“Layoffs at Microsoft's gaming division. 1,900 employees at Activision Blizzard and Xbox are out of work.”
“Sony will lay off 900 employees in its PlayStation division. The layoffs will also include closing the entire studio.”
“EA announced plans to lay off 5 percent of its staff and continues its commitment to never appear in positive news coverage.”
Simone del Rosario:
It certainly seems like the gaming industry is in trouble.
Joost van Drunen:
“This is both the best year and the worst year for the gaming industry. Right?”
“Last year, a total of 10,500 layoffs were announced in the industry. We are now at the end of February and we are already at or near 7,100.”
Simone del Rosario:
However, the global gaming market will reach an estimated record $217 billion in 2023, according to video game data company Aldra.
“New high score? Is that bad? What do you mean? Did I break it?”
Simone del Rosario:
So what exactly is dismissal?
Michael Pachter:
“I think Sony probably assumed that the PlayStation 5 was going to follow the same trend as the PS 2, 3, and 4. And, you know, it hasn't sold as many. I mean, three full years into the cycle. has sold 54 million units over the years, and typically sells more than 20 million units a year.”
Simone del Rosario:
Meanwhile, Microsoft's layoffs came on the heels of its big acquisition of Activision-Blizzard, which the FTC isn't too happy about since it couldn't block the deal.
Michael Pachter:
“So there was definitely a lot of redundancy. You don't need two CFOs, you don't need two HR people, you don't need that many legal people.”
Simone del Rosario:
The torrent of layoffs therefore appears to be indicative of an industry transition, not necessarily disruption.
Microsoft's $69 billion acquisition of Activision-Blizzard is an exclamation point on a trend we've seen for years from the console giants. They've gobbled up studios and publishers to shore up their stable in the race to be the top hardware choice for gamers.
Prior to its blockbuster deal with Activision, Microsoft acquired ZeniMax Media for $7.5 billion in 2020, adding the Doom, Fallout, and Elder Scroll series to its catalog. And in 2014, when those big deals were just a pipe dream, Microsoft still spent $2.5 billion to acquire the Minecraft studio.
Sony is feeling pressure to step up its acquisition game. They dropped $3.7 billion on Destiny maker Bungie in 2022, but most of their meals are being made at smaller studios.
Joost van Drunen:
“You can either invest a lot of money in-house and develop it yourself, or you can buy it and hope it works.”
Simone del Rosario:
Microsoft's recent acquisition is an attempt to attract gamers to its subscription service, Game Pass, which offers a large rotating selection of first-party, triple-A, and indie games. It's like the Netflix or Hulu of the gaming world.
Michael Pachter:
“If you spend enough time with Game Pass, you don't have to leave. If you spend enough time with Netflix, you don't have to leave. Do you miss Oppenheimer? Yes. Can you survive?”
Simone del Rosario:
We believe that strong subscription services are critical to revenue, and that making money on 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 in order to lock you into an ecosystem of accessories, subscription services, and software.”
Phil Spencer:
“So when someone buys an XBox at a local retailer, we subsidize that purchase by between $100 and $200. We invest in that investment over time through accessory sales and in-store. I hope we can recover it.”
Michael Pachter:
“They rely on scale to bring down the cost of their components. I mean, a few years ago, in 2005, flash memory was very expensive. And by 2013, the prices were cheap.”
“But that's not happening anymore. We don't see component costs coming down that quickly.”
Simone del Rosario:
Before all gaming consoles were connected to the internet, the business model was simple.
Develop your game in the most cost-effective way, sell as many copies as possible, come up with another idea and try again.
matte butt:
“We've seen this reversal over the past five years where platforms were the biggest thing. Within today's platforms, big games like Roblox and 2 Weeks actually have the potential to be bigger than any other platform. And it really changed the way we think about things.”
Simone del Rosario:
Gaming as a service, known as “live gaming,” is king right now. These are games that have a recurring revenue model, not just the initial purchase.
This can be done in various ways.
“For the Horde!”
Simone del Rosario:
There is a monthly subscription for Playtime, which is common in World of Warcraft.
