Thread by @ballmatthew

1/ After only 5.5 months, the video game industry has set a tragic new record for in-year layoffs (10,900 versus the prior record of 10,500 in 2023, and the record before that, 8,500 in 2022).

These layoffs span games that were canceled and scaled back, as well as studios that have been shutdown or shrunk, and start-ups forced to close after an evaporation of private funding for gaming studios (down 28% from pre-pandemic times though overall VC is up 15%).

2/ The layoffs sit alongside many other dramatic shifts, such as Xbox publishing many of its (former) exclusives on the Switch and PlayStation, and announcing it would open up its closed hardware to 3rd party stores. PlayStation too, now publishes selectively across PC, Switch, and even Xbox (thus far, Destiny + forthcoming Marathon).

After nearly four decades, Square Enix has said it simply cannot continue under its exclusives model and is struggling to break-even on its franchise titles. Ubisoft has lost 80% of its value. And so on.

3/ Gaming’s current struggles are hard to reconcile with its creative, financial, and cultural ascendence - and in particular, 2023.

Last year had an all-time content slate, saw several of biggest games in history grow even larger (e.g. Roblox, Fortnite), launched new and diverse hits such as Honkai Star Rail, Baldur’s Gate, Lethal Company, Hogwarts Legacy, Monopoly Go!, soared in TV and film adaptation (The Last of Us, Super Mario Bros. Movie) and adapting (Spider-Man 2, Star Wars Jedi: Survivor).

2024 seemed to burst out of the gates with incredible and innovative new hits Palworld, Helldivers, Manor Lords, etc.

4/ The quick answers of a COVID pullback, capitalism run amuck, and surging interest rates aren’t sufficient explanations for gaming’s troubles.

The answers is diverse and structural, including changing business models, evolving user behaviors and preferences, labour economics and microeconomics, disappointing forecasts (and only-recently abandoned rationales for the related shortfalls), competitive and budgetary escalation, console saturation, and an end to the growth-drivers of the last five and ten years. It is the convergence of these many trends that is behind the current state of gaming (as I wrote in detail in January )matthewball.co/all/gaming2024

5/ Over the last few years, the gaming industry has experienced material annual declines in consumer spending:
• US is ↓$2.4B (-4%) since 2021
• International is ↓$3.2B (-2%) since 2021

In real terms (i.e. after inflation), the annual declines are steeper
• US is ↓$9.6B (-14%) since 2021
• International is ↓$18.8B (-13%) from 2020

6/ These declines may not sound dire; gaming is still a $185B industry. One can fairly ask “Why is more revenue ‘needed’ every single year’” or “Why is the industry struggling to adapt to revenues that delighted them only a few years ago?”

Inflation-adjustments can seem abstract. And it’s true COVID led to an unprecedented ~$30B (~20%) surge in 2020 – isn’t it ok for a few years of low-to-no growth? The issues here are a bit more complex and not just about the “number”

7/ First, inflation has hit four-decade highs. We have to look at “real” revenues because it reflects what this revenue “buys” a game-maker today and tomorrow (i.e. investing in DLC, new games, staff, etc). If gross spend grows 1% versus 2% inflation (i.e. -1% in real terms), that’s not too brutal. But in years like 2022 when gross falls 4% but inflation is 8% (approx -12%), this really adds up.

Second, part of the reason the above “adds up” is that costs have gone up due to inflation. Staffing (and benefits), manufacturing, marketing, tech licenses, et al, are up ~10-20% (some, though not all large publishers suggest the shift to hybrid staffing models have also harmed productivity).

Third, despite the COVID bump, real industry revenues have grown only 5% since 2019 (or 0.7% compound annual growth). In comparison, real GDP globally is up *19%* (or 4.6% annually). Put another way, the gaming industry grew at less than a sixth the rate of the global economy.
And crucially. No one projected this trajectory. In fact, they budgeted for an entirely different scenario.

8/ The overwhelming consensus was that video gaming would continue to grow rapidly (from 2009 to 2019, real revenues grew 4.8% versus 3.7% for world real GDP).

