What's preventing mass layoffs among Japanese developers?

On June 14, Tango Gameworks celebrated its final day with a pizza party, marking the end of the studio following Microsoft's decision to shut it down. This closure came as a shock, considering the studio's success with titles like Ghostwire Tokyo and the acclaimed Hi-Fi Rush.

Tango Gameworks' Ghostwire Tokyo
Image credit: Tango Gameworks' Ghostwire Tokyo

Just a few weeks earlier, the game was made available on platforms beyond Xbox as part of a new company initiative to expand their reach. This decision was particularly surprising given that Tango Gameworks was Microsoft's only Japanese studio, a key player in a region where Xbox and Game Pass have been making strides after years of market challenges.

If you focused solely on the Japanese industry, you would be forgiven for forgetting the crisis that has subsumed the wider industry

The gaming industry has been plagued by layoffs and studio closures in recent times, with over 10,000 developers losing their jobs already in 2024, matching the total for 2023. Despite this, some positive developments can be seen in the same city where Tango once thrived, underscoring its unique situation within Japan's relatively insulated market.

FromSoftware president Hidetaka Miyazaki has expressed strong support for his team, ensuring that mass layoffs are not planned. Konami is re-entering the game development scene, and Capcom has significantly increased salaries for new employees by 28% starting in fiscal year 2025, a move far exceeding recent inflation rates.

Furthermore, Nintendo has shown remarkable growth since Satoru Iwata's decision during the 3DS era to cut his own pay to avoid layoffs. The company has continued to hire more employees and raise base wages, maintaining an impressive retention rate of 98.8% and an average tenure significantly above the industry norm.

Despite industry turmoil globally, conversations with Japanese developers reveal a sense of job security and confidence not often seen elsewhere. Companies in Japan, from major players to independents, have continued to thrive and expand, largely avoiding the wave of layoffs seen in other parts of the world.

Even Square Enix, which recently canceled some unannounced projects, has not followed up with layoffs domestically. The company is shifting strategies to target a wider range of platforms for future releases.

So why is Japan's gaming industry less impacted by layoffs? Cultural factors and strong labor protections play a significant role. Under Japanese law, reducing the workforce through layoffs is challenging unless the company is facing severe financial hardship, making employees' positions far more secure compared to their counterparts in Europe and the US.

"It's almost night and day. In Japan, the law protects the employee. In the US, [it] protects the company. For Europeans, it's somewhere in the middle"Serkan Toto

Industry analyst Serkan Toto, CEO of Kantan Games, explains that Japanese regulations make it difficult to classify many roles as non-permanent, thereby ensuring greater job security. “In Japan, the law protects the employee. In the US, the law protects the company. For Europeans, it's somewhere in the middle,” Toto noted.

When asked specifically about Tango Gameworks' closure, Toto clarified that shuttering an entire company, as Microsoft did, sidesteps many of the legal challenges associated with laying off individual employees. This method involves eliminating everything, including staff, office space, and equipment, which legally differentiates it from reducing headcount while keeping a portion of the workforce.

Japan's resilience in the face of global challenges is partly due to its unique market characteristics. As noted, Japan holds the third-largest mobile gaming market globally, following the United States and China. Some of its major titles, such as Uma Musume and Dragon Quest Walk, are created and released by local companies. New game launches mainly aim to attract Japanese audiences, reducing dependence on international success for profitability.

Ken Toto commented, "Mobile gaming outstrips console gaming in Japan threefold. Although companies like Sega and Nintendo are globally recognized, in Japan, 70% of the market is driven by mobile game firms. Businesses such as CyGames, Gree, DeNA, and Akatsuki are dominant in this space, yet they often operate under the radar with large workforces that rarely experience layoffs."

Over the past decade, Japan's mobile gaming industry has stabilized. Although it no longer experiences explosive growth comparable to its early years, the sector remains steady. Meanwhile, there is a notable increase in PC gaming revenue.

