By James Batchelor

Compiled by: GameRes

Since the beginning of 2023, the wave of layoffs in the gaming industry continues.

In the past few weeks alone, Ascendant Studios, Beamdog, Crystal Dynamics, Roblox, Blizzard, Epic Games, Team17, Naughty Dog, Twitch, and Keywords have all laid off a number of employees, with Epic laying off more than 800 people. The reasons behind the layoffs vary. For example, Crystal Dynamics and Beamdog laid off as part of Embracer's restructuring plan, while Keywords laid off employees because BioWare decided to terminate an outsourcing service contract with the company. However, the fact that layoffs have made headlines so frequently in a short period of time shows that there are obviously broader problems in the gaming industry.

So why are game companies laying off employees? On this topic, industry analysts, recruiters and investors mentioned many factors that reflect the current economic environment, including high interest rates, inflation, slowing market growth, rising (R&D) costs, and intensified competition. In fact, throughout the technology industry, these challenges have also led to large-scale layoffs at giant companies such as Microsoft, Meta and Amazon.

Serkan Toto, Kantan Games

“The importance of ‘efficiency’ in the gaming industry has increased significantly over the past 18 months,” said Kantan Games CEO Serkan Toto. “More than ever, gaming companies are more focused on cost savings, The urgency to streamline organizational structures is much higher. Faced with pressure, gaming industry CEOs have to swing the hammer to deal with the biggest cost block: employees. This is what we see in 2023."

“The general thinking among these CEOs is: ‘If we don’t lay off people, our competitors will, and then use the efficiency to eliminate us.’ So people are being fired everywhere… At the same time, they often assume that at any given time, 15% to 20% of the company’s employees are redundant.”

Spike Laurie, a partner at venture capital firm Hiro Capital, noted that the current wave of layoffs in the gaming industry can be traced back to one specific event: In November 2022, Elon Musk fired 50% of Twitter's employees.

"He (Musk) discovered from employees' electronic passes that more people were served food in the cafeteria than actually eating in the restaurant," Lowry said. "This became the impetus needed for other business leaders to start taking a closer look at the size of their companies and making smart layoffs. Why? We have reached the end of an economic cycle driven by dependence on cheap and ready money. A year later, we are seeing widespread layoffs in the gaming industry, causing many talented people to lose their jobs and financial security. For those affected by the soaring prices of necessities such as energy and food, the job losses are particularly painful."

Emilie Avera, senior vice president of consulting at IDG Consulting, added that there was a "clear disparity" in pay between executives and rank-and-file workers at gaming companies, especially those listed, which made the mass layoffs all the more galling.

Emily Avila, IDG Consulting

"While layoffs and other measures can effectively reduce costs and temporarily improve the balance sheet, the total compensation of executives has not decreased accordingly," Avila said. "In terms of executive compensation, the current priority is to build a "performance pay" model that strictly links executive compensation to actual results and performance indicators: if the company's performance fails to meet pre-set targets, executives should reduce their salaries."

In addition, the epidemic has inevitably affected the current situation of the game market. According to Avila, the game industry once expanded rapidly driven by the "stay-at-home economy", but this situation is destined not to last long.

"As funding began to dry up, game companies were forced to re-evaluate how they allocated their money, and layoffs became a straightforward solution to cut costs," she explained. "Many companies have been eager to expand over the past two or three years, hastily making a large number of acquisitions for quick financial returns without sufficient due diligence and poor budget management, often at the expense of sustainable profitability... These crazy practices have instead frustrated the industries they were originally intended to develop vigorously."

Avila said that in this regard, the gaming industry has many similarities with the entertainment industry: streaming platforms prioritize attracting more audiences rather than improving profitability. Now, major streaming platforms are "fixing their unsustainable models" by raising prices, and the gaming industry is also experiencing a "similar reckoning."

Liz Prince, director of Amiqus, a gaming headhunting firm, said the current situation in the gaming industry, from a recruiting perspective, is more like a reset than a reflection of any deep-seated problems in the industry that are cause for concern.

"First, I want to express my sympathy to everyone affected by the recent layoffs and studio closures," Prince said. "This is undoubtedly a challenging time, and we are deeply troubled by the fact that many talented people are facing unemployment. However, any industry goes through cycles of expansion and contraction, and the gaming industry is no exception. During the epidemic, the growth of the gaming market has prompted many companies to quickly expand, make acquisitions, or over-invest in certain areas, and now need to readjust. It is worth noting that while some studios are facing challenges, many others are expanding."

Piers Harding-Rolls, director of games research at data analytics firm Ampere Analysis, agrees. "This is nothing new, especially in tough economic times. Of course, given the size of the budgets of modern large-scale games, the cancellation of a single project can result in hundreds of layoffs, which in turn has a greater impact on the industry than in the past. Just two or three years ago, the shortage of talent was a hot topic in the games industry, and many studios were scrambling for top talent, and the competition was very fierce... For the larger companies, this is part of the reason why they made a lot of acquisitions from 2019 to early 2022."

