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The vibes are bad | This Week in Business

The demise of E3 continues a string of setbacks around the industry, but there are reasons for optimism

Existing as they do at the intersection of "brevity is the soul of wit" and "a picture is worth a thousand words," social media posts and memes can be great for drawing easily graspable parallels between complex subjects and situations, with the capability to get across insightful comparisons in humorous shorthand.

And as evidenced by that lead, editorials like this are perfect for spelling out jokes at cumbersome length, articulating those complex parallels and draining them of all humor.

Hrm, let me try that lead again.

So I saw this thing on Twitter.

It was a picture of the Los Angeles Convention Center, long-time home of the Electronic Entertainment Expo, with a Spirit Halloween banner strung above the entrance.

(The tweet has since been deleted, but the concept endures.)

It instantly evoked a complicated emotional concoction. It was hilarious, and sad, and felt fundamentally true, even if E3 had not yet been cancelled at that point and Spirit would probably never rent out the LACC to hock costumes, much less in early June.

For anyone unfamiliar with the North American chain, Spirit Halloween is a harbinger of doom, a hallmark of suburban blight, a seasonal retailer that swoops into vacated storefronts each September with a fly-by-night operation that sells various costumes, props and decorations before shuffling off the mortal coil in early November, appropriately leaving a spooky vacant retail space to molder for the other 10 months of the year.

In a nature documentary about the demise of mighty brick-and-mortar retailers that once ruled the planet, Spirit would be the carrion-eater in time-lapse footage of the fallen giant, the fungus thriving in the woods atop a shallow grave.

Wherever you see a Spirit, you know something has died.

Much like the stores Spirit might replace, E3 was once ubiquitous, the largest anchor tenant in the gaming industry's marketing mall. Now it's equally conspicuous by its absence, a giant empty space in what once seemed like the beating heart of the enterprise.

And given the grim goings-on around the industry these days, I wouldn't blame anybody for thinking the LACC in that picture represented a bit more than just E3.

It's hard to be chipper about the future of the industry when the hot new trend is mass layoffs

After all, it's hard to be chipper about the future of the industry when the hot new trend people are chasing isn't a hot new genre or novel social functionality but mass layoffs.

Google, Meta, and Microsoft have all announced layoffs of at least 10,000 people each in recent months. Meta liked its November round of 11,000 layoffs so much it double-dipped earlier this month and pledged to shed another 10,000.

Amazon did what Amazon does and mimicked its competitors at a discount, cutting 9,000 staff and keeping the number to a psychologically very different four figures.

While those companies are not primarily known for their gaming efforts (if at all), the cuts absolutely affected their gaming divisions, and the layoff contagion has also been spreading through more gaming-focused companies.

Unity laid off hundreds in January, Take-Two and Ubisoft are looking to cut costs by laying off employees, and this week Disney shut down its metaverse division while EA sharpened its own ax.

STAT | 6% - The percentage of EA employees who will be laid off as the publisher restructures this year. Those losses are in addition to layoffs of external Apex Legends QA staffers already reported on last month.

(Correction: The original version of this article mistakenly stated the EA cut as being 6.5% of staff. It has been corrected.)

Combine all that with the pandemic's impact on in-person gaming events in recent years, and people just haven't had opportunities to get stoked about the industry with other people in far too long. Even at GDC last week, there was plenty of unpleasantness, from the abundance of tweets about positive COVID tests to the abundance of tweets about harassment and spiked drinks at GDC parties.

At GDC, the tech optimism that had previously defined the Bay Area's economic engine had been replaced by a great deal of fear and loathing

Beyond that, the Moscone Center and nearby Union Square area where many attendees stayed in hotels resembled a zombie apocalypse (if you swapped out the bloodthirsty hordes of undead with "For lease" signs on empty storefronts). The collapse of Silicon Valley Bank the week before – and the onlookers eager to see a proxy for the VC crowd brought low – also colored the show, as the tech optimism that had previously defined the Bay Area's economic engine had been replaced by a great deal of fear and loathing.

