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,

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

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

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

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

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),

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

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,

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

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

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

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,

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

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).

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

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

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

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,

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%

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

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

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

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

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

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

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

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,

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

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/stat...

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