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Blaming the Crunch

Layoffs and closures have little to do with the recession - but it's certainly a convenient excuse.

Predicting the short-term future of the games industry is a messy business, but there's one prediction for 2009 which requires no crystal ball and in which I have absolute confidence. It is this - that by the end of this year, you're going to be absolutely sick of hearing the words "credit crunch" and "recession" drop out of the mouths of videogame executives to explain studio closures and job cuts.

In fact, you'd be entirely justified in feeling a bit sick of hearing those terms already. They tend not to be phrased quite so blatantly (at least, not yet), but "difficult times", "tough macroeconomic conditions", "tightened consumer spending"... All of these, and a dozen other increasingly eyebrow-raising permutations, have been rolled out in the past few months by games companies or those commenting upon them.

Hang on, though - isn't this the games industry, the wonderful recession-proof industry whose hide should be unmarked by the slings and arrows of economic misfortune? Has that concept gone out the window so quickly, with our newfound state of recession only months old?

The simple answer is no, it hasn't. In fact, just about every metric going suggests that videogames continue to be in absolutely rude health in spite of the tough conditions in the wider economy. In the UK, for instance, high street retailer GAME bucked a downward trend in Christmas spending, while the US market overall grew to $21 billion last year, up 23 per cent from the economically sunny months of 2007.

There is, quite simply, not a shred of credible evidence so far which suggests that the conventional wisdom of the market - that videogames won't be significantly hit by recession because they're viewed as an economical form of "stay at home" entertainment - is showing any cracks.

With an enormous audience of market newcomers for whom gaming is arguably not yet established as a key form of entertainment, Nintendo's Wii is the canary in the coalmine - the first whiff of economical toxicity will hit the Wii market before it goes anywhere near the more established "hardcore" end of the games sector. The Wii, however, is still singing its heart out. If this recession is going to stunt Nintendo's growth spurt (and that does remain a distinct possibility), it certainly hasn't done so yet.

In other words, on an industry-wide level, things are pretty good. Very good, in fact. So why are we seeing job cuts, and why is each fresh announcement of a studio closure or workforce cutback either accompanied by, or greeted with, dark rumblings about the state of the economy?

There are two reasons for this - one legitimate, one rather less so. The legitimate reason is that while the games business isn't seeing a contraction in its sales in line with the contraction in overall consumer spending, it is certainly affected by the other major aspect of the recession - the "credit crunch" itself, which has led to many banks slashing the credit available to businesses.

A lot of modern businesses rely heavily on credit agreements with their banks to finance their day to day operations, allowing them to continue meeting regular obligations in markets where income fluctuates wildly from month to month. Indeed, a large number of businesses are so reliant on credit that, like many unwary consumers, they end up financing everything they do - including payroll and property rental - from credit, with their income being diverted into repayments.

It's not a terribly secure arrangement, but when banks were handing out huge credit deals to practically everyone who walked in off the street, it was secure enough to persist with. Today, with those lines of credit much harder to find, businesses which haven't had liquid assets in years are finding themselves in serious difficulties. It's hard to say if any of the games industry closures and layoffs we've seen in the past six months are a result of this situation, but it's a problem that can afflict companies in any industry, and is a legitimate reason for blaming the "credit crunch" for shutting a firm's doors.

Of course, it's not just small firms with bad fiscal management which find the lack of credit problematic. Even much larger enterprises with far better management are now finding that it's difficult to find finance for new projects, for expansion or even for the continuation of speculative projects that had already been started. The rude health of the market's fundamentals makes no difference in this regard; we have built our economy on the availability of cheap credit and until the banks start lending again, even companies whose products are unaffected by recession will be under threat.

So there you have a reasonable and legitimate reason for blaming the credit crunch and/or recession for closures and layoffs. However, take a quick glance at the reality of those recent closures and layoffs - a thousand jobs on the way out at EA, the games division reportedly among those hit in a 5,000 job cull at Microsoft, not to mention smaller losses at places like Sega, Nexon, Rockpool, Crystal Dynamics and so on. The list is extensive, and quite honestly, this is not a list of unfortunate victims of the credit crunch.

On the contrary, this is a list of job losses and closures which would almost certainly have happened even if the global economy was still booming at 2006 or 2007 levels. Jobs have been lost at publishers which are fighting to control spiralling costs, at developers whose games weren't as successful as they could have been, at experimental enterprises whose experiments didn't work out as hoped.

It's entirely possible that the way in which these cuts were approached would have been different without the credit crunch as a convenient whipping boy for every corporate woe on the face of the planet, of course. Microsoft regularly brags about the profitability of the Xbox 360 (without detracting too much from this achievement, it's worth noting that it's easy to be profitable on a quarter by quarter basis if you've written off most significant costs, such as a billion-dollar repair bill, back near the start of the system's lifespan), but the job losses in the games division show that the firm still wants to cut costs. That imperative would have existed regardless of economic conditions - it's just that now, it's wrapped up in a larger package of company-wide layoffs. Under the blanket label of "credit crunch", these will include major cost cutting exercises at a large number of underperforming or excessively expensive projects.