◙ In 2020, NewZoo forecast industry revenues would hit $218B in 2023. By 2023, NewZoo had revised its 2023 number to $183B (or $34B less) and predicted to 2026 would be $205.7B ($12.3B less than originally estimated for 3 years earlier)
◙ In 2020, Morgan Stanley forecast $232B by 2023
◙ In 2022, Bain & Company forecast revenues would grow from $199B that year to $307B by 2027, suggesting 2023 would be roughly $217B

9/ The expectation that video gaming would continue to add billions (if not tens of billions) in new revenues each year, and add tens (if not hundreds) of millions of players each year was used to underwrite new game greenlights, budgetary expansions, new studios, VC investments, hiring, M&A, etc. Not directly, of course, but when games take 3-6 years to develop, the impact of the expected growth during that period is enormous. And thus so too is its absence.

10/ Overly rosy forecasting is an executive failure; it leads to sales targets that are unlikely to be met (exacerbating an already inherent planning bias towards success), costs that are too high, and larger pipelines of game incubations and greenlights than the market is likely to support.

The consequences are primarily felt by non-executives, some of whom received a job or promotion because of these executive-level expectations, yes, but these *individuals* also invested their lives and families in these same ambitions (and sometimes relocated or changed employers to support them)

11/ Still, it’s important stress that everyone assumed *some* growth, or at least market average growth rates, rather than decline. And multi-year decline was essentially inconceivable. Industries that are growing ~1% (let alone contracting) after a period of sustained growth are always in for a shock – and that’s before hitting 5% interest rates or an environment in which the average industry is growing several times as fast by comparison.

Worse, and this gets to the core explanation for the recent uptick in layoffs: it is increasingly hard to envision a broad turnaround in the near future. Circana, for example, is estimating another 2% drop in the US for 2024, and as much as 10%.

12/ So why the shortfall? At a high level...
◙ There are fewer active gamers than years ago (E.g. Circana reports 79% of Americans played games in 2020, but by 2022, it was down to 73%, the same as in 2019)
◙ Retained players are playing less (Circana reports Americans played an average of 14.8 hours in 2020, 16.5 in 2021, but 13 in 2022, barely above 2019’s 12.7)
◙ Retained players are also spending less in real terms (and often nominal terms)

COVID is a convenient, but incomplete explanation for this multi-factor pullback. Audio revenues are up, book revenues are up, video revenues are up. Gaming is down.

13/ Part of the challenge is that the core growth drivers of the last decade have been largely exhausted
◙ Mobile: 97% (or $83B) of real industry growth by platform from 2008 to 2023 was from mobile, which massively expanded who played games and when they could play. However, there are no longer many “new” players to be found (and those still left do not have much income), meaning player growth returns to population growth - which is a low growth business (less, after inflation)
◙ Cross-Platform Gaming: Drove material increases in engagement time, friend groups, and spending after 2017. Today, nearly all titles that fit cross-platform play, are cross-platform (and thus mostly competing with one another)
◙ Free-to-Play: Also drove material increase in engagement, friend groups, and spending by making gaming more accessible and less risky to consumers. Throughout the 2010s, expanded from select mobile titles to nearly all plausible ones, including AAA/AA PC/console multiplayer
Battle Passes: Another engagement and spend driver that also added recurring revenue to FTP/microtransaction-based games

Supposed new drivers, such as VR/AR/Metaverse, cloud gaming, and Web3/NFTs, have not yet delivered at meaningful scale

14/ Some major headwinds have also emerged. A particular challenge for mobile (which, again, is most market growth) was Apple’s introduction of IDFA/ATT in April 2021 (and Google’s progressive implementation of the similar GAID and PSOD).

These changes made it more costly for games to acquire customers and then harder to generate ad revenue from these customers, creating a vicious cycle that harmed game discovery, game playtime, game monetization, reinvestment in game content and player acquisition, etc.

Since IDFA, US mobile gaming downloads have plummeted over 20%. Consumer spending is down a comparatively modest 6%, but it’s closer to an 18% drop after inflation – and after accounting for ad revenues, monetization is down more like 23%.

15/ Another issue that publishers talk about are “black hole” games, such as Roblox, Fortnite, Call of Duty, Minecraft, GTA. This isn’t meant in a derogatory way, but to reflect how hard it is to pull players out of their “gravitational pull” (or event horizon, if you prefer).

These games continue to grow (Roblox now has more MAUs than Nintendo + Sony + Microsoft combined) and benefit from not just enormous social networks, but players who have invested hundreds if not thousands of hours and money into these titles. And these titles are superb, constantly changing, backed by thousands of (profitably employed) developers, and are usually free-to-play, too.

