“Layoffs at Microsoft’s gaming division. 1900 employees at Activision Blizzard and Xbox are losing their jobs.”
“Sony is laying off 900 employees at its playstation division. The cuts include the closure of an entire studio.”
“EA has announced plans to layoff 5 percent of its staff, continuing its initiative to never appear in positive news coverage.”
SIMONE DEL ROSARIO:
It certainly sounds like the gaming industry is in trouble.
JOOST VAN DREUNEN:
“It’s both the best year and the worst year for the games industry. Right?”
“So last year, we saw, you know, a total of 10,500 announced layoffs in the industry. It’s now the end of February, we’re already up to 7100, or something like that.”
SIMONE DEL ROSARIO:
But the global games market reached an estimated record $217 billion in 2023, according to video game data firm Aldora.
“New High score? Is that bad? What’s that mean? Did I break it?”
SIMONE DEL ROSARIO:
So what’s with all the layoffs?
MICHAEL PACHTER:
“I think that Sony probably assumed that the PlayStation five would trend the same way that PS two, three and four did. And it’s not selling as many, you know, period. I mean, they’re, they’re three full years into the cycle, and they sold 54 million units, they typically sell north of 20 million a year.”
SIMONE DEL ROSARIO:
Meanwhile, Microsoft’s layoffs came following its huge acquisition of Activision-Blizzard, and the FTC isn’t too happy about it after it failed to block the deal.
MICHAEL PACHTER:
“So there was certainly a lot of redundancy, you don’t need two CFOs or as many HR people or as many legal people.”
SIMONE DEL ROSARIO:
The torrent of job cuts, then, seem to point to a transition in the industry, not necessarily turmoil.
Microsoft’s $69 billion Activision-Blizzard acquisition is an exclamation mark on a trend seen for years from console heavyweights. They’ve been gobbling up studios and publishers to strengthen their stable in competition to be a gamer’s top hardware choice.
Before its blockbuster Activision deal, Microsoft bought ZeniMax Media for $7.5 billion in 2020, adding the Doom, Fallout and Elder Scroll series to its catalog. And back when these big deals were just a pipedream in 2014, Microsoft still spent $2.5 billion to buy the studio behind Minecraft.
Sony’s feeling the pressure to up the acquisition game. They dropped $3.7 billion on Destiny-maker Bungie in 2022, but most of their meals are smaller studios.
JOOST VAN DREUNEN:
“Either you invest lots of money internally and develop it yourself, or you acquire and hope it works.”
SIMONE DEL ROSARIO:
Microsoft’s recent acquisitions are an attempt to attract gamers to its subscription service Game Pass, which offers a plethora of first party, Triple A and indie games that rotate in and out. Like Netflix or Hulu for the gaming world.
MICHAEL PACHTER:
“If you spend enough time in Game Pass, you never have to leave. If you spend enough time on Netflix, you never have to leave. Do you miss out on you know, Oppenheimer? Yes, you do. But can you live without seeing Oppenheimer?”
SIMONE DEL ROSARIO:
Strong subscription offerings are crucial to the bottom line, considering making money off consoles is like trying to squeeze blood from a turnip.
“It’s no secret that Sony and Microsoft are willing to sell their hardware at a loss to lock you into their ecosystem of accessories, subscription services and software.”
PHIL SPENCER:
“So when somebody goes and they buy an XBox at their local retailer, we’re subsidizing that purchase somewhere between a hundred and 2 hundred dollars. With the expectation that we will recoup that investment over time through accessory sales and storefront.”
MICHAEL PACHTER:
“They rely upon scale to bring down the cost of the components. So, you know, years ago, I mean, 2005, flash memory was super expensive. And by 2013, it was cheap.”
“But that’s not happening anymore. We’re not seeing component costs coming down as rapidly.”
SIMONE DEL ROSARIO:
Before every console was connected to the internet, the business model was simple.
Develop a game in the most cost-effective way, sell as many copies as possible, and try to come up with another idea to do it all over again.
MATT BOOTY:
“We’ve sort of seen this inversion over the last five years where it used to be that the platform was the biggest thing. And the games would sort of tuck in. Within the platform today, big games, like a Roblox or fortnight could actually be bigger than any one platform. And that really has changed the way that we think about things.”
SIMONE DEL ROSARIO:
Now, games as a service, known as “live games,” are king. These are games that have a continuing revenue model rather than just the initial purchase.
This can be done in lots of ways.
“For the Horde!”
SIMONE DEL ROSARIO:
There are monthly subscriptions for playtime, something you’ll see in World of Warcraft.
