Inexpensive financing and risky investments: How the gaming industry's pandemic-era boom led to turmoil

The anticipation was that the video game sector would shrink following the conclusion of pandemic lockdowns. Surprisingly, the aftermath has been more chaotic than forecasted due to a unique cocktail of worldwide sociopolitical and economic challenges, compounded by the overconfidence of industry leaders.

Despite 2023 being a notable year for game releases, the industry continues to struggle. The question arises: why, with such a robust gaming landscape, do we still experience economic discomfort?

Redefining 'Generation' in Gaming

With the seventh generation of consoles, Microsoft and Sony adopted strategies familiar in the handheld sector, similar to Nintendo's approach. As a result, consumer expectations for hardware updates increased, which, for the past two generations, has led to heightened hardware investment contingent upon favorable conditions like reduced component costs and a stable global economy.

In 2024, pricing has presented significant hurdles, with US hardware expenditure falling by 30% through May compared to the prior year, according to Mat Piscatella of Circana. This drop comes as the Nintendo Switch approaches the end of its lifecycle, impacting sales of other major consoles like the PlayStation 5 and Xbox Series X/S. The industry's focus on steadfast pricing while offering new hardware like the PlayStation 5 Pro at steep rates highlights the barriers facing hardware upgrades.

Constraints such as the lack of price depreciation in launch models increase the challenge for enhanced "Pro" versions to capture a broad market. This has limited console turnover and adoption rates, leading to stagnation in user migration, with only half of PlayStation Network users moving from PS4 to PS5.

Both Sony and Microsoft are aware that they cannot sustain these trends to 2027 or beyond, encouraging some competitive pricing dynamics. Upcoming hardware releases from competitors, like a rumored new Nintendo device, could impose further pricing pressures industry-wide.

Popular releases like Grand Theft Auto 6 could potentially drive console sales despite high price points, yet trends indicate that many younger players prefer PCs and mobile devices nowadays, often playing titles like Fortnite and Minecraft that don’t demand the latest gaming consoles.

"Sony and Microsoft can't allow these declines to continue at these rates until 2027 or 2028 (or whenever the next devices and/or services arrive)"

Mat Piscatella, Circana

Erosion of Industry Fortunes

Game publishers have increasingly leaned on the Games-as-a-Service model to maintain engagement through continuous content updates. However, as more service games entered the market, players found it difficult to invest time in multiple titles, evident in that 61% of gaming time was for titles older than six years, per Newzoo.

Investment and growth strategies hinged on the hope of sustained post-pandemic prosperity. When financial conditions worsened, executives turned to layoffs as a cost-cutting measure. Since 2022, nearly 30,000 industry roles have been eliminated, affecting both large publishers and indie developers alike, who grapple with slashed budgets and reduced opportunities.

"Leadership may be sitting in LA, but then the work will be split between crews in Brazil, India and maybe Vietnam. Because four people in LA will cost you just as much"

Jason Della Rocca, Execution Labs

This volatile landscape underscores a broader labor crisis, as increasing switching costs and player attachment to legacy games limit new service games' success. Prominent titles have been abruptly discontinued, exemplified by the fall of games like Concord, emphasizing the risk-averse nature of game publishing today.

Navigating a Future Path

In the current environment, big game publishers focus on fewer, bigger franchises. Smaller titles, like Palworld, are thriving but don't align with the larger publishers' reluctance to take risks. Funding dynamics are shifting, with deals taking longer and offering less capital at lower valuations, reverting to pre-bubble norms.

Regions outside traditional markets, like the Middle East, are seeing investment, part of diversification strategies beyond oil. In contrast, Chinese companies are adopting more cautious internal expansions.

"Growth of game companies has slowed globally. Interest rates are no longer as low. Investments in new technology areas related to gaming such as VR, Cloud Gaming, and Web3 have not yielded expected results"

Daniel Ahmad, Niko Partners

Despite challenges, hope remains for future stabilization with early-stage investments picks up, suggesting a potential industry resurgence by 2025. However unpredictable events, akin to previous industry upturns, might again alter expectations.

With aspirations for more diverse, sustainable investments, stakeholders anticipate a brighter future for gaming, fostering a robust ecosystem that can weather upcoming changes and welcome innovative ideas.