16/ “Black holes” are particularly hard on new, aspirant live services. To thrive over the long run, these titles need to attract not just individual players, but much of their friend groups, too. This requires an outstanding mix of creative, gameplay, monetization, and internal processes for GAAS. This is doable (Helldivers fricking rocks!) but, mathematically speaking, nearly all new live services titles cannot gain a critical mass of friend networks.

Singleplayer narrative games have it somewhat easier because they are based more on individual gamer choices (not friend groups) and can succeed by winning 10-20 hours of that player’s time, rather than needing 10s if not 100s or 1000s. Still, these titles compete with titanic, typically free live service leaders jam packed with content and all of your friends. Hard to earn $70.

17/ We can clearly see the “black hole” effect, as well as the general control the top titles have in each genre. NewZoo reported that 60% of console/PC playtime in 2023 was spent on games that were 6+ years old since launch; AppAnnie/Data.AI shows 40% of mobile revenues by genre are held by the top 3 titles (in shooters, it’s 70%) and games over 2 years old have 70% share (95% for shooters!). In other words, man is it hard to break in.

18/ It’s also important to stress that until mid-2023, many in the industry excused a few years of anemic growth arguing one of the following:

◙ 2021 and 2022 were not considered great years for content, and thus consumers mostly played what they already owned, had little reason to spend on new games, and didn’t play as much as they might otherwise. This theory suggested sales would expand in 2023, an all-time year for content. Instead, it barely budged
◙ Some hoped that IDFA was a one-time shock, after which the industry would adapt and the proposed solutions of Unity’s and Google’s ad network would come into effect. Companies like Meta and Google have recovered, and some of the publisher networks (e.g. AppLovin) have partly repaired, too, but mobile remains impaired overall
◙ During 2021 and 2022, Gen 9 consoles and high-end GPUs were scarce, which meant hardware spend was constrained, and thus so too was content buying (especially given Gen 9 titles were $10 more than Gen 8, and some titles were Gen 9 exclusive). By 2023, the shortage was over, but hardware sales didn’t grow, and content didn’t either

Once these explanations proved illusory, executives had to deeply re-assess their expectations. Gaming revenue growth wasn't held up by supply or technology in 2022 and 2023... it wasn't demanded by consumers

19/ The result of all of the above is that scores of games have fallen short of even the “low” forecasts of their publishers’ medium term forecasts. Apex Legends Mobile (lasted 8 months), Anthem (2 years), Hyper Scape (~ 2 months), New World (lost 96% of players in 3 months, halving again two years later), The Avengers (2.5 years, but largely defunded much earlier), Splitgate (effectively shutdown a year after it drove a $1.5B valuation), MultiVersus (taken offline for a year), Gotham Knights and Suicide Squad, Redfall, Far Cry, and on and on. Even RDR2, the highest grossing Gen 8 game, ended online updated after 20 months... even though GTA Online is going strong after 125! The FINALS had a superb, superb opening... and has dwindled hard every month since

20/ In parallel to declining toplines, game development costs have also surged in recent years and across several drivers. In response to inflation, talent scarcity in 2020-2021, unionization and expanded benefits, the shift to hybrid and/or remote work, publishers report 10-30% increases in effective developer costs per month. Meanwhile, the raw developer months required to make a game have surged.

2023’s Spider-Man 2 reportedly cost 3x that of 2018’s Spider-Man 1. Some estimate 2021’s Halo Infinite cost over $500MM, up from $10-20MM for the original in 2001

21/ The drivers of production-specific costs are easy to see in harddrive space (a good proxy for asset diversity, fidelity, complexity) and team size. Gen 9 games are 100-150x bigger and require 5x the people. The first Last of Us had 90 minutes of mocap cinematics, the second was 9 hours.

22/ Many argue the return on these incremental production investments are near, if not outright negative. However, these titles are fighting for scarce attention in a low-to-no growth market - this naturally leads to additional investment to elevate visuals, or performance, or game length, etc.

Sequels face a similar issue. If you’re the nth entry in a franchise over a decade, the title needs to convince as many customers would bought the n-1th title to buy the new one, and to convince those who didn’t buy it, that they should this time around. It’s hard to do that with *less*. Definitely not impossible, but hard.

23/ Many AAA publishers also assumed, not unreasonably, that market growth would offset at least some of their growing budgets. The theory suggested that ongoing improvements in console fidelity, plus generational succession, and maybe cloud gaming and/or mobile, would significantly enlarge the AAA player base. This hasn’t really happened.