Then there are microtransactions, low-cost purchases that include cosmetic items or power ups. While these appear in all kinds of games, they are most prevalent in mobile games. We did a whole piece on Kim Kardashian: Hollywood, that really breaks this down.
Then there’s the season pass…
MICHAEL PACHTER:
“The guys who invented Season Pass were the Epic guys with Fortnite. And, you know, it’s brilliant.”
SIMONE DEL ROSARIO:
For a season pass, you might spend 10 bucks and get 20 bucks worth of stuff. But the boost only lasts for a short period of time.
MICHAEL PACHTER:
“the real rationale for Season Pass is not to collect the 10 bucks for the pass, it’s to keep the player engaged with daily tasks. Because the player who comes back every day to make sure he gets his money’s worth and earns his little thing tends to stay an extra 10 or 20 or 30 minutes. And more engagement just necessarily translates to higher in-app purchases.”
“You know the idea is convert MAUs into DAUs and that conversion goes up with a season pass.”
SIMONE DEL ROSARIO:
Along with constant revenue streams, live games give developers the chance to keep building out the game as they go, instead of presenting a finished product up front without knowing what demand for it might be.
JOOST VAN DREUNEN:
“But at the same time, you know, you could also then sort of shape the experience according to the, like, likes of the audience, right. So it’s much more of a back and forth rather than we develop this pristine experience right here. It’s secret and and now we hope that it works.”
MICHAEL PACHTER:
“Some people like to watch movies in a theater, be entertained for two hours and go home and talk about the movie for a week. And others like to watch reality TV shows, and watch dating shows and guess who the bachelorette is going to pick. So those are completely different experiences. Live services is far more analogous to reality TV than it is to, you know, a self contained film.”
SIMONE DEL ROSARIO:
But let’s talk about those self-contained films.
Since the dawn of the modern video game industry, it’s been console-exclusive video games driving sales to a specific platform.
“It’s Me Mario!”
JOOST VAN DREUNEN:
“they’ve built their fan base, very strongly around these exclusives.”
“Sony and Microsoft have really put together a marketing plan for the devices that has a particular personality. And so people identify very closely with.”
SIMONE DEL ROSARIO:
But, in February, as rumors swirled that Xbox may be offering some of its exclusive wares to its competitors, the gaming media acted like it was the end of the brand as we know it.
MICHAEL PACHTER:
“The gaming press plays to that stupid, infantile approach by saying, Oh no, no, like our understanding as gaming press is all console first party titles should be exclusive. And you’re violating our preconceived notion that you know that of how it should be.
SIMONE DEL ROSARIO:
All that drama culminated with a “special edition” of the XBOX podcast featuring Microsoft Gaming CEO Phil Spencer.
PHIL SPENCER:
“So we’ve made the decision that we’re going to take four games to the other consoles, just four games, not a change to our kind of fundamental exclusive strategy.”
SIMONE DEL ROSARIO:
Those games include Pirate-sim Sea of Thieves, Grounded, Hi-Fi Rush and Pentiment…a far cry from Halo and Gears of War leaving XBOX.
MICHAEL PACHTER:
“So I actually think Microsoft’s overarching goal is to sell Game Pass subscriptions. And their strategy is to hook the consumer. And I think that they’re acknowledging right now that they don’t have everybody.”
JOOST VAN DREUNEN:
“What makes Fortnite so successful, makes Minecraft so successful, is that they’re available on any platform. And so increasingly, we’ll be moving in that direction. And then we become much more platform agnostic.”
SIMONE DEL ROSARIO:
Despite these notable changes to the gaming industry, don’t expect the traditional console war to end in a peace treaty.
JOOST VAN DREUNEN:
People have been questioning the continuity and the the extent of the console that it’s going to be around, circumscribe, for much longer, the death of the console is sort of the new year is not a new conversation.
MICHAEL PACHTER:
“I just think sales get cut in half next cycle not to zero. And then they get cut in half again, the next cycle, and they get cut in half again, the next cycle. “
JOOST VAN DREUNEN:
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“It’s a little bit the equivalent of have a really, really expensive headphones are really, really, really high definition televisions and you’re like, there’s always going to be an audience for that. And then there’s everybody else.”
SIMONE DEL ROSARIO:
The reasons behind the job cuts vary. This year’s gaming layoffs are on track to far outpace last year’s. But it doesn’t appear to be the canary in the coalmine for an industry that has seen substantial growth in recent years.
JOOST VAN DREUNEN:
“I would expect all these companies in 18 months to be rehiring a lot of the people that just laid off.
