As earnings results for the second quarter come in, it appears likely that the broader economy is spiraling into a recession. The question remains whether or not this recession will last. And my question is how should the gaming industry deal with this happening?
Inflation, high interest rates, the Ukraine war, rising gasoline prices, Chinas logistics problems, the return of COVID variations, and cryptocurrency and NFT price crashes are all causing problems. Gaming cannot defy gravity.
Major games have been postponed due to a lack of remote management, and Microsoft reported a decrease in game revenue in Q2. It is beginning to feel like a time when things arent in our control, even though game companies are always in charge of whether or not their games are enjoyable.
Intel's CEO has just cut his company's estimates dramatically yesterday due to the company missing billions of dollars in losses and revenue. He predicts the PC industry will shrink 10% this year, and Intel will see its decline by the end of the third quarter. That's enough for Intel to put a stop to hiring.
MetaBeat 2022 will be released.
On October 3-4, MetaBeat will bring together metaverse thought leaders to discuss how metaverse technology will transform the way all industries communicate and do business.
Meta Reality Labs (metaverse and VR) division is experiencing a slowdown, according to Mark Zuckerberg, who is also concerned about earnings and revenue targets. This week, Meta decided to hike prices on its VR headsets by $100, which will likely decelerate the VR gaming industry in a significant way.
Caroline Stokes, a human resources expert and CEO of Forward, believes that recessions serve as a time for businesses to demonstrate responsibility to shareholders. The mobile industry was shaken up dramatically in 2008 and 2009. My eyes are on the VR and NFT companies that are taking the brunt of the blows and reforming.
The gaming industry has gone through this plenty of times before. In 2008, the game industry saw a year of growth despite the burst of the housing bubble and the accompanying financial meltdown. And during the recovery from that recession, the industry began a transformation as Facebook and mobile games exploded.
During the height of the epidemic in 2020, games benefited with a 30% increase in users and hours played. New users became more interested in playing games because they could connect with people they could no longer see in person. However, the best-case scenarios did not materialize.
In 2022, the game industry faces more competition for users time as people return to travel and other in-person activities. This time, the game industry isnt the only option that people have for entertainment; engagement is diminishing. On top of that, Apple prioritized user privacy over targeted advertising, and mobile gaming is losing momentum.
Chris Heatherly, NBC Universal's former head of games, said in a message that the outcome for each game company in the recession depends on industry dynamics.
I predict a lot of layoffs if you are in the mobile industry. The privacy push by Apple has altered the business' economic model, and with all of the consolidation, the push is going to ring the cost out, said Heatherly. I do not anticipate the IPO market to be healthy for 12 to 24 months, so that puts pressure on all of the companies that did not IPO during the boom.
While game VC funds are plentiful right now, they may be more adamant about deploying capital, and they will demand better terms and lower valuations.
Heatherly said if you have a business that has raised pre-bust money and is willing to take on a good financial stance, preserve it. Even console seems like a tough place. People will continue playing and buying games, but they are less likely to spend $60 on a game they arent really anticipating.
Do you need proof of the Great Recession?
Despite the old adage that games are recession-proof, there is still reason for optimism.
In a message to GamesBeat, people play games in good times and bad times (maybe even more in bad times). Game development should concentrate on creating fantastic games and unique experiences and keep going.
Mike Wilson, Deepwell's CEO and another industry veteran, agreed. Home entertainment always works well when people slow down and stop doing more expensive things.
Some people have an optimistic view on how firms operate during a recession. Jadu CEO Asad Malik said in an interview with GamesBeat, We think winter is a fantastic time to build. Our hardcore audience is still here.
Rhys Elliott, a Newzoo analyst, said that games have been recession resistant, and platforms like the Wii have benefited from the downturn from 2007 to 2009. Today, there are more than 3.2 billion gamers.
And, Elliott stated, gaming will continue to be a big part of so many consumers' lives in 2022, even if the economy declines.
The game industry is expected to grow by 2.1 percent to $196.8 billion this year, somewhat slower than predicted earlier this year, but the change in revenues isnt a catastrophe.
Gaming's continued strong growth even in the face of stabilization following the 2020s boom is a testament to the markets' will, innovation, and resilience. However, we are far more optimistic for the future, given that many of the popular games that were supposed to launch this year will be released in 2023 and 2024, which we believe will be some of gaming's finest years ever in terms of quality content.