That's exactly why you're going to be sick of hearing about the credit crunch or the recession by the end of 2009 - because it's a convenient label that will be used to obfuscate the business realities which are causing these layoffs and closures. A need to cut costs in the Xbox division would say something interesting and worthwhile about the performance of the console or Microsoft's future plans; instead, it's buried in an avalanche of "credit crunch" cuts. The same goes for EA's cutbacks, for possible cutbacks at Sony (16,000 jobs will go across the company - none have yet been confirmed in the games division) and for the majority of studio headcount reductions or closures in the past few months.

The reality for the games business is that we are now at the middle of the hardware cycle, and regardless of any macroeconomic conditions, that means that companies need to take stock of their situation - and in some cases, take tough decisions. Some projects and franchises which have underperformed in this cycle need to be knocked on the head, and new projects have to be critically evaluated with consideration to the fact that a new hardware refresh will be on the doorstep before any game whose development begins today is finished.

This is always a point when the industry consolidates - when those firms which have been hugely successful bulk up their numbers, while those which have met with difficulties are forced to downsize or disappear. This time around, however, the recession is being waved around like a doctor's note, an excuse for poor performance and a cover for decisions whose true reasons lie elsewhere. This is only the beginning. 2009 will be a growth year for game sales, but a consolidation year for game publishers and developers. Expect to hear the "credit crunch!" line unjustly rolled out many more times before the year is out.

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Latest comments (2)

Mat Bettinson Business Development Manager, Tantalus Media10 years ago
I absolutely agree with you on the disconnect between consumer demand and the impact upon the industry and it seems reasonable to linke with wider economic issues such as the availability of credit. Ultimately publishers take bets on games and the formula of how many times you bet depends on the key stone of how much it cost to make the bet. The cost of finance is a part of that.

However just calling the impact on the industry by the announcements of job losses at major companies isn't really doing it justice. I don't really think that a lot of us in the industry, even those of us fortunate enough not to need to let any staff go, think of this as an opportunistic crisis.

While it may be true that some companies have coincidentally decided to cut costs and that the 'credit crunch' is providing timely excuse, I submit that what we're seeing is far more serious than that. Whether or not the cost-cutting strategies are valid (and I'd seriously call into question whether being in the middle of a cycle is really relevant - who here doesn't see an extended cycle due to economic conditions?), the feeling I get out there is of a resigned seige mentality.

If you're ringing around pitching for business today you would find a surprising amount of your senior business contacts have suddenly left their company with no announcement on any web site.

Then when you talk to someone who still has their job and they say almost exactly the same thing that the last guy said; "Everything is on hold, less external, we're focusing on internal so we don't have to sack as many people", then you know something is going on.

Speaking for ourselves, we're having to work harder to pitch and we're having to invest more in demonstrating our capabilities where as before a deal might have been knocked out on the phone based on past performance. Developers less able to do this are feeling the pressure. Many wont survive. Locally we've gone from a skilled labour drought in 2008 to a glut of highly skilled labour on the market place. It'd be nice to be able to hire them.

I don't think any of us are a stranger to a publisher falling on hard times and the symptoms that manifests as. It's when you get the same reception from pretty much everyone that you realise it's something more than that.

I'd also query your claim that consumer demand looks bullet proof. The UK had a great year. The US was a mixed-story. Overall growth but if you look at it year-on-year throughout 2008 you see a substantial slowing from what was going to be an excellent growth to what ended up being back at pre-2006 levels.

There's also no question that the minimum impact was an unexpected surge in older generation cheaper hardware being sold than the current generation gear. That's really quite significant in its own right.

One thing I hope we can all agree on is the hope that common sense prevails within the industry financiers and that good quality projects are given the greenlight so we can avoid a game drought in 2010/11.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.10 years ago
The current situation is certainly a cocktail of factors derived from global economics, market trends, narrowed margins and more.

Sure blame for poor performance or negative corporate actions will be laid at the feet of the nearest scapegoat but that's PR 101. Our industry is not exclusive in this nature, of course. Worse still that blaming yourself, while noble, could harm investor relations and will be avoided like a McDonald's in Hollywood.

I agree with Mat that our industry was headed for cost reduction measures regardless of the global economic circumstances strictly on the grounds that margins have shrunk significantly from last generation. The cost of production, and business in general, has increased far faster than the relative increase in revenue. Investors don't like seeing less for their money and publishers will make cuts and strategy alterations to try to increase margins.

I'd also like to point out that the Wii will not be the first to be hit by the global recession because indeed the PS3 already has. It sold less in the late 4th quarter of 2008 than it did in 2007.
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