The actual content on offer at the Moscone Center was more upbeat, as AI was a subject of much conversation and enthusiasm. But as noted last week, it wasn't too difficult to remember when blockchain and the metaverse and virtual reality and stereoscopic 3D and so many other promises of an imminent sea change had captured our attention and enthusiasm.

In short, the vibes are bad.

So bad, in fact, that one of my co-workers had recently been warned by a contact that the games industry is in "a tulip bubble," referencing the three-year speculative frenzy around the flowers in the Netherlands in the 1600s.

That struck me as excessively pessimistic, but I get where it's coming from. The pandemic bubble is still bursting, and we're not quite sure if it's done yet.

Rising interest rates are increasing the cost of borrowing money, so the pandemic acquisition spree is probably over regardless of which way the Microsoft-Activision Blizzard deal ends up going.

The boom in VC money funneled into games in recent years may also be subsiding, partly in light of the amount of money wasted on blockchain, augmented reality, and the metaverse in recent years with little or nothing to show for it, and partly because other industries offer the same flexible ethics and a penchant for tech promises as gaming, but paired with traditionally more reliable returns less dependent on actual results.

Games industry sales were also down last year. Mobile game spending, which drove a significant amount of the growth in recent years, is declining, according to the Circana February consumer spending report, released this week.

Also, the NPD Group is now Circana. Truly, we are in scary and unfamiliar times.

The greater economy is in shambles, or at least that's what we're frequently told as very profitable companies cite "macroeconomic headwinds" for the decision to cut costs.

STAT | 2.6% - The growth rate of the US GDP over the fourth quarter of 2022, as reported by the US government's Bureau of Economic Analysis this week.

Now the first two quarters of 2022 did see the GDP shrink a little, fulfilling one traditional definition of a recession, but it returned to growth in the third quarter and overall growth has been significant since the middle of 2020. Besides, there's another economic indicator the BEA reports on that seems relevant here.

Chart of US Corporate Post-Tax Profits, 1990-2021, showing them steadily increasing from $0.25 trillion to nearly $3 trillion

That chart covers through 2021. And for all the doom and gloom we've heard, the BEA's latest tally has corporate profits increasing even further for 2022.

STAT | $2.87 trillion – Total US corporate profits after tax in 2022, as reported by the BEA this week, up more than 4% on 2021, which was already up 30% on 2020.

It's not those profits are all coming from textiles and lumber mills, either. Many of the gaming and tech companies cutting staff are still outrageously profitable, even as they kick thousands of employees to the curb in a country where proper health care is essentially dependent on employment.

STAT | $1.04 billion – EA's net income over calendar 2022, up 62% year-over-year.

STAT | $60 billion – Google parent Alphabet's net income for 2022.

STAT | $4.7 billion – Meta's net income for 2022 (and that's despite a $13.7 billion operating loss from its Reality Labs division as it chases the metaverse boondoggle).

STAT | $34 billion – Microsoft's net income for the last six months of 2022.

STAT | $3.5 billion – Disney's net income for the fiscal year ended October 1, 2022, a year-over-year jump of 40%. It followed that up by reporting $1.36 billion in net income for the first quarter of its current year, a jump of 18% year-over-year.

Even Unity, which has never turned a profit in the history of the company, had a milestone 2022 that culminated last month with it reporting its first profitable quarter ever!

People are still playing games, and publishers are still putting out games that people want to play

Yes, it was only on a non-GAAP basis and the GAAP net loss was $921 million (about 72% larger than 2021's net loss), but at least we can all agree that Unity reported profits the likes of which it has never before seen!

Many of the pillars of the industry are still doing just fine. People are still playing games, and publishers are still putting out games that people want to play.

STAT | 10 – The number of new releases in Circana/NPD's Top 20 charts through January and February. There's a whole lot of 2023 left, but that still puts the industry on pace to have more new releases appear in the monthly Top 20 charts than any year since the company first started reporting monthly top 20s in 2018.