Harding-Ross added that the M&A boom of the past few years was also driven by "exorbitant valuations of gaming companies" (which peaked during the pandemic) and cheap loans. However, since Microsoft announced it would acquire Activision Blizzard for a record amount, debt costs have risen rapidly and valuations of gaming companies have fallen.

Lowry noted that many game companies have been housing "large, unprofitable teams." "It was too easy to get loans and raise investment for a while, so too many new teams made too many games," he said. "Too much money was poured into untested blockchain and metaverse studios, driving up (employee) salaries, but those studios failed to launch any games."

Spike Lowry, Hiro Capital

Avila mentioned another factor: Today, players buy fewer and fewer games and invest more time in their favorite game series. As the market continues to shift to service-based games, this trend is likely to accelerate. Even stand-alone games will take up more time for players, such as Baldur's Gate 3 and The Legend of Zelda: Kingdom Tears, which have a main line clearance process of more than 50 hours. "All developers have to do everything they can to compete for as much attention as possible from picky players," she said.

Kim Parker-Adcock, boss of recruitment agency One Player Mission, noted that people's spending habits have expanded again since the end of the pandemic. "People are spending their disposable income on travel, holidays abroad or events. There are still some hardcore gamers who will spend all their money on games, but there are far fewer people willing to spend money on new consoles than two or three years ago because they are like luxury goods based on the price alone... Sony's latest exclusive games are no longer available on PS4, and if you want to play them, you have to spend more than £400 on a PS5."

Karol Severin, co-founder and senior analyst at Midia Research, added: "The growth rate of the gaming industry has peaked. In the future, the revenue of the entire industry will continue to grow, but it will be mainly driven by population growth and improved Internet conditions, rather than the improvement of the gaming business itself. As cloud gaming subscriptions grow, players' demand for high-priced games will decrease. When streaming subscriptions really take off, the gaming industry will face similar pressures as the music and video industries. The decline in the value of individual games in the eyes of consumers will inevitably decline, people's demand for games will decrease, and the number of developers and publishers will also decrease accordingly."

Severin also pointed out that the number of games is growing much faster than the growth rate of global game revenue. For example, more than 13,500 new games are expected to be released on the Steam store in 2023, higher than last year's number (12,500). In addition, some companies whose business models do not rely on games (such as Netflix, Amazon and Apple) are also constantly competing for more market share in the game market.

Avila talked about some of her ideas about the future development direction of the game industry. Avila believes that generative AI can be used to assist (but not replace) the overloaded R&D team and shorten the development time of game products; user-generated content (UGC) may also become a way to reduce development costs. She also mentioned that over time, more developers will outsource art, programming, sound effects production and other aspects to outsourcing service companies such as Virtuos and Keywords, so as to focus on their core strengths.

Avila stressed that game companies also need to manage expectations for performance wisely. "In order to get back on track, game companies and investors need to agree on realistic KPIs and stick to them," she said. "While positive sentiment from players about a game on social media may be exciting, it doesn't mean the game will necessarily sell well. Before making an investment decision, we should evaluate real indicators such as (game) review scores, pre-sales, and the number of bugs."

Carol Severin, Midia Research

"It is undeniable that some studios may face further financial pressure and make additional adjustments, including further layoffs...but no matter how painful these adjustments may be in the short term, they are necessary steps to ensure the sustainable development of the games industry."

Severin added that there is no magic bullet to solve the layoffs, as many of the factors behind layoffs are beyond the control of the gaming industry, such as inflation, high interest rates, etc. "While many people are pessimistic about the future, the gaming industry is not going away and will still be worth about $187 billion this year. If gaming companies are considering new projects, it will become increasingly important to carefully plan the path to profitability (rather than how to promote user growth). In addition, we expect that in the future, games that focus on satisfying the needs of niche players rather than competing for mainstream audiences will be more successful."

Toto believes that the wave of layoffs in the gaming industry will not subside anytime soon. "From the outside, it seems that some studios are still overstaffed. My personal guess is that we will see more bad news between now and the end of 2024."

Prince noted that game practitioners affected by layoffs "are still very popular" with their accumulated skills and expertise and will be able to find jobs at other companies. Parker-Adcock also pointed out that as some studios downsize, new studios often emerge in the industry. "These new studios are still in their growth stage, but the key is to avoid overspending, ensure that the team can survive, and only hire people in key key positions."

Liz Prince, Amiqus

Lowry concluded that although the future of the gaming industry "seems challenging," with the rise of Generation Z and the widespread adoption of gaming technology by large technology companies such as Meta and Apple, practitioners still have reason to be optimistic about the future.

"If this round of layoffs in the games industry becomes the catalyst that developers need to make new games in a more streamlined, efficient and creative way, then we will all benefit," Lowry said. "We have to remember how lucky we are to work in such a thriving industry. When the macroeconomic environment improves, the games industry will surely be at the forefront of driving economic and job growth. Our skills will be invaluable in the new forward-looking digital economy."