Tango Gameworks' Hi-Fi Rush

Another significant aspect is the challenge of outsourcing work overseas, which is more complex for Japanese developers due to language barriers and the absence of established outsourcing channels. This necessity to keep operations local drives wage increases amid a shrinking workforce.

Toto elaborates, "Japan's insular nature and demographic trends mean companies can't simply replace domestic workers with foreign labor. Major firms like Bandai Namco and Nintendo aren't increasing wages out of generosity but necessity. Without competitive salaries, software engineers might switch to other industries, such as AI at Toyota."

"In Japan, 70% of the market is dominated by mobile game companies like CyGames, Gree, DeNA, and Akatsuki"Serkan Toto

Despite higher wages, Japan still offers a more affordable environment for game development. The nation's lower living costs and average wages (¥4.58 million yearly for general workers, ¥5.23 million for game programmers) help maintain manageable production budgets.

When examining cases like Rocksteady's The Suicide Squad, where Warner Bros incurred substantial losses exceeding $200 million, Toto points out that Japanese production costs are significantly lower. He estimates that developing a major game in Japan could be 30-40% cheaper, reducing financial risk.

Industry analyst Serkan Toto, CEO of Japan-focused games industry consultancy Kantan Games

Globally, the gaming sector is contending with low morale and frequent layoffs, despite record profits for some companies. For instance, Microsoft, with an operating income of $88.5 billion in 2023, recently cut 1,900 jobs under its Xbox division.

Toto opined, "The constant layoffs impact morale and job security. Even successful companies are trimming their workforce to maintain profit growth, with those remaining often feeling insecure."

"Japan’s distinct culture and language protect its labor market from easy outsourcing"Serkan Toto

Mass layoffs can seem counterproductive as they risk losing invaluable talent and industry expertise. Despite slower growth, the gaming market continues to expand, remaining larger than the film, TV, and music industries combined. Many of these job cuts might be avoidable.

In contrast, Japan's approach focuses on retaining talent, which could prove advantageous if the industry experiences a resurgence. As Toto emphasized, "When the gaming industry sees its next upswing, Japanese companies will benefit from having retained their skilled workforce, fostering trust and stability."

"A considerable philosophical divide exists between Japanese and Western perspectives. Japanese game developers tend to have a much longer term outlook compared to their American peers. In contrast, American companies often operate under a capitalist framework emphasizing constant profits. If their financial graph shows a decline, it triggers widespread concern."

As waves of layoffs persist, numerous developers will permanently exit the industry. Rebuilding that expertise will take years, and the threat of more job cuts could negate this progress. The question arises: how much can the industry endure before it collapses under its own weight? Even with recovery, without a shift in mentality, could a similar downturn in a decade be unavoidable?

"Removing the capitalist mindset from the executives at companies like Activision or Electronic Arts is unlikely," suggests Toto as our conversation concludes. "It's a perpetual clash between American and Japanese methodologies. The American model zeroes in on short-term efficiency and profitability, while Japan's approach is markedly different."

Following a final pizza gathering funded by Microsoft, Tango Gameworks shuttered permanently. On a distant spreadsheet, the idea of a remote games studio ceasing operations might appear as a cost-effective measure to slightly boost profits. Not every valuable asset can be captured on a graph, and prioritizing short-term gains may negatively impact future quarters.

"It's always a battle between the American system and the Japanese system, with the American system very much focused on profitability."Serkan Toto

Yet, who thinks about that? Continuous growth is seen not as an unrealistic goal but as an imperative to be achieved at any expense. Consequently, individuals suffer.

It's not that Japanese companies are vastly different from their American equivalents. Many are publicly listed and, regardless of being private or public, have a deep affinity for profit. One might wonder if the situation would alter with different employment protections or if the language barrier didn't hinder the transfer of work overseas. Regardless, this divergence in methodology makes the working environment in Japan appear more stable, with less immediate anxiety about job security.

For now, perhaps we can find some solace knowing that, amidst ongoing waves of layoffs, some individuals retain their employment.

gamesindustry.biz
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