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The $200 billion video game industry is dealing with its biggest slowdown in 30 years as huge growth driven by smartphone games and the latest generation of consoles reaches its limits.
Hardware sales are slowing, with Sony this week cutting its forecast for PlayStation 5 sales. Consumer spending on mobile games fell last year, down 2% to 107.3 billion dollars according to Data.ai, which forecasts low single-digit growth in 2024.
The sense of crisis affecting the gaming industry is in stark contrast to the growth achieved during the Covid-19 pandemic, which has allowed many stranded consumers to spend excess time and money on games. That peak marked the culmination of a streak of victories for the digital entertainment business that began with the original PlayStation in the mid-1990s and further accelerated by Apple’s iPhone.
Many in the gaming industry expected a quick recovery after 2022’s post-pandemic decline, but last year didn’t deliver the growth initially hoped for.
The latest quarterly numbers from some of the biggest publishers, including Electronic Arts and Take Two, have disappointed investors. Meanwhile, game developers have been forced to cut thousands of jobs this year after already cutting up to 10,000 in 2023.
“There is a lot of commercial anxiety: about growth, about profitability, about keeping budgets under control and having an impact on the market when there are so many established products,” said Piers Harding-Rolls, director of games research at Ampere Analysis, a market research company. “We are in an era of much slower growth.”
Concern surrounds the lack of new gaming devices being sold to expand the market. Boost from the latest generation of PlayStation and Xbox consoles released in 2020 has waned, and the global decline in smartphone sales means there are fewer new gamers coming online in what has become the most profitable part of the industry in recent years .
After the PlayStation 5 surpassed 50 million units in December, Hiroki Totoki, Sony’s group president and interim head of its gaming unit, said this week that it is “entering the second half of the console cycle.” . . therefore we expect a gradual decline in unit sales from the next fiscal year onwards.”
Deep discounting of the PS5 in 2023 has already contributed to what Totoki called a “significant” decline in Sony’s gaming operating profits. He warned that Sony “does not plan to release any new existing franchise titles” in the fiscal year that begins in April, depriving it of any boost from bankable, big-budget games like Spiderman OR God of war.
Microsoft, whose Xbox has fallen a third behind Nintendo and Sony, said this week that it is looking to sell more games on rival consoles, seeking to tap new sources of growth in an increasingly saturated market after paying $75 billion . for Activision Blizzard last year.
The long-awaited launch of a new Nintendo console later this year may only accelerate declining PlayStation and Xbox sales as gamers save up for the next new thing.
“There is a console-specific problem in the gaming industry: no one is buying an Xbox, PS5 has peaked at the cost of significant discounts and everyone is waiting for Switch 2.0,” said Gareth Sutcliffe of Enders Analysis. “Consoles have proven not to be a growth model for gaming – they hit a very clear number.”
Phil Spencer, head of Microsoft Gaming, cited a recent report by tech author and investor Matthew Ball showing the gaming industry grew less than 1% last year.
“This is a slower rate than inflation, slower than most GDP growth, which means [gaming’s] the relevance decreased last year compared to what happened in others [entertainment] categories,” Spencer said.
He added that the “key opportunity” for the industry is to find new sources of growth among gamers who can’t afford a $500 console or a $70 bundled game. “How do we provide games to people who don’t and can’t play today?” Spencer said. “I think this is an area we should focus on.”
Reducing prices is a double-edged sword. The huge popularity of free online games like Fortnite AND Roblox consumes hours of gameplay previously spent on $70 titles. The strong network effects of multiplayer games, such as call of Duty, they also make it more difficult for new entrants to succeed. “Thousands of titles come out every month and the success rate is very low,” she said. “You face significant challenges in trying to bring a new product to market.”
The rising costs of developing successful games have also raised the stakes. “When you’re talking about a budget over $100 million, even for a large company, if you fail on two or three of those, then commercially you’re on the ropes,” Harding-Rolls said.
This has led to a Hollywood-style reliance on reboots of the same big franchises by Sony, Microsoft, Electronic Arts, and other big game companies. At the same time, entertainment giants are showing renewed interest in gaming, adding new competition for existing players in a shrinking market.
This month Disney invested $1.5 billion in Fortnite creator Epic Games to create what studio chief Bob Iger called “a massive Disney universe that will be dedicated to video games and gaming,” while Netflix is also expanding its game offerings.
“Just like we take our intellectual property from our movies and our television and express it in our parks, this is a great way to do that in games,” Iger told analysts after the Epic deal was announced, pointing to the demographic trends that showed young consumers were spending as much time on games as they did on TV and movies.
“The conclusion I came to is that we need to be there, and we need to be there as soon as possible, in a very compelling way.”