The Atlantic

Relax, the game industry isn’t dying, it’s just changing

Relax, the game industry isn’t dying, it’s just changing

It can be tough to feel good about the video game industry; especially when we read about layoffs every week, company closures every month, and beloved companies struggling to make a profit all year long.

But at the same time we know that gaming has expanded its borders to include more of the rest of the world, and we know that there are many companies innovating and making large sums of money, even if it's hard to track how much in the new digital world. Is this industry booming? Or is it busting? Depending on what day of the week it is, it can seem like the former, the latter, or both at the same time.

It's very hard to figure out what's going on

You can't look at the monthly reports and expect to get a decent idea of what's going on in the business. They often don't factor in the huge success of free-to-play games, social games, or any other type of game that doesn't come off a store shelf.

“The monthly reports also only deal with consumer spend, and ignore revenue like the ad sales on Xbox Live or successful marketing services like TapJoy,” we wrote in a PAR report on game research firm NPD Group's faulty information collecting last year. “You don’t have to take money directly from gamers to draw a profit, and these aspects of the gaming business are also not considered when we make sweeping statements about how bad things are. The reality is we just don’t know.”

“Video games in general have always been in a continuous growth phase,” said Jesse Divnich, vice president of insights and analysis at game industry research firm EEDAR. “We consistently grow every year. Some years more than others, but we've consistently grown.”

Even though OMGPOP was shut down, Timegate was shuttered, and EA recently laid off 900 people, it's really just a drop in the bucket of the international games industry. What makes news is often different than what makes money.

The issue of downsizing is also more complicated than they look at first. Layoffs aren't always due to mismanagement and corporate evil, sometimes the market simply changes, and that often means a change in your staff.

“What worked five years ago does not work now, and the markets that were popular five years ago are not popular now,” said Divnich. “So that's going to always require [companies] to have the appropriate staff to meet the current needs. Whether it's social games or mobile and tablet games. That just requires us as an industry to shift our experience and our staff accordingly. So we're always going to see fluctuations of layoffs. But then companies quickly start focusing on more profitable markets and start hiring again.”

From a certain point of view, layoffs sometimes need to happen in order for a company to grow. Beyond that, the scale of layoffs in gaming might seem horrific anecdotally, but might not actually too bad for an established industry.  

“Game developers are seeing more layoffs than established low-risk industries like manufacturing, but are not undergoing a large layoff phase on the scale of other industries like IT/Technology,” concluded Dan Teasdale, lead designer at Twisted Pixel after a thorough analysis of the stats and figures. His analysis showed that about 2.42% of game developers were laid off in 2012, while that figure was nearly 4% in Information Technology.

Despite these unfortunate events, Divnich said the games business is still growing even in North America where the problems are most highly concentrated.

“When we look at well-developed countries in places like Western Europe and North America the growth is much smaller,” he said. “We're seeing most of this growth in emerging markets in places like China and the Middle East, and some other parts of Asia.”

“I think we get too narrow-focused and think we can measure the health or the economy of the video game business just by looking at the United States, but we definitely should not be doing that,” he continued.

The slowing growth of the video game business in the United States can create the illusion that the whole industry is doing poorly. But we now live in a world with a growing global middle-class, and every territory needs to be taken into account before making a judgment about the health of the business.

What ails Japan? Not much

One of the reasons this illusion can prove so convincing is because the fan narrative of the games business is very often focused on the console games market in North America, Japan, and some parts of Europe. These territories have slowed compared to the height of console gaming growth in the mid-2000s.

Despite what you may have heard, Japanese gaming isn't dying either. Divnich said games like Resident Evil and Final Fantasy still have the same large audience on both sides of the Pacific. 

In many cases the Japanese games business is still growing, but the rapid inflation of the cost of game development has taken a big bite out of those profits.

“It certainly highlights a problem,” Divnich said. “And I think that's reflective of some of the things we've seen from some of the Japanese publishers in terms of not being able to hit the same profits that they used to be able to hit.”

What is our future?

None of this is meant to sound bleak. The rise of mobile and tablet games has significantly changed the business and will have a huge impact on console gaming. The next generation of consoles is right around the corner, and no one knows how that will change things.

There is still plenty of demand for high-quality blockbuster games on consoles, but the value equation has been altered. You simply can't expect consumers to purchase $60 games in the same numbers anymore now that amazing games like League of Legends are available for free.

“What consumers consider a $60 experience yesterday is different from today, and it's going to be a heck of a lot different tomorrow,” Divnich said. “Games like League of Legends have completely changed the way consumers value a quality experience. Pricing doesn't need to decrease at all, but if publishers are interested in the traditional market then they need to bring their A-game.”

That is likely to be the future of console gaming. The middle tier of AA games from publishers like THQ are gone, and the future is a much higher focus on quality and spectacle.

“You can no longer release a 60 or 70 rated game and expect to be profitable,” Divnich said. “In the past you very much could. Going forward, no you can't [...] These sort of middle-of-the-road mid-tier titles are not generating the profit that they used to. The games that are making money are the ones that are focusing on quality. Going forward we're going to see consoles become the destination for AAA high-quality experiences. It's going to be a huge focus on quality.”

So is the gaming business booming or busting? At the moment, it's probably most accurate to think of it like a collapsing volcano: both exploding and imploding at the same time, all the while steadily building the mountain higher and higher.

Image of the Soufriere Hills Volcano used above was originally published in a volcano photo essay in The Atlantic.