Additionally, there are microtransactions, low-cost purchases including cosmetics and power-ups. These appear in all kinds of games, but the most popular are mobile games. We produced an entire article on “Kim Kardashian: Hollywood” that really explains this in detail.
And then there's the season pass…
Michael Pachter:
“It was the Epic guys at Fortnite who invented the season pass. And you know, it's great.”
Simone del Rosario:
With a season pass, you might get $20 worth of stuff for $10. However, the effect only lasts for a short period of time.
Michael Pachter:
“The real rationale for a season pass is not to collect $10 for a pass, but to keep players engaged with daily tasks. Because players who come back every day tend to stay an extra 10, 20, or 30 minutes. And more engagement inevitably leads to more in-app purchases.”
“You know, the idea is to convert MAUs to DAUs, and with a season pass you increase the conversion rate.”
Simone del Rosario:
In addition to a recurring revenue stream, live games give developers the opportunity to continue developing their games rather than presenting a finished product up front without knowing what demand will be there.
Joost van Drunen:
“But at the same time, you can shape the experience according to the audience's preferences. So it's more like a back-and-forth thing than developing this primitive experience here. It's a secret. , now we hope it works.”
Michael Pachter:
“Some people like to watch a movie in the theater, enjoy it for two hours, and then go home and talk about it for a week. They also like to watch reality shows and dating shows and see who the singles choose. Some people like to speculate. So they're very different experiences. A live service is, you know, much more like reality TV than a self-contained movie.”
Simone del Rosario:
But let's talk about those self-contained movies.
Since the dawn of the modern video game industry, console-exclusive video games have been the driving force behind sales to specific platforms.
“I'm Mario!”
Joost van Drunen:
“They've built a really strong fan base around these exclusive products.”
“Sony and Microsoft have seriously put together a marketing plan for devices that have a specific personality. So people feel very relatable.”
Simone del Rosario:
But in February, when rumors circulated that Xbox might offer some of its exclusive products to competitors, the gaming media began to talk about how Xbox, as we know it, would be the end of the brand. He acted as if he had just arrived.
Michael Pachter:
“The gaming press is capitalizing on that stupid, infantile approach, much like our understanding that first-party titles for all consoles should be exclusive. And you. violates our preconceptions of what we know it should be.
Simone del Rosario:
All that drama culminated in a “special edition” of the XBOX podcast featuring Microsoft Gaming CEO Phil Spencer.
Phil Spencer:
“So we made the decision to bring four games to other consoles. Just four games, and it doesn't change our fundamental exclusivity strategy.”
Simone del Rosario:
These games include the pirate sims Sea of Thieves, Grounded, Hi-Fi Rush, and Pentiment. It's very different from his Halo and Gears of War games, which were pulled from Xbox.
Michael Pachter:
“So I actually think Microsoft's most important goal is to sell Game Pass subscriptions. And their strategy is to attract consumers. And they're all I think they are aware that they are not aligned.”
Joost van Drunen:
“What's made Fortnite so successful, what's made Minecraft so successful, is that it's available on any platform. And I think we're going to move more and more in that direction. become platform agnostic.”
Simone del Rosario:
Despite these notable changes in the gaming industry, don't expect the traditional console wars to end in a peace treaty.
Joost van Drunen:
People have been wondering about console continuity and its scope for a long time now, but the death of the console is kind of like a new year, it's not a new topic.
Michael Pachter:
“I think next cycle, instead of having sales go to zero, we're going to see them cut in half. And then the next cycle, we're going to get cut in half again, and the next cycle, we're going to get cut in half again.”
Joost van Drunen:
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“It's the same thing as having really, really expensive headphones and having a really, really, really high-definition TV and there's always going to be an audience that likes that. And then there's everybody else. ”
Simone del Rosario:
The reasons behind layoffs vary. Layoffs in the gaming division this year are occurring at a much faster pace than last year. But it doesn't appear to be a canary in the coal mine for an industry that has seen significant growth in recent years.
Joost van Drunen:
“Within 18 months, we expect all of these companies to rehire many of the employees they just laid off.
