OPINION
If our problem is too many studios producing too many games then live game and studio closures are unavoidable. What will industry recovery in game development look like?
Catching up:
INTRO
DISCLAIMER: you won’t like the message of this article.
In a previous article I followed up on the topic of game development and market failures by exploring factors that can influence the boom/bust cycle. The natural follow on is to ask, “What does our path to wellness look like?”
Step one is getting the industry to a healthier condition, and that isn’t fun.
THE WORKING FRAMEWORK
As a reminder, here are the axioms that I have been reasoning from:
🔃 Gamers have a high elasticity of demand - they can choose to spend variably, even nothing, depending on life events and preferences
🔀 Games have a high elasticity of substitution - there are many games with roughly equal entertainment value, and gamers can and do switch without a lot of provocation
👊 Gamer time and money are rival to investors - time and/or money spent on one game (investor) is no longer available to be spent on another game (investor)
⏭️ Gamer time and money are non-excludable to investors - games (investors) cannot significantly limit gamers from switching freely to other games (investors)
It is the last two that lead to our problem because there are no natural barriers for investors who want a slice of the pie.
THE OVERSUPPLY
I believe the core issue underlying the boom/bust cycle is over creation of games in an environment where the pool of player time and money is either stagnant or growing slowly. In other words, market forces create more studios, and hence games, than the existing player resources — time and money — can support.
In an earlier article we saw that the game industry has characteristics much like the restaurant industry - an environment labelled monopolistic competition. Continuing to look to economic history for help, our current situation is strikingly similar to the history of farming in the USA.
Farmers wanting to earn more money on a crop would plant more acreage. But we can only consume so much of that crop — say, rice. The oversupply created when too many farmers produced too much resulted in ever falling prices. Farmers would go bankrupt when prices fell below production costs.
In the game industry, the issue is falling revenue per studio. Yes, some studios with big hits can earn enough, but the wealth gets spread thinner and thinner when those hits earn a larger share of the pie. Only the biggest studios or biggest hits can survive.
The solution is to only create as many game studios as the market can sustain. But how do we get back to a place with better balance?
THE PLOWING UNDER
This is the crappy part. When you have too many, you have to lose a few. Lets continue with the farming analogy. As a last resort, farmers who can’t make a profit will plow crops under and euthanize livestock to reduce supply. That is a waste all around, and things are bad in the short term, but it is a rapid path.
NOTE: we’ll ignore the mechanism of farm price supports through $500B+/year of worldwide subsidies, because game developers and studios are never going to get scads of free money from government.
For the game industry “plowing under” translates to reducing the number of available games. Closures can be because the game launched and failed, or for some of the reasons outlined in this article. However, we are seeing more and more studios plowed under before they can even complete development.
Games have a natural life cycle, and waiting for those to run their course takes time. Plowing some games and studios under artificially shortens the life cycle so that oversupply ends sooner.
OUTRO
The current purge we are seeing is “ripping off the band aid”. It should get the industry to a stable place faster and maybe reduce cumulative pain relative to a process that takes longer.
But that thought is cold comfort to everyone who is out of work.
Assuming this ugliness recreates balance between gamer spend and studio revenues, how do we maintain that balance? We need an answer if we are to improve the lives of game developers who are caught in the middle and being jerked around.
Cuz Heimdall knows we can’t keep living with cyclical employment whiplash.
Resources
Read about elasticity of demand
Read a technical description of elasticity of substitution
Wikipedia article on farm subsidies
Read about rival and non-excludable goods
Read up about Heimdall
The Tremendous Yet Troubled State of Gaming in 2024, by Matthew Ball.
Monopolistic Competition: Definition, How it Works, Pros and Cons, Investopedia.