Home Technology News Are video games recession-proof? Sort of, experts say.

Are video games recession-proof? Sort of, experts say.

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Are video games recession-proof? Sort of, experts say.

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During the 2008 recession, the video games industry was heralded as one bright spot in the economy. Described as recession-proof, the industry showed resilience by selling million of copies of the Nintendo Wii and DS systems, even as banks folded and the housing market crumbled.

In today’s economy, though, analysts say the video game industry may be not as invincible as a Super Star-powered Mario. Copies of games — and the microtransactions they sometimes contain — are getting more expensive. Prices on virtual reality hardware are going up. As the U.S. economy contracts and people re-examine their financial budgets, analysts say video game spending may be on the decline.

“This time, it’s much more uncertain,” said Cassia Curran, founder of games business consulting firm Curran Games Agency. “Employment is remaining high and demand for outdoor entertainment is jumping after two years of pandemic, and game sales in the last quarter finally saw a slight decline after the pandemic-driven couple of bumper years.”

In an impending recession, one of the first things people tend to cut is discretionary spending. The video game industry is no exception to this general rule, experts say, but the value of a $60 game or a free-to-play title can last hours and stretch into months, making them a bargain during an economic downturn.

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During an earnings call on Aug. 8, Take-Two CEO Strauss Zelnick said, “We’re seeing now the decline in consumer spending and increase in inflation will have an impact on the industry. You’ve seen it from our report today and from our competitors’ reports as well.” Take-Two’s game properties include Rockstar and 2K studios, makers of hits like “Grand Theft Auto V,” Red Dead Redemption II” and 2K’s popular lineup of sports titles.

Gaming titans Nintendo, Microsoft and Sony all reported declining revenue and missed earnings expectations in late July or early August. Part of the reason, gaming companies say, is a weakened supply chain, still affected by pandemic-related lockdowns and the challenges of delivering consoles to stores. Another aspect is that much of the world has now reopened and isn’t looking online to forge social connections.

In August, Meta, formerly known as Facebook, raised the price of its Quest 2 VR headset, from $299 to $399.

“The costs to make and ship our products have been on the rise,” Bryan Pope, a Meta spokesperson, said in a statement. “By adjusting the price of Quest 2, we can continue to grow our investment in groundbreaking research and new product development.”

Pope said that Meta would continue to bet big on gaming, as it was one of the most popular content categories on the Quest 2.

The Washington Post reached out to over a dozen gaming companies for comment on how they plan to weather a possible recession. Hoyoverse, Electronic Arts, Take-Two, Ubisoft, Devolver Digital, Annapurna, Square Enix, CD Projekt Red, Sega declined to comment. Others, including Sony and Xbox, did not respond.

Video game companies are tightening their belts, slowing hiring in some cases, and being choosier with new game development. Tencent reported its first-ever revenue drop in August, falling 3 percent to a total of $19.78 billion, with gaming revenue declining 1 percent.

Unity and Niantic laid off part of their staff as cost-cutting measures, as first reported by Kotaku and Bloomberg. Niantic spokesperson Mark Van Lommel said in a statement, “In June, we decided to stop production on some projects and reduce our workforce by about eight percent to focus on our key priorities. We are grateful for the contributions of those leaving Niantic and we are supporting them through this difficult transition.” He added that the layoffs help put Niantic in a position to “weather the broader economic uncertainty” companies are facing and invest in augmented reality technology.

Ubisoft confirmed in a July earnings call it had canceled four new games, citing the “changing financial environment.”

“Budgets are going to become tighter with every company across the board, which means it will be tougher to get new projects approved unless they have a rock-solid chance of being successful,” said Chris Kramer, Tencent Games’ head of North American communications. “Publishing efforts will be scaled back as budgets shrink, so game companies will have to do more with less and really examine where the best return on investment is on dollars spent.”

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Investors are more likely to bet on known entities, such as proven franchises and game developers with strong track records, rather than risking it with new and unknown properties, according to Curran.

