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INTRO
I’ve previously shared a model for understanding the boom and bust we are experiencing in game development today. The simple description is that we created too many games in a world of stagnant gamer spending. My goal for the model is to reach into the body of our industry and grab the beating heart of the problem so we understand how to make better choices.
Some people don’t agree with my thoughts, and that’s fine. Granted, the model I describe results in a boom/bust cycle in the simplest simulation that I can program. But that doesn’t mean the model is correct, only that it captures the behavior.
Whether the cycle is driven by the proposed mechanism or not, there are certainly additional forces shaping the ebb and flow of our industry.
OPTIMISM AND RISK TAKING
Business cycles are intervals of general expansion followed by recession in economic performance across all industries. These cycles are caused by a lot of things, including unpredictable economic shocks like the pandemic.
The very existence of a business cycle interacts with us. For example, it has a psychological effect on investors — some people become enthused by all the good news and lose sight of the fact that things will turn down again. This effect is attributed to a human behavior we call optimism bias. Investors with optimism bias tend to take more risks when a cycle is in the expansion phase, including starting more studios. Existing publishers can go on a buying spree.
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” — Sir John Templeton
Within an existing studio, that reduced risk aversion can take the form of starting additional game development, exploring other forms of revenue, or dabbling in transmedia projects. Starting preproduction on “the next game” can happen as an anticipation of grabbing more of the perceived-to-be increasing pie.
On the whole, reduced risk aversion can put more projects in the pipeline, which results in more developer hires.
EASY MONEY
Starting a studio or new side project requires funding. Anything that affects the availability of that funding can provide a push or pull on game development. Low interest rates make it easier to risk someone else’s money, while increased rates can slow or stop investment.
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Mostly we discuss money costs in the context of investor behavior, not player behavior. Can increasing Federal funds rates explain player spending changes in 2022Q3, when both play time and money spent fell off a cliff?
Federal funds rates began rising in Q2 of 2022. The Fed is watched like a hawk, with every word examined and debated like oracle utterances. Maybe observant business started pulling back during Q1 and Q2, or even in late 2021. Those actions may have had influence over the player base through fears passed on by osmosis.
I am not an economist, but I would expect player spending to respond slowly and with a lag after investors and business start to put on the brakes. What we observed instead was player spending plummeted in a short period, a portion of a single quarter. There was nothing gradual about it. (My experience may differ from yours; this is what I saw.)
Moreover, it is intuitive that economic fears could reduce player spend, but why would that also affect the time spent playing games? That fell off the same cliff. Why wouldn’t players shift to F2P games, since they are free?
BUSINESS CYCLES AND GAMER SPEND
You might conclude that the overall business cycle’s effect on the game industry would be to restrict the resource availability (time, money) of our player base. However, there is evidence that gamer spending, like alcohol and tobacco sales, is inversely correlated with the economy. In other words, game industry revenues go up when the economy goes down, and visa versa. From Konvoy.vc:
“We believe gaming is essentially recession-resilient with strong fundamental tailwinds that are counter-cyclical in bad times and accelerated during bull markets.”
We saw evidence of that countercyclicality during the pandemic. But no one was ready for the downturn when it arrived, or were at least unprepared for the magnitude of that downturn — Q3 of 2022 sent player time and spending off a cliff.
KATAMARI DAMACY SIDE EFFECTS
When times are good, the ambitious and large investors start acquiring studios, pursuing that game of thrones size advantage. That M&A activity uses layoffs as a way to pay for the spend — and profit extraction — that accompanies the process.
It is not uncommon for those acquisitions to simply be part of a larger strategy, like reducing competition, or grabbing up intellectual property. For our industry, that would be the game worlds and audiences who love them. The teams are considered expendable at some point after the acquisition, at least on spreadsheets.
FOLLOW THE LEADER AMPLIFICATION
By follow the leader, I refer to what some call the “Wisdom of the crowd”. In this case I don’t mean making better decisions through group action. Rather, this is when company leadership and investors see other businesses taking actions, and choose to follow suit based on an assumption that these other folks have inside or secret information of some sort.
This flocking behavior can result in implementing layoffs by following admired or respected leaders or companies. It could also mean dabbling in — taking risks on — non-core projects like cryptocurrency, blockchain, or non-fungible tokens (NFTs).
The problem is that flocking behavior can amplify poor decisions just as easily as good ones.
COVERING REAR ENDS
There is a lot of bad decision making in business. Those bad decisions can get forgiven or hidden when times are good, maybe because mistakes are harder to see. But when things hit the fan, mistakes can take on a greater significance.
Cutting staff or projects provide more ways to cover for poor previous judgment. After all, how did the company get so overextended in the first place? Poor choices. Try searching the internet for the phrase, “failing up”.
OUTRO
Let’s summarize things. We’ve described many factors that can shape the economy of the game industry with varying directions of effect.
The game industry is countercyclical to the overall economy.
Easy money leads to greater risk taking.
Risk taking leads to acquisitions, new projects, and developer hiring.
Acquisitions lead to layoffs as a means of paying for the spend.
Subsequent poor acquisition execution leads to shuttering of games, studios, and more layoffs.
Flocking behavior can cause followers to amplify both good and bad choices made by the admired flock leaders.
Bad managers can use bad times to sweep their mistakes under rugs and place blame on the victims through layoffs and project shutdowns.
I don’t think these factors are controversial. Most are based on economic principles and behavioral data. We generally have a feel for how and when they affect things.
However, some are unproven or possibly unprovable hypotheses that feel intuitively true because they are based on anecdotes — flocking behavior, and brooms and rugs. Proposals that seem “true enough” to believe without pursuing data can be dangerous, so we need to take care.
I am still convinced that the root cause of our boom and bust is too many games in an environment with stagnant gamer spending. And even if we get back to some degree of secular growth in gamer spend, without some other change we’ll still have the problem of over subscription to the future in the form of new game startups.
RESOURCES
Martijn van Zwieten presentation bullet pointing some of these ideas - Survive to ‘25 (and beyond)
Federal Reserve data download page
Quote pulled from Duncan Williams Asset Management
Article on failing up
Description of optimism bias
Konvoy article - Gaming: Is It Recession-Proof?
Wikipedia article on “wisdom of the crowd” decision making
Wikipedia article on the general business cycle
Morningstar article on interest rates
A definition of the term secular in economics