What does the wave of layoffs in the global gaming industry mean to the gaming industry?

Author: James Batchelor

Since the beginning of 2023, the wave of layoffs in the gaming industry has continued.

In the past few weeks alone, Ascendant Studios, Beamdog, Crystal Dynamics, Roblox, Blizzard, Epic Games, Team17, Naughty Dog, Twitch, and Keywords have all laid off employees, with Epic’s layoffs exceeding 800 people. The reasons behind layoffs at game manufacturers vary. For example, the layoffs at Crystal Dynamics and Beamdog were part of Embracer’s restructuring plan, and the layoffs at Keywords were due to BioWare’s decision to terminate an outsourcing service contract with the company. Still, the fact that layoffs have made headlines so frequently in such a short period of time is indicative of broader issues within the gaming industry.

So, why are game manufacturers laying off employees? Around this topic, industry analysts, recruiters and investors mentioned many factors that reflect the current economic environment, including high interest rates, inflation, slowing market growth, rising (research and development) costs, intensified competition, etc. In fact, across the technology industry, these challenges have also led to large-scale layoffs at giant companies such as Microsoft, Meta and Amazon.

Serkan Toto, Kantan Games

“The importance of ‘efficiency’ in the gaming industry has increased significantly over the past 18 months,” said Kantan Games CEO Serkan Toto. “More than ever, gaming companies are more focused on cost savings, The urgency to streamline organizational structures is much higher. Faced with pressure, game industry CEOs have to swing the hammer to deal with the largest cost block: employees. This is what we see in 2023."

“The common thinking among these CEOs is: ‘If we don’t lay off employees, our competitors will do it and take advantage of their efficiencies and eliminate us.’ So people are being laid off everywhere…and at the same time, they often think that at any given moment, the company is 15% to 20% of employees are redundant.”

Spike Laurie, a partner at venture capital firm Hiro Capital, noted that the current wave of layoffs in the gaming industry can be traced to one specific event: Elon Musk laid off 50% of Twitter’s employees in November 2022 .

“What he (Musk) discovered from employee electronic passes was that more people were serving food in the cafeteria than actually eating in the restaurant,” Lowry said. "This became a catalyst for other business leaders to start taking a closer look at the size of the company. , smart layoffs provided the needed impetus. Why? We’ve reached the end of an economic cycle, fueled by a reliance on cheap and readily available capital. A year later, we’re seeing widespread layoffs in the games industry, leading to Many talented people have lost their jobs and financial security. Job losses are particularly painful for those affected by soaring prices for necessities such as energy and food.”

Emilie Avera, senior vice president of consulting at IDG Consulting, added that there is a “significant gap” between the pay of executives and ordinary employees at game companies, especially public companies, which makes large-scale layoffs possible. Seems even more embarrassing.

Emily Avila, IDG Consulting

“Although measures such as layoffs can effectively reduce costs and temporarily improve the balance sheet, there has been no corresponding reduction in the total compensation of executives.” Avila said, “In terms of executive compensation, the current The top priority is to build a ‘performance pay’ model that strictly links executive pay to actual results and performance indicators: if the company’s performance fails to meet pre-set targets, executives should take a pay cut.”

In addition, the pandemic has inevitably affected the current status of the gaming market. According to Avila, the gaming industry once expanded rapidly driven by the “stay-at-home economy”, but this situation is destined not to last long.

“As funding began to dry up, game companies were forced to re-evaluate how they allocate funds, and layoffs became the immediate solution to cutting expenses.” She explained, “Many companies have rushed to expand in the past two or three years in order to obtain quick financial returns. The rush to make a large number of acquisitions without adequate due diligence and poor management of budgets, often at the expense of sustainable profitability… These crazy practices have only undermined the industries they originally intended to vigorously develop.”

Avila said that in this regard, the gaming industry has many similarities with the entertainment industry: streaming platforms prioritize attracting larger audiences rather than increasing profitability. Today, major streaming platforms are “fixing their unsustainable models” by raising prices, and the gaming industry is experiencing “a similar reckoning.”

Liz Prince, director of gaming executive search firm Amiqus, said the current situation in the gaming industry is more like a realignment from a recruiting perspective and does not reflect any deep-rooted industry issues that warrant deep concern.

“First and foremost, I want to express my sympathies to everyone affected by the recent layoffs and studio closures,” Prince said. “There is no doubt that this is a challenging time and we are concerned about the many talented people facing job losses. I feel deeply uneasy. However, any industry goes through cycles of expansion and contraction, and the gaming industry is no exception. During the pandemic, the growth of the gaming market has prompted many companies to quickly expand, make acquisitions, or overinvest in certain areas. Now it’s time to recalibrate. It’s important to note that while some studios are facing challenges, many others are expanding.”

Piers Harding-Rolls, director of games research at data analytics firm Ampere Analysis, feels the same way. "This is nothing new, especially in recessionary times. Of course, given the size of modern big game budgets, the cancellation of a single project can result in hundreds of layoffs, having a greater impact on the industry than in the past. Just two or three years ago, the talent shortage was a hot topic in the game industry. Many studios were competing for top talents, and competition was fierce… For those larger companies, this is also what they will do from 2019 to 2022. Part of the reason for the large number of acquisitions at the beginning of the year.”