Many businesses, including game companies, may not be able to raise as much money as they did in the past couple of years. That does not bode well for anyone who fails to execute on their ambitions. Those companies may not be able to secure an additional round of investment.
Michael Pachter, an analyst at Wedbush Securities, believes that recessions typically result in people being unemployed, and unemployed individuals tend to spend more time playing games. Therefore, games are immune to recession in a normal recession.
In a message to GamesBeat, the Fed refuses to refer to the decline in GDP for two quarters in a row, stating that employment is at 50-year highs. It's difficult to predict whether or not games will thrive or not, but inflation fears are unfavorable (its been 40 years since the last time we had inflation), so perhaps people will spend less money on expensive entertainment (vacations).
Are blockchain games and the metaverse to the rescue?
Blockchain games are a wrong-headed turn, rather than a fork for the wonderful future that lies ahead in the metaverse, according to investment firm Drake Star Partners. These companies should be flush with cash.
The end is near for those who plop out half-baked plans to savor an overhyped trend, and investors will begin to care more about profitability and revenue rather than just the number of users. Many people will see this as a positive, as scam companies and weak ideas will be shaken out by the recession, and quality companies will remain.
Many triple-A game designers have moved into blockchain games, and they have raised a lot of money. For those who are far enough ahead in their plans, this is their chance to market games that shake up the industry and reward players in return. (The recession is a time when players may come to appreciate that model).
Hiring will become more effortless.
We all have challenges. Quality game businesses always seem to get funding, and gamers always gravitate to the finest games, no matter the economy.
Game businesses may be able to hire talented people more easily at lower costs as a result of the recession. That's why so many entrepreneurs believe that recessions are the best times to start a small business (once you have funding).
And so yet, the game business has slowed down, but it hasn't been as badly harmed as yet. Niantic and Unity have faced layoffs, and Ubisoft has pulled the plug on four games that were in the works, but large layoffs haven't yet swept through the entire industry. Layoffs.fyi says 420 companies have laid off 59,000 people so far in 2022.
According to Drake Star Partners, the speed of acquisitions has slowed and game investments have slowed, but blockchain game investments have remained stable in the first and second quarters.
In an interview, Chris Hewish, the president of Xsolla, said the game industry appears to be continuing to expand. While it isn't expanding at the pace that it has in recent years, we are seeing continued growth in the industry.
So, what should game designers do?
CEOs should keep in mind that funding sources might dry up for a couple of years, and perhaps growth will not resume in a major way until 2023 or 2024.
The ones who dont panic, like Mr. Potter or George Bailey in Its a Wonderful Life, are the ones who survive and continue to strengthen the market.
In a message, big businesses will likely slow hiring and concentrate on short-term gains (getting more out of existing games, putting a priority on games near release). Smaller developers should see players continue to spend, but perhaps more cautiously be open to expanding your audience and keeping them engaged.
If the recession continues, the predictions will get worse. Now is a good time to put the will of everyone involved in gaming to the test. Will the platform owners do the right thing for their ecosystem and continue to invest in them? Will VCs continue to invest in their businesses and give them more money? Time will tell.
I believe that long-term thinking pays off. Sure, everyone should execute and focus on doing business correctly. However, you should stick the course if you are designing a fun game, a cool platform, or a vibrant ecosystem. A recession should steer you off the path of an open metaverse.
Microsoft was mocked and chastised for entering the game console business in the midst of a major downturn. Back in 2001, Bill Gates sold the Xbox at a loss in order to break into gaming and defeat Sony and Nintendo. It sold 24 million units. It also added additional memory to the machine to make developers like Tim Sweeney happy.
In the first generation, losses increased to $4 billion. Microsoft stayed the course. Now, Microsoft can make billions in a quarter. That's the way to steer your way through difficult times.
Facebook/Meta has been losing around $3 billion a quarter as it introduces the Meta Quest 2 to the market, following a $4 billion investment in Oculus in 2014.
Meta continues to spend like crazy, but it just increased the price of the Meta Quest 2 by $100 each in the midst of the recession. The price rise isn't the way to demonstrate to the ecosystem that you've got the desire to persevere.
Developers will notice, and they will conclude that you dont have the drive to go the extra mile and finish what you started. It may save billions and make shareholders happy. But it is not the way to win an ecosystem battle.
Im happy to learn more about this topic as the discussion here is just getting started. This will be one of the topics we will discuss at our next event, GamesBeat Summit Next 2022, in October.