Even the ‘recession-proof’ video game industry is feeling an economic chill

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During the 2008 recession, the video game industry was heralded as a bright spot in the economy. Described as recession-proof, the industry showed resilience by selling millions of Nintendo Wii and DS systems even as banks closed and the housing market crashed.

In today’s economy, however, analysts say the video game industry may not be as invincible as a Super Star-powered Mario. Copies of games – and the microtransactions they sometimes contain – are getting more and more expensive. Virtual reality hardware prices are rising. As the US economy shrinks and people re-examine their financial budgets, analysts say spending on video games could be down.

“This time it’s a lot more uncertain,” said Cassia Curran, founder of games business consultancy Curran Games Agency. “Employment remains strong and demand for outdoor entertainment is surging after two years of the pandemic, and game sales last quarter finally saw a slight decline after two bumper years caused by the pandemic.”

In an impending recession, one of the first things people tend to cut back on is discretionary spending. The video game industry is no exception to this general rule, experts say, but the value of a $60 game or free title can last for hours and span months, making does a good business in an economic downturn.

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On an Aug. 8 earnings call, Take-Two CEO Strauss Zelnick said, “We are now seeing that declining consumer spending and rising inflation will impact the industry. . You saw it in our report today and in our competitors’ reports as well. Take-Two’s gaming properties include Rockstar Studios and 2K, creators of hits like “Grand Theft Auto V”, “Red Dead Redemption II” and 2K’s popular line of sports titles.

Gaming titans Nintendo, Microsoft and Sony all announced lower revenues and missed their profit forecasts in late July or early August. According to game companies, part of the reason is a weakened supply chain, still affected by pandemic-related lockdowns and challenges in delivering consoles to stores. Another aspect is that much of the world has now reopened and is not looking online to forge social connections.

In August, Meta, formerly known as Facebook, raised the price of its Quest 2 VR headset from $299 to $399.

“The costs of manufacturing and shipping our products have increased,” Bryan Pope, a spokesperson for Meta, said in a statement. “By adjusting the price of Quest 2, we can continue to increase our investments in groundbreaking research and new product development.”

Pope said Meta would continue to bet big on games, as it was one of the most popular content categories on Quest 2.

The Washington Post has reached out to more than a dozen game companies for comment on how they plan to weather a possible recession. Hoyoverse, Electronic Arts, Take-Two, Ubisoft, Devolver Digital, Annapurna, Square Enix, CD Projekt Red, Sega declined to comment. Others, including Sony and Xbox, did not respond.

Video game companies are tightening their belts, slowing down hiring in some cases, and being more demanding with the development of new games. Tencent announced its first-ever revenue drop in August, down 3% to a total of $19.78 billion, with gaming revenue down 1%.

Unity and Niantic have laid off some of their staff as part of cost-cutting measures, as first reported by Kotaku and Bloomberg. Niantic spokesperson Mark Van Lommel said in a statement, “In June, we decided to halt production on select projects and reduce our workforce by approximately 8% to focus on our top priorities. We are grateful for the contributions of those leaving Niantic and we support them through this difficult transition. He added that the layoffs help position Niantic to “overcome the broader economic uncertainty” facing businesses and invest in augmented reality technology.

Ubisoft confirmed in a July earnings call that it had canceled four new games, citing “the changing financial environment”.

“Budgets are going to get tighter with all businesses at all levels, which means it will be harder to get new projects approved unless they have a solid chance of succeeding,” Chris Kramer said. , head of North American communications at Tencent Games. . “Publishing efforts will be scaled back as budgets shrink, so game companies will need to do more with less and really look at where the greatest ROI is on the dollars spent.”

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According to Curran, investors are more likely to bet on known entities, such as proven franchises and game developers with solid track records, rather than risk it with new and unfamiliar properties.

