It's not even the end of January yet and the games industry has already announced layoffs for several thousand employees, showing that 2024 could be even more problematic than the already troublesome 2023 in this regard. We reached out to MIDiA Research Senior Analyst and Strategy Director Karol Severin to discuss the state of the games industry in this post-pandemic, high-inflation environment.
Sales were up 1% in the US and 1.7% in Europe for 2023, and Newzoo is forecasting growth for 2024 (although they believe it will be a lean year). At the same time, the games industry has been rocked by constant layoff news: less than a month into the year, there have been around 60% of the layoffs seen last year. Some games industry leaders are reportedly bracing for 'up to two years of pain'. What do you think about this seemingly conflicting state of the industry?
It's important to note that even though these statements may intuitively sound as conflicting at first glance, they are not necessarily mutually exclusive. It is possible that the industry will grow revenue (depends how you count/define ‘the industry’) in absolute terms. MIDiA’s forecast states the growth will be only very modest (approximately 3% globally in 2024) and below the rate of inflation, which means that even though the revenue number may end up higher, the industry will probably be worse off in reality. The growth in absolute numbers is more driven by ongoing price hikes and growing gamer population. The layoffs are an ongoing part of the industry consolidation and optimizing for profitability (though some are calling it ‘sustainability’). If we assume that the market is over-saturated with too many games at the moment, then it is possible for layoffs to happen without affecting the global games revenue. It will likely just become more concentrated among fewer games companies as closures and/or downsizing efforts play out.
As for ‘bracing for up to two years of pain’ it very much depends on who you ask. Traditional pure-play game companies will find it more difficult to compete as tech majors and other non-pure-play entertainment companies (e.g., Netflix) make strides into games and compete for valuable time spent. These companies are not entirely financially dependent on games, which makes it easier for them to sustain lower margins as they compete for market share. So yes, pure-play companies will find it more difficult in the coming years. We are seeing a gradual redistribution of market share/power/influence from traditional game companies towards more sector-agnostic players in the games industry. Also, this is not to say that all game companies will struggle. In every market transition, there are winners and losers, of course.
For Microsoft specifically, were you expecting such a big round of layoffs? Mergers tend to translate into redundancies, but this is a bit much. Plus, they already did layoffs last year as well. Should we expect Microsoft to pare back its investments in gaming despite the overall success of the company?
Microsoft likely made layoffs that it felt were optimal to continue the integration of Activision in as effective a manner as possible. Layoffs are not unusual after M&A. Of course, the 1900 layoffs included staff beyond just Activision. Games companies/divisions have clearly been staffed for growth rather than optimized for profitability in previous years. We believe the overall number is in line with other game companies' layoffs we’ve seen. We’ve seen many game companies lay off anywhere between 5%-12% of their workforce during this and last year, and the layoffs by Microsoft are within this range.
Lastly, where does the runaway success of Palworld fit in all of this? What's the takeaway for developers and publishers in the games industry?
The takeaway is that even in a market facing increasing competition, consolidation, and increasing production budgets, the games that manage to address consumer preferences well do break through the clutter and rise to the top. As I mentioned earlier, there will still be winners – the climate is challenging for pure-play game companies right now, but that does not mean that no companies will thrive. Palworld is a great example of this.
Thank you for your time.
