battlefield isn't alone - Call of Duty, the Grand Theft Auto remasters, eFootball, New World - the release schedule is littered with examples of marquee titles receiving backlash from fans for what they feel are defective, rushed-feeling releases, that simply don't deliver on their initial promises.
Even Microsoft's Halo Infinite, arguably the flagship title for Xbox consoles, was delayed by a year, launched without several key modes of play, and has still struggled with online issues and what fans feel is a lack of content, especially for a so-called "live service" title. At time of writing, co-operative play and the beloved Forge mode still aren't in the game.
"Making AAA games is really hard. It sounds obvious, but it's actually kind of a miracle that any game like that comes out at all - I've heard people describe it as like shooting a blockbuster movie, except the cameraman is inventing his own camera while you're shooting, and the audio guys are inventing new microphones between takes, and in fact, everyone on set is inventing new technology all the time, and using existing technology in novel ways - all in service of eventually, hopefully, arriving at something innovative and ground-breaking. Any organisational issue, or dip in productivity during that process, is potentially devastating to the results."
- Adam Burt
It's little surprise that some fans would be put off by these outcomes, and would perhaps spend less, or choose to spend on indie titles which they feel are more honest about their ambition and potential limitations, which are often reflected in lower price points. Earlier this year, YouGov reported that indie gaming is growing more popular, while other genres such as MMORPG and FPS titles, which are common among AAA studios, are decreasing in popularity by comparison.
That all said, some large companies have done very well despite drawing the ire of vocal online gamers. Cyberpunk 2077 famously had a number of high profile defects, but reportedly made CD Projekt several hundred million dollars. Diablo: Immortal, a mobile game, has been criticised thoroughly online for having limited content and what some have called predatory microtransactions, that force users to spend big to enjoy the game - but it worked, and the game has made Activision Blizzard over $100 million in just two months after release.
As time goes on, it may be that those wins are short lived. Gamers may have bought Cyberpunk 2077, but will they buy the next title from the same studio, or will they remember? Will gamers continue to spend their disposable income on franchises and studios that have 'burned' them before?
Costs Rising
By now, you've probably noticed that most things in life are getting more expensive. Energy, fuel, food, and even Meta Quest 2 VR headsets. Here in the UK it's being felt particularly keenly, and is known as the Cost of Living Crisis (although VR headsets don't qualify as essential living costs - sorry folks).
During recent investor questions, Sony shied away from answering questions about whether their consoles, such as the PS5, could increase in price to reflect rising costs in the manufacturing materials and processes. Then, last week, Sony did announce that the price will rise in many territories, albeit not in the United States.
Whether prices go up further or not, many consumers will be faced with difficult financial choices. Some are already finding it difficult to pay bills and feed families, and the threat of full blown recession looms large. The Bank of England has confirmed that they expect the country to be in a recession this year.
While some argued that gaming was pandemic proof, others still consider the industry recession proof, or recession resistant. That's a position that Take-Two's chief officer, Strauss Zelnick, disagrees with. They're forecasting sales significantly below analyst expectations for the months ahead, including for games such as Grand Theft Auto, which is historically a big, consistent earner.
“If you are feeling the pinch of inflation, specifically with regard to non discretionary expenditures like fuel and food, you could imagine that if you’re playing a game, you might choose to spend a bit less or spend a bit less frequently...”
- Straus Zelnick, Take-Two Interactive
We agree. There doesn't seem to be any reason why gaming would be exempt from a recession's effects. While some tight budgets may still make room for games as a beloved form of entertainment, it seems obvious that many fans, gamers, and players will be cutting back on spending - perhaps buying fewer games, or spending less on microtransactions in the games they do have. Further price rises, if they do materialise for games and consoles, are likely to exacerbate that further.
"I think the good news for games is that, although times are hard and we expect that to have a real impact, gaming is still growing at a better rate than other forms of entertainment. So while there are difficult months or even years ahead, gaming won't struggle as much as, say, cinema. And when spending normalises after a recession we would expect games to be in an incredibly strong position."
- Taya B
The industry has weathered recession before - even performed well during one. Most notably, 2008's global financial crisis failed to slow the unstoppable onslaught of Nintendo's Wii and DS sales. So while there may be less money to go around, it's still the case that desirable products will continue to be desirable. Gamers may buy less, but it seems unlikely that they would stop spending altogether. Simply put, it makes a competitive market even more competitive.
Big companies are already responding to that competitiveness - becoming a little more picky about what projects get greenlit, a bit more risk averse when it comes to new IP, and just generally streamlining how many games they intend to release. In July, Ubisoft cancelled four new games, attributing it to the "changing financial environment". Elsewhere, layoffs at companies like Niantic reflect project cancellations, all in service of a renewed focus on "key priorities".
While this new financial challenge seems comparable to 2008 in many ways, the industry has changed drastically in the last 14 years. While there's still money to be made in traditional game sales, a tremendous amount of monetisation in the industry now occurs within live service titles - games that are constantly updating, usually free to play, and make their profits from cosmetics and season passes that unlock additional content.
With that in mind, it's difficult to predict exactly how this recession will impact consumer behaviours in a nuanced sense. We know people will try to spend less, but will the remaining spending perhaps also trend towards free-to-play games, where a small amount of money may go further in entertainment value? Or will those who habitually spend in recurring online games decide to opt for buying a traditional game up front, and cutting themselves off from their usual spending habits?
What to do next
The tricks to running a successful games studio, whether it's 2022, 2021 or 2023, are largely similar. Make fantastic content, market it effectively, and earn enough money through sales or deals, in order to finance yourself long enough to make the next one. In an economic downturn, those principles aren't any less important.
It is, however, something to take seriously. If you haven't already, you should look to revise your sales projections for the next quarter, keeping them updated with what information we can continue to glean from player spending habits and trends as the situation develops. If you're juggling multiple projects and cash is getting tight, you might need to put a plan in place for refocusing on whatever your best chance is at making money in an extremely competitive marketplace.
"When there's less spending money to go around, it absolutely impacts your overall launch strategy, and your strategy for how to support games after launch. The most critical part, I think, is to collect data, because data is what can tell you how to focus your efforts over time. And focus is essential if you're trying to achieve the best possible results."
- Ben Joy
Many companies will be tempted to spend less on marketing, and sadly, for some of them that will exacerbate their issues, and result in a vicious cycle of poor performance that leads to less money to spend on future projects. But perhaps difficult times are actually also an opportunity, to re-evaluate the way that your marketing is being done - is it cost-effective? Are there more radical approaches to marketing, that would gives you a better return on less money? There are plenty of valid questions to ask.
Assuming you can afford to hire, talent acquisition and retention will continue to be absolutely critical during this time period. Your employees will be struggling too, so ensure that you're doing everything within your power to support them and enable them to deliver great products. Because as 2008 has taught us - if you can manage to create truly brilliant products, and communicate that to audiences effectively, then massive success is still within your grasp.
It's still an exciting time for gaming. Our industry is constantly evolving, and adapting, to keep players entertained. The state of games is that it's time for us all to keep evolving, and adapt again. The only constant, is change.
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