Hogwarts Legacy has been a massive hit, and I certainly wouldn't bet against Zelda: Tears of the Kingdom, Spider-Man 2, Starfield, and Diablo 4 joining it.

Console and PC look to have plenty of great games out this year, and there are loads of people looking for new games to play

Throw in Star Wars: Jedi Survivor, Resident Evil 4: Remake, Street Fighter 6, Final Fantasy 16 and whatever game you're outraged I didn't include in this list, and 2023 is shaping up to be a banner year for console and PC gaming.

I'm a little curious about whether Call of Duty will take a hit considering this year's entry was reportedly intended to be an expansion rather than a standalone game, but then again, I'm frequently curious about Call of Duty, and it frequently does just fine regardless.

The point is, the traditional console and PC business looks to have plenty of great games out this year, and with supply constraints finally easing on the hardware side, there are loads of people looking for games to play on their fancy new hardware.

STAT | $495 million – US hardware spending on games in February, up 68% year-over-year with PS5 leading the way. Over the first two months of the year, hardware spending is up 29%.

Throw in the potential for a Switch successor in 2024 and this chunk of the market is practically guaranteed to thrive over the next couple years.

(This prediction is null and void if Nintendo pulls a Nintendo and follows up the Switch with a Wii U or 3DS-style different-for-different's-sake novelty system instead of the straightforward 'more powerful and backward compatible' iteration on the Switch concept that any normal company would do.)

And mobile? Truthfully, I think there are some lights flashing on the dashboard there.

You can't exactly show exponential growth when you're already got billions of customers, and I find it hard to believe there are that many people who weren't convinced to spend money on mobile during the pandemic that are just one more YouTube pre-roll spot or Facebook ad away from becoming a free-to-play whale.

It's also concerning that mobile giants like Tencent, Zynga, and others are looking to expand into the console and PC space, perhaps because they're worried mobile has topped out, and see the difficulty of breaking into mature markets with entrenched leaders as still their most likely path to growth.

Then you've got Playtika, which has simply given up on launching new mobile games for now because the cost of acquiring new users is too high.

None of that is terribly encouraging if you're hoping for mobile's meteoric growth to continue at the same pace of the past decade.

There may no longer be a rising tide to lift all ships, but that doesn't make those ships any less seaworthy than they were yesterday

That said, there's no shortage of successful mobile games already out there, and thriving companies with mobile hits that are proven to bring in money year-in and year-out. People may not have quite as much free time or money to throw at these games for entertainment as they did in the summer of 2020, but I suspect only a relative few have actually stopped playing entirely. There may no longer be a rising tide to lift all ships, but that doesn't make those ships any less seaworthy than they were yesterday.

Unlike many of the much-hyped Next Big Things we've seen fizzle over the years, the console, PC, and mobile markets are proven commodities with a massive audience. The abundance and diversity of games being made these days probably top any other time up to this point. There is something for almost everyone out there, and unlike the tulip speculators, those players aren't here for the money (no matter how much the Web3 types wish otherwise).

The silly money that has floated around games in recent years may be going away, and that will have negative and non-trivial consequences for numerous parties. But even when you strip all the speculative investment away, you're still left with a very lucrative and very large business, perhaps one that might be better served in the long run if it isn't fueled by investors drawn to monopolistic and exploitive business practices that maximize ROI and promise prolonged exponential growth.

The rest of the week in review

QUOTE | "First, several companies have reported that the timeline for game development has been altered since the start of the COVID pandemic. Second, economic headwinds have caused several companies to reassess how they invest in large marketing events. And third, companies are starting to experiment with how to find the right balance between in-person events and digital marketing opportunities." – ESA president and CEO Stanley Pierre-Louis explains to us three big reasons behind the cancellation of E3 2023. The things companies want to "reassess" and "experiment with" suggest to me that if E3 ever does come back, it will only be in name, with a fundamentally different function.