Across all gaming companies, those that offer live service games (like “Apex Legends” or the constantly updated “Candy Crush Saga”) have seen microtransactions bolster their results over the past three months. While players can access these games for free, the titles offer shiny cosmetics or battle passes for real money. Many analysts wonder how free games will perform in a recession.

“There’s a huge question mark hanging over the entire games industry,” Curran said. “Would a recession cause more gamers to choose free games over premium titles? The big spenders [free-to-play] games – which usually generate the bulk of revenue – have reduced their purchases? At the moment, we can only guess.

Riot Games has increased the price of its in-game currency, which can be exchanged for cosmetics and champions, by approximately 10% globally. Five dollars was equal to 650 Riot Points, but starting August 19, it will only net players 575 RP.

“We update our pricing by region approximately every year to account for factors such as inflation, currency fluctuations, and exchange rates,” Riot Games spokesperson Joe Hixson said. “We know that price changes never feel good, especially in times of economic uncertainty, so we try to approach these situations with empathy and understanding. That said, these changes are necessary to continue to respond to what the players expect from Riot.

The economy has also impacted the industry’s competitive gaming efforts around esports. Will Partin, a University of North Carolina affiliate researcher at the Chapel Hill Center for Information, Technology and Public Life, pointed to the unreliable ways the esports industry makes money that could make it vulnerable in the event of a recession.

Teams rely on content creation to generate sponsorships and advertising revenue, while venture capitalists are more reluctant to pay for esports during a time of higher interest rates, he said. note.

“These are turbulent times and this has a tangible impact on esports,” Partin said. “The teams that will do best are those that have built strong revenue streams (whether in merchandising, agency work, consulting, etc.) outside of their core esports business. But I doubt even they can avoid layoffs and spending cuts. »

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Twitch streamers have also felt the pinch, as viewers become more reluctant to pay for subscriptions, and streaming for multiple hours becomes less interesting.

Esports and content creation company FaZe Clan went public in July through a special-purpose acquisition company, a so-called “blank check” company that raises money for private companies. In a filing in April, the company lowered its financial guidance due to “current market trends.” The company declined to comment for this story.

FaZe Clan, one of the world’s best-known and most popular esports and gaming content brands, has never been profitable, according to its financial filings. In 2021, FaZe Clan recorded a net loss of $36.86 million. It’s on track to lose more this year, posting an $18.86 million loss from January to June, about $5 million more than it lost in the same period. last year, according to an August filing. The company has $94 million in debt, including $1 million from a Paycheck Protection Program (PPP) loan it took out during the pandemic.

Similar to the esports industry, esports journalism is also heavily reliant on ad revenue, which leaves it on shaky ground when ad sales dry up. In March, Enthusiast Gaming abruptly fired 11 members of an editorial team of around two dozen on its esports and gaming news website Upcomer.

“There’s just a lot of uncertainty in the market in general, and that can lead to quick decisions, hard decisions, rash decisions,” said a person who works in esports journalism and spoke undercover. anonymity as he was not authorized to speak to the media by his employer.

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“People who invest in these properties expect a very quick return. It’s not just in esports journalism, it’s in esports in general,” the esports reporter said. “That’s why you [saw] so many teams and organizations have entered the Overwatch League before. Activision Blizzard’s Overwatch League launched in 2017, selling franchise slots to investors for over $20 million, but struggled to provide returns to team owners like Robert Kraft and Stan Kroenke, owners of the New England Patriots and Los Angeles Rams, respectively.

“It’s largely about people buying into an industry and an audience that’s very used to not paying to see the things they like and not going to change those habits,” the reporter said.

Several Overwatch League teams have recently removed players from their roster, such as the Washington Justice, which is in the process of trimming its roster, as first reported by journalist Jacob Wolf. Former General Manager Aaron “PRE” Heckman tweeted on July 5“Teams are fighting for a shrinking fanbase instead of trying to make it bigger,” before deleting his account.

The Overwatch League declined to comment. Heckman did not immediately respond to a request for comment.