The games industry is going through a tumultuous time. It could be felt a lot at GDC 2024. No conversation that sooner or later steered towards the desolate state of the industry. A lot of companies are struggling to get by. Investments into games are down. Publishers are signing a lot less games. In total this is probably the biggest games market correction since the games industry crisis in 1983. Back then home video game revenue dropped by 97%. [1]
Here's what's up in my humble opinion - as a random game dev trying to make sense of what is happening right now. For that we have to zoom out a bit to understand why the current state is the effect of cumulative effects that result in a perfect storm.
So all markets go through boom and bust cycles. [2] That has been observed as long as markets are around. Governments around the world try to dampen this effect. They do that through different monetary instruments. One of the most importants ones are central banks. These banks are responsible for managing the money flow and their policies are guided by anti cyclical adjustments.
One of the most powerful mechanisms they control is the base rate, which is the interest rate at which banks can borrow reserves from the central banks. In simple terms this metric controls the interest rates in an economy. When the market is down, central banks lower the base rate to lower the overall interest rates on money lending. Why? To incentivise companies to take on debt and to invest in future growth.
They aim to infuse money in the economy so that companies can hire people, buy machines and so on. This push should help companies to grow again - even in market environments where investments are down and resulting in a vicious cycle of companies going out of business. Generally borrowing money should be cheap enough so that the expected return on the debt becomes higher than the interest rate. The lower the interest rate, the higher the chance for this, and the higher the incentive to take on debt as a rational market member (“homo economicus”).
Vice versa when a market is booming central banks typically raise interest rates.This discourages investment by making borrowing more expensive. Companies have to pay higher interest rates on loans, and investors see a more attractive return on less risky options like bonds. Thereby future growth is reduced and a booming market is incentivised to not over invest because there are more risk free alternatives.
Basically the policy is to have a market that is on a stable sustainable growth trajectory rather than a market that goes through extreme boom and bust cycles, because you can't have a boom without a painful correction (including high inflation and unemployment) at some point.
Now let's look at the state of the world. Since at least 2008 this policy has been under a lot of pressure. We've gone from housing crisis, to bank/financial crisis, to covid crisis, numerous wars, looming climate crisis and government instabilities, with only shorter moments of global recovery. For over a decade the central banks have been trying to put the global economy back on a solid growth trajectory, while having been forced to maintain extremely low interest rates to prevent the global economy from slipping into a major recession.
Usually when a new crisis appears you have enough wiggle room regarding the interest instrument because it was raised during the previous boom cycle. What happens when you go from crisis to crisis though and there is no chance to raise interest in between? Well you have to lower interest rates from the previous low position. In the recent decades we've been facing so many crises and lowering of interest rates that the banks literally ran out of numbers. At some point the interest rate reached ZERO percent.
At this point a lot of central banks additionally resorted to their second super power, quantitative easing (EQ), which in simple terms means printing money. This can have further adverse effects on inflation, but I’m not writing a book about macroeconomics, so I’ll ignore that aspect and will focus on the interest rate instead.
What happens if you face even more crisis but you are already at ZERO percent base rate, but the mood is so dire that even at that rate people don't think they would be able to beat 0% profit expectation (basically saying that people are expecting shrinking profits).
Well, you lower interest to negative numbers, resulting in basically being punished for having savings. Banks around the world enacted rules that you would have to pay money for keeping your bank account with them. (Technically this wasn’t the first time something like that had been tried, but never so widespread and long-lasting). Desperate measures!
Now these are extreme measures and they kinda worked. Especially in the tech and games industries as these boomed during the Covid years, money found its home in these sectors. Businesses started investing like there is no tomorrow. Driven by the positive trend and the market incentives engineered by state banks they did: invest, invest, invest. It was like a free-for-all.
Now the incentives are so strong that for some companies the business model became riding this unique wave. The business model of companies like embracer is NOT creating games: it is using the low interest environment as much as possible. Using cheap debt to consolidate markets and to perform roll-ups in which they buy other companies to leverage 'risk reduction' and synergies to raise evaluation of the holding company. [3] When you are arguing that this does not result in better working environments or better games, you are not playing the same 4d chess game that these corporations are playing.
Now a bit further in history: these historically low interest rates were an unprecedented extreme move to kick the economy into growth. And it worked… a bit too well. Markets started to get into a frenzy. Stock markets are going from all time high to all time high. (When interest rates are low, more money floods into the stock market as a viable alternative). And in no time we go straight into the drawbacks of an extreme boom cycle.