Have a look at the prior industry revenue charts, but exclusively considering real spend on PC + console + handhelds.

24/ If you showed anyone a Gen 9 console in the 1990s, it would have been hard to imagine AAA gaming wasn’t as big as TV. In truth, high performance consoles (PlayStation + Xbox) haven’t grown at all since Gen 6 (started in 2000). This is despite the console generation elongating by a year or two, which leads to more replacement sales and has involved more mid-cycle upgrades (e.g. a Pro update), which skews the sales figures up and thus overstated the unique install base.

The Switch has been a massive growth driver, but the story here is a bit more complex. The Switch over-indexes to multiple purchases per person/household due to its many new models (e.g. Lite and OLED) and higher break rates (due to being portable). The Switch’s sales have also come at the “expense” of Nintendo’s handheld line - Nintendo actually ships fewer devices and software units than it did for much of the 15 years before the Switch. The Switch also sells 8 games for every device sold, versus Xbox/PS selling 12 (partly because many hit games don’t run on the Switch), and the majority of these sales are of Nintendo’s 1P titles. The Switch is an all-time hit for Nintendo, but limited in lift for the rest of the biz.

And even with the Nintendo Switch, the number of US households who own a console is flat despite 10% growth over the last decade.

25/ So in fact, each generation means the console owners pay (via device subsidies) to transition players from one generation to the next, but don’t get many new players, costs go up, and while prices recently increased, they did so at a sub-inflationary rate. This was OK in Gen 6 and 7 when budgets went from $20 to $50MM or so, but breaks when you go from $100 to $200, $300, $500. This is why we see the recent focus on multi-platform releases: you simply need to reach every possible buyer.

26/ This returns us to 2024. For years, publishers have been investing to grow their pipelines: more incubations, more greenlights, bigger live services expansions. And after years of revenue stagnation/decline, cost increases, and flops, they are now re-evaluating their forecasts. Often coming to the conclusion their original business cases were too optimistic and/or their titles unlikely to succeed. So we see countless cancellations, such as Odyssey (X years development) at Blizzard or Mandalorian at EA, sometimes studios lost altogether, and cuts at the titles still moving forward.

The result is many employees without a P&L.

27/ This is no publisher or executive’s preference. They tend to succeed from more, bigger hits - not fewer, even if those few are more profitable on average. The macro challenge isn’t quarterly or even annual margins maintenance, but concerns about the outright viability of newer bets (i.e. whether they will be profitable at all)

28/ This is also why we see the new focus on GenAI (EA's CEO says that in three years, he hopes GenAI can make them 30% more efficient, expand their player reach 50%, and improve monetization 10-20%)

And ads (PlayStation, Microsoft, Roblox, EA are all publicly deploying, hiring, piloting 3D ad networks). If there aren't more players or more spend per player, but there are growing costs, revenue per user or user hour needs to grow. AA/AAA gaming is unique from all other entertainment mediums in its de facto non-use of in-media, and for many reasons (history, culture, difficulty of the tech, high growth rates through direct spend), but the focus is now on it.

29/ There are new and massive hits - but the lessons for the big publishers don't encourage hiring. Palworld had under 40 employees (mostly using asset stores and outsourced, low cost labor), Helldivers came from a team of 100 (and took 7 years), Manor Lords only a few, Lethal Company but a single creator

(Tweet reposted to fix typo)

30/ This is complex, fraught, and often sad circumstance. It's best served by long-form, than tweet, so I'll share the original essay here, as it captures a lot more of the nuance, as well as the areas of hope

(Tweet reposted to fix typo)

https://x.com/ballmatthew/status/1749853184435032436

31/ Here is what has happened to venture funding for gaming start-ups.

There will be many, many gaming start-up closures over the next two years — as they will be unable to raise capital and thus complete the games they’ve begun (and probably budgeted too high). This sucks. It is historically new gaming studios that crack a new mechanic, be it battle royales via Brendan Greene (or the independent Minecraft mod Survival Games), AR/LBE via Niantic, MOBAs through DotA, and so on.

32/ Suffice to say that if the industry is struggling to reach (and retain) new players, increase playtime, and drive more spending, then a reduction in the number of titles produced, staff behind them (and thus also talent with experience), as well as start-ups in the space... is unlikely to solve the problem in aggregate