Harding-Ross added that the M&A boom in the past few years has also been driven by “overvalued gaming companies” and cheap loans. However, since Microsoft announced that it would acquire Activision Blizzard for a record sum, the cost of debt has risen rapidly and the valuations of gaming companies have declined.

Lowry noted that many game companies have been housing “large, unprofitable teams.” “It was too easy to get loans and investments for a while, so there were too many new teams producing too many games,” he said. “A lot of money poured into blockchain and metaverse studios that had not been tested by the market. (Employee) pay was raised, but those studios failed to release any games."

Spike Lowry, Hiro Capital

Avila mentioned another factor: Today, players are buying fewer games and investing more time in their favorite franchises. As the market continues to shift towards games as a service, this trend is likely to accelerate. Even stand-alone games will consume more time for players, such as “Baldur’s Gate 3” and “The Legend of Zelda: Tears of the Kingdom” where the main line clearance process reaches more than 50 hours. “All developers have to do whatever they can to get as much attention as possible from discerning gamers,” she said.

Kim Parker-Adcock, boss of recruitment agency One Player Mission, noted that people’s spending habits have expanded again since the end of the pandemic. “People will use their disposable income to travel, go on vacation abroad or participate in various activities. There are still hardcore gamers who will spend all their money on games, but fewer people are willing to spend money on new consoles than two or three years ago. Many, because based on the price alone, they’re almost like luxury goods…Sony’s latest exclusive games are no longer available on PS4, and if you want to play them, you have to buy a PS5 for more than 400 pounds.”

Karol Severin, co-founder and senior analyst at Midia Research, added: “The growth rate of the gaming industry has peaked. In the future, the revenue of the entire industry will continue to grow, but it will mainly be driven by the population. Driven by growth and improved Internet conditions, rather than the improvement of the gaming business itself. As cloud gaming subscriptions grow, players will have less need to buy high-priced games. When streaming subscriptions (models) really take off, the gaming industry is about to Facing similar pressures as the music and video industries. As the value of a single game decreases in the eyes of consumers, it is inevitable that there will be less demand for games, and with it the number of developers and publishers."

Severin also pointed out that the number of games is growing much faster than the growth rate of global game revenue. For example, more than 13,500 new games are expected to be released on the Steam store in 2023, up from last year’s figure (12,500). In addition, some companies whose business models do not rely on games (such as Netflix, Amazon, and Apple) are also constantly competing for more shares in the game market.

Avila shared some of her thoughts on the future development direction of the gaming industry. Avila believes that generative AI can be used to assist (but not replace) heavy-duty R&D teams and shorten the development time of game products; user-generated content (UGC) may also become a way to cut development costs. She also mentioned that as time goes by, more developers will outsource art, programming, sound effects production and other aspects of work to outsourcing service companies such as Virtuos and Keywords, thereby focusing on their core strengths.

Avila stressed that gaming companies also need to manage performance expectations wisely. “To get back on track, game companies and investors need to agree on realistic KPIs and stick to them,” she said. “While positive player sentiment about a game on social media may be exciting, it doesn’t It does not mean that the game will definitely sell well. Before making investment decisions, we should evaluate real indicators such as (the game’s) evaluation scores, pre-sales volume, and number of bugs.”

Carol Severin, Midia Research

"It is undeniable that some studios may face further financial pressure and make additional adjustments, including continued layoffs… But no matter how painful these adjustments may be in the short term, they are important to ensure that the games industry is sustainable. necessary steps for development.”

Severin added that there is no magic bullet to solve the problem of layoffs, as many factors behind layoffs are outside the control of the gaming industry, such as inflation, high interest rates and more. “While many people are pessimistic about the future, the gaming industry is not going away and will still be worth approximately $187 billion this year. If gaming companies are considering new projects, careful planning of the path to profitability (rather than how to promote user growth) will will become increasingly important. In addition, we expect that in the future, games that focus on satisfying the needs of niche players rather than competing for mainstream audiences will be more successful.”

Toto doesn’t think the wave of layoffs will subside anytime soon in the gaming industry. “From the outside, it looks like some studios are still overstaffed. My personal guess is that we’re going to see more bad news between now and the end of 2024.”

Prince noted that game workers affected by layoffs “remain very popular” and will be able to find work at other companies based on the skills and expertise they have accumulated. Parker-Adcock also pointed out that as some studios downsize, new ones tend to emerge in the industry. “These new studios are still in the growth stage, but the key is to avoid overspending, ensure the team can survive, and only hire talent in key key roles.”

Liz Prince, Amiqs

Lowry concluded that although the future of the gaming industry “seems to be full of challenges,” with the rise of Generation Z and the widespread adoption of gaming technology by large technology companies such as Meta and Apple, practitioners still have reason to be optimistic about the future.

“If this round of layoffs in the games industry becomes the catalyst developers need to make new games in some more streamlined, efficient and creative way, then we will all benefit from it,” Lowry said. "We have to remember that What a blessing it is to work in such a booming industry. When the macroeconomic environment improves, the games industry will certainly be at the forefront of driving economic and job growth. In the new forward-thinking digital economy, our skills will be invaluable. "