QUOTE | "E3 is the industry show. It may belong to the ESA, it may be pulled together by my parent company, but it is an event that was created by the likes of Nintendo, EA, Sony and Sega back in 1995. And it'll be those same companies, plus a few new ones, who will decide whether it comes back or disappears from view. As of today, the industry's decision seems pretty clear." – Our own Chris Dring, who was involved in the planning of E3 2023 with our parent company ReedPop, writes about what went wrong from his perspective.

QUOTE | "We're trying to change the perceptions of the challenge of developing and publishing games on PlayStation. It's a communication challenge we've been working on. We've been doing conference tours, going to events and doing talks and keynotes and things like that to send the message that we're open for developers to bring their games to PlayStation." - Shuhei Yoshida, head of Sony Interactive Entertainment's Independent Developer Initiative, tells us about the PS5 maker's efforts to win back indie developers after losing focus on them toward the end of the PS4 generation.

QUOTE | "I wouldn't describe it as disruptive, because I don't think it is in the way that like Uber came in and got rid of all the taxis in that industry. It's additive. People still buy a lot of games and they still buy a lot of games on Xbox… we as an industry needs to look at more of those additive business models. A bit like digital distribution, that may have been somewhat disruptive to the retail space, but it was ultimately additive because not every game needed to be of the size to justify being on a disc." – ID@Xbox director Chris Charla downplays concerns about the Game Pass subscription model and it shaking up the status quo in a way that disadvantages indie developers.

QUOTE | "It seems like [diversity, equity, and inclusion] has been co-opted – or created – by the powerful to become a shield against criticism and real change." – Anita Sarkeesian says the abundance of DEI executives appointed to positions in the industry only to find they can't actually bring about meaningful change is a feature, not a bug.

QUOTE | "[The BAFTA awards ceremony] 100% was worth watching for everyone’s SHOCKED FACES when Vampire Survivors won... It’s for moments like that I love games." - Marie Dealessandri, in our work chat, talking about the dark horse Game of the Year winner at last night's BAFTAs. (She's a fan.)

STAT | 28,000 – GDC 2023's announced attendance figure. Only GDC 2019 had more attendees, with an announced showing of 29,000. The event itself is in rude health, even if the abundance of COVID warning tweets toward the end of the show and in the days afterward suggest that's not necessarily true of attendees.

QUOTE | "We are very upset to hear that some people, especially women, reported concerning experiences during the GDC week at off-site events, including assault and drink spiking. This is outrageous and unacceptable; everyone has a right to feel safe." – GDC organizers respond to various reports of predatory behavior around the show. Between that and the attendance, it really does seem like the GDC of old is back.

STAT | 15 – The mandatory minimum age rating for any game with loot boxes, according to the Australian's government's proposed amendments to its national ratings and classification scheme.

QUOTE | "I'm told that Sony controls a monopoly of 98% of the high-end game market, yet Japan's government has allowed Sony to engage in blatant anti-competitive conduct through exclusive deals and payments to game publishers." - US Senator Maria Cantwell (D-Wash.) was one of a number of politicians from both sides of the aisle publicly suggesting that Microsoft's decades-long failure to crack the Japanese market with Xbox can be chalked up to anti-competitive practices by Sony.

QUOTE | "Since it was recognized that it would not substantially restrain competition in a certain field of trade, the company was notified to the effect that a cease-and-desist order would not be issued, and the examination was completed." – The Japan Fair Trade Commission (translated via Google) says it will allow Microsoft's acquisition of Activision Blizzard to go through because it somehow doesn't see a threat to competition when a platform holder with 2% of the high-end game market buys a publisher best known for a jingoistic Western first-person shooter series of middling popularity in the country.

QUOTE | "People seem to be consistently shocked that we exist and dig what we are doing with the [Jamaica Game Developer Society]." – Glen Henry of the JGDS was just one of the people speaking to us about the Windies Direct showcase designed to celebrate and spotlight Caribbean-developed indie games.

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Brendan Sinclair avatar
Brendan Sinclair: Brendan joined GamesIndustry.biz in 2012. Based in Toronto, Ontario, he was previously senior news editor at GameSpot.
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