These massive investments lead to a lot of employment (at least for highly qualified personnel). The employment leads to the tech job market being sucked empty. Salaries have to be raised to keep attracting personnel away from other companies. What happens if the market is flooded with this money? Inflation happens.
People realize that employees are earning more money, so they might as well pay a bit more on the rent right? If they can afford more rent how about paying more for groceries or energy or basically everything. This is a bit of oversimplification since there are a lot of compounding elements that also have a lot of impact, like for example at the energy crisis resulting from Russia's gruesome and despicable attack on the Ukraine.
But the bigger picture is basically that: the biggest market crises of decades resulted in the biggest counter reaction in market incentivization, which resulted in an environment where inflation thrived. So now the central banks are again under pressure to update their policies to this situation. The economical pressure on everyday people through inflation is now an even more severe problem than trying to make these economies grow again.
So the banks hit the brakes very hard. They incorporate one of the biggest base rate hikes ever. Usually these interest rates would slowly lower and raise throughout the years to have a sustainable effect on the market. We're beyond that: one extreme measure follows the next. We go from recession crisis mode of trying to money shock the economy into growth into immediate boom crisis mode and trying to damp the growth that has gone out of control by installing an extreme interest hike.
So knowing all that: how could this NOT result in extreme disruption? It's time for a moment to recognize that the state banks are not acting maliciously by the way. They are just desperately trying to fulfill the role for which they were created and to fulfill the same monetary practices which are considered best practices for decades. They are caught in a very tricky situation.
So now back to the games industry that has been caught in this storm more than most markets: the covid years resulted in explosive growth, the money policy by central banks fighting global recession incentivized extreme spending (as seen with embracer and other similar roll-ups), the games industry has not been able to sustain the overly optimistic growth projections of those years, while being starved from taking on further debt in this high interest rate environment. It's not just a storm, it's a perfect storm.
That’s even without considering more games industry specific changes like general engine and availability and digital distribution having removed almost all market entry barriers and are resulting in a number of game releases and companies that are simply unsustainable by the market, even under normal circumstances. (When I started in the games industry, the Unreal engine cost over $1M to license, crazy right?)
So that's what's what. I'm not an economist, I’ve just taken some economics classes during Uni, but I think that is what has been happening. Of course this is an oversimplification but I think the bigger picture checks out. Companies have not all of the sudden gotten more ‘greedy’. At least not more than they have always been. A deadly combo of cheap money and overly optimistic growth projections, fueled by world-scale events, have given rise to a games bubble that has caught lots of bigger games companies with their pants down.
The players are still there. They are still buying as many games as ever. There are trends in the industry (life-services games, subscription models, market saturation, low entry barriers) which will have a big impact in the coming years and games will keep going through cycles, like any market. In terms of why this crisis hit so strongly though: it’s because of a build-up that has been going on for over a decade.
Will games be okay again? I think so, once we've priced in the new environment and absorbed the market shock. That doesn't make the current times necessarily easier to bear for people caught at the bottom of the totem pole and discarded in masses by these big companies
I think the reason for this goes beyond other takes that I've seen where this is made to look like a random weather change, or mass hysteria or 'greed'. Technically I think the market actors are pretty much acting according to the incentives that have been laid out for them and behaving as relative rational participants.
Maybe this thread can make a small contribution towards explaining what the hell is going on.
On a side note I didn’t go into quantitative easing which is the second big power that central banks have. This is the power to basically print new money, which has been going on a lot in recent years. Since I don’t want to write a whole book on macroeconomics I’ll leave that out of this article though, even though it has compounding effects on inflation and availability of money.
The big question is: shouldn't this development have been anticipated earlier? Couldn't the severe impact on many lives be reduced by acting more restrictive in the first place? Maybe yes, maybe no. It’s always easier to tell in hindsight.I don't think anybody really could foresee the speed at which we would move from extreme anti crisis measures to extreme anti boom measures. Nobody could have known with certainty if the tech growth during COVID would keep going or not.
The more cynical answer: it's simply more profitable to "ride the wave" as hard as companies like embracer have done. After all the dust has settled and companies like embracer have consolidated some people will still have made a lot of money by chasing the opportunity as much as they did.
Compounding factor: the money went to the industries that were able towards a positive growth trajectory like the games industry was able to do during the COVID years. The fact that the new kid on the block is now AI, results in extreme amounts of money being pushed in that direction sucking even more investment money out of the games industry. We were really caught in a macroeconomic storm. We don't know how long this games crisis will last. Hopefully we'll see improvements by next year again. Make sure to bring your umbrella.
Games will be okay.