Even the ‘stagnation-proof’ video game industry is feeling the economic cold
“This time, it’s more mysterious,” said Cassia Curran, founder of gaming advisory firm Curran Games. “Employment remains high and demand for outdoor recreation is jumping two years into the pandemic, and toy sales in the last quarter finally saw a slight decline after two years of boom caused by the pandemic.”
In an impending recession, the first thing people tend to cut back on is discretionary spending. Experts say the video game industry is no exception to this general rule, but the value of a $60 game or free title can last for hours and stretch into months, making it a bargain during an economic downturn.
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Take-Two CEO Strauss Zelnick said during an August 8 earnings call, “We are now seeing lower consumer spending and increased inflation going to have an impact on the industry. You saw that from our report today and from our competitors’ reports as well.” Take-Two game properties include Rockstar and 2K studios, the makers of hits like “Grand Theft Auto V”, “Red Dead Redemption II” and the popular 2K lineup of sports titles.
Gaming giants Nintendo, Microsoft and Sony all reported lower revenue and lost earnings forecasts in late July or early August. Game companies say part of the reason is a weak supply chain, still affected by pandemic-related shutdowns and challenges getting consoles to stores. Another aspect is that a lot of the world is now reopening and not looking online to make social connections.
In August, Meta, formerly known as Facebook, raised the price of the Quest 2 VR headset from $299 to $399.
“Manufacturing and shipping costs for our products are rising,” Meta spokesperson Brian Pope said in a statement. “By adjusting the price of the Quest 2, we can continue to grow our investment in ground-breaking research and new product development.”
Bob said that the Meta will continue to bet heavily on games, as it was one of the most popular categories of content in Quest 2.
The Washington Post reached out to more than a dozen gaming companies for comment on how they plan to weather a possible recession. Hoyoverse, Electronic Arts, Take-Two, Ubisoft, Devolver Digital, Annapurna, Square Enix, CD Projekt Red and Sega declined to comment. Others, including Sony and Xbox, did not respond.
Video game companies are tightening their belts, slowing hiring in some cases, and being more picky as new games are developed. Tencent reported its first-ever decline in revenue in August, dropping 3 percent to a total of $19.78 billion, with gaming revenue down 1 percent.
Unity and Niantic have laid off part of their staff as cost-cutting measures, as first reported by Kotaku and Bloomberg. Niantic spokesman Mark Van Lommel said in a statement, “In June, we decided to halt production on some projects and reduce our workforce by about eight percent to focus on our key priorities. We are grateful for the contributions of those who have left Niantic as we support them through this difficult transition.” He added that the layoffs help put Niantic in a position to “surpass the broader economic uncertainty” businesses face and invest in augmented reality technology.
Ubisoft confirmed in a July earnings call that it was canceling four new games, citing the “changing financial environment.”
said Chris Kramer, Head of North America Communications for Tencent Games. “Publishing efforts will be curtailed as budgets shrink, so game companies will have to do more with less and really consider the best return on investment on the dollars spent.”
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Investors are more likely to bet on well-known entities, such as proven franchises and game developers with strong track records, rather than taking risks with new and unknown properties, according to Curran.
Across gaming companies, companies with live service games (like the constantly updated “Apex Legends” or “Candy Crush Saga”) have seen small transactions boost their bottom line in the past three months. While players can access these games for free, the titles offer shiny cosmetics or battle cards for real money. Many analysts are wondering how free games will survive the stagnation.
“There is a huge question mark hanging over the entire gaming industry,” Curran said. “Will the stagnation cause more players to choose free games over premium games? Will the big spenders in [free-to-play] Games – which usually generate the bulk of revenue – reduce their purchases? For now, we can only guess.”
Riot Games has raised the price of its in-game currency, which can be exchanged for cosmetics and heroes, by nearly 10% globally. Five dollars was used to equal 650 Riot points, but as of August 19, players will only net 575 RP.
“We update our rates by region almost annually to take into account factors such as inflation, currency fluctuations and exchange rates,” said Jo Hickson, a spokesperson for Riot Games. “We know price changes never feel satisfactory, especially during turbulent economic times, so we try to approach these situations with empathy and understanding. However, these changes are essential to continue delivering what players expect from Riot.”
The economy has also influenced the industry’s competitive gaming efforts around esports. Will Bartin, a University of North Carolina associate researcher at the Center for Information, Technology, and Public Life at Chapel Hill, points to the unreliable ways the esports industry is making money that could leave it vulnerable in a recession.
He noted that teams rely on content creation to increase sponsorship and ad revenue, while venture capital investors are reluctant to pay for esports during a period of high interest rates.
“These are turbulent times and they are having a tangible impact on esports,” Bartin said. “The teams that will go the extra mile are those that have built solid revenue streams (whether in trading, agency work, consulting, etc.) outside of their core esports business. But I doubt they even will be able to avoid layoffs. and cut spending.
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Twitch channels have also been feeling the pinch, with viewers becoming more reluctant to pay for subscriptions, and multi-hour broadcasts becoming less worthwhile.
Esports and content creation company FaZe Clan went public in July through a special purpose acquisition firm, a company called “blank check” that raises money for private companies. In the April filing, the company revised downward its financial outlook due to “current market trends”. The company declined to comment for this story.
FaZe Clan, one of the most popular and well-known brands of esports and gaming content, has never made a profit, according to its financial files. In 2021, the FaZe Clan recorded a net loss of $36.86 million. It’s on track to lose more this year, posting a loss of $18.86 million from January to June, nearly $5 million more than it lost in the same time period last year, according to an August filing. The company has $94 million in debt, including $1 million in a Paycheck Protection Program (PPP) loan it took out during the pandemic.
Similar to the esports industry, esports journalism also relies heavily on advertising revenue, which puts it on shaky ground when advertising sales dry up. In March, Enthusiast Gaming laid off 11 nearly two dozen editorial staff members for its esports and gaming news site Upcomer.
A person who works in esports journalism said he spoke on the condition of anonymity because he was not authorized to speak to the media by his employer.
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People who invest in these properties expect a very fast return. This is not just in esports journalism, this is in esports in general,” the esports journalist said. “That’s why you [saw] Lots of teams and organizations that jumped into the Overwatch League, previously.” Activision Blizzard’s Overwatch League launched in 2017, selling franchise slots to investors for over $20 million, but has struggled to deliver returns to owners like Robert Kraft and Stan Kroenke, owners of New England Patriots and Los Angeles Rams, respectively.
“A lot of this is people buying in an industry and an audience that’s too used to not paying to see things they like and it’s not going to change those habits,” the journalist said.
Several teams in the Overwatch League recently cut some players from their roster, such as the Washington Justice, who are working to shrink their lineup, as first reported by journalist Jacob Wolf. Former General Manager Aaron Hickman “PRE” Tweet on July 5“Teams are fighting over a diminishing fan base instead of trying to get everything bigger,” before deleting his account.
The Overwatch Association declined to comment. Hickman did not immediately respond to a request for comment.