Across gaming companies, those with live service games (like the constantly updating “Apex Legends” or “Candy Crush Saga”) saw microtransactions bolstering their bottom lines in the last three months. While players can access these games for free, the titles offer shiny cosmetics or battle passes for real money. Many analysts wonder how games that are free to play will fare in a recession.

“There’s a huge question mark hanging over the whole games industry,” Curran said. “Would a recession drive more players to choose free-to-play games over premium titles? Will the big spenders in [free-to-play] games — who typically generate the bulk of the revenue — cut back on their purchases? At the moment, we can only guess.”

Riot Games has raised the price of its in-game currency, which can be exchanged for cosmetics and champions, by roughly 10 percent globally. Five dollars used to equal 650 Riot Points, but as of Aug. 19, it will only net players 575 RP.

“We update our pricing by region roughly annually to account for factors like inflation, currency fluctuations and exchange rates,” said Joe Hixson, a spokesman for Riot Games. “We know that pricing changes never feel good, especially during uncertain economic times, so we try to approach these situations with empathy and understanding. That said, these changes are necessary to continue delivering on what players have come to expect from Riot.”

The economy has also impacted the industry’s competitive gaming efforts around esports. Will Partin, research affiliate at the University of North Carolina at Chapel Hill’s Center for Information, Technology and Public Life, pointed to the unreliable ways the esports industry makes money that could leave it vulnerable in a recession.

Teams rely on content creation to drive sponsorships and ad revenue, while venture capital investors are more reluctant to pay for esports during a period of higher interest rates, he noted.

“These are turbulent times and that’s having a tangible impact on esports,” Partin said. “The teams that will do the best are those that have built strong revenue streams (whether in merchandising, agency work, consulting, etc.) outside of their core esports business. But I doubt that even they will be able to avoid layoffs and spending reductions.”

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Twitch streamers have also felt the pinch, as viewers become more reluctant to pay for subscriptions, and streaming for multiple hours grows less worthwhile.

Esports and content creation company FaZe Clan went public in July via a special-purpose acquisition company, a so-called “blank-check” firm that raises funds for private companies. In an April filing, the company revised down its financial forecast due to “current market trends.” The company declined to comment for this story.

FaZe Clan, one of the world’s best-known and most popular esports and gaming content brands, has never been profitable, according to its financial filings. In 2021, FaZe Clan reported a net loss of $36.86 million. It’s on track to lose more this year, reporting a $18.86 million loss from January to June, approximately $5 million more than it lost in the same time period last year, according to an August filing. The company is in $94 million of debt, including $1 million from a Paycheck Protection Program (PPP) loan it took out during the pandemic.

Similar to the esports industry, esports journalism also relies heavily on ad revenue, leaving it on shaky ground when ad sales dry up. In March, Enthusiast Gaming abruptly laid off 11 members of an editorial staff of roughly two dozen at its esports and gaming news website Upcomer.

“There’s just a lot of uncertainty in the market in general, and that can lead to quick decisions, harsh decisions, rash decisions,” said a person who works in esports journalism and spoke on the condition of anonymity because he was not authorized to the speak to the media by his employer.

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“People who invest in these properties are expecting a very quick return. This isn’t just in esports journalism, this is in esports in general,” the esports journalist said. “It’s why you [saw] so many teams and organizations jumping into the Overwatch League, previously.” Activision Blizzard’s Overwatch League launched in 2017, selling franchise slots to investors for upward of $20 million but has struggled to deliver returns to team owners like Robert Kraft and Stan Kroenke, owners of the New England Patriots and Los Angeles Rams, respectively.

“A lot of this is people buying into an industry and an audience that is very used to not paying for seeing the things they like and isn’t going to change those habits,” the journalist said.

Several teams in the Overwatch League have recently cut players from their roster, such as the Washington Justice, which is in the process of trimming its lineup, as first reported by journalist Jacob Wolf. Former general manager Aaron “PRE” Heckman tweeted on July 5, “Teams fight over a dwindling fan base instead of trying to grow the whole thing larger,” before deleting his account.

The Overwatch League declined to comment. Heckman did not immediately respond to a request for comment.

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Go to Publisher: Technology
Author: Shannon Liao