State of the Gaming Industry

Last year, I predicted our industry would start recovering in the fall of 2024. I was optimistic and want to update that prediction based on what I see today.?

We will continue to see studio closures and layoffs this year, and I don’t see that changing much in 2025. From a B2B perspective, very few investors and publishers fund external studios. If investors fund a studio, they want to share the risk with other investment groups. So, you need to acquire two sources of funding. In today's market, you need to have a game far enough in development to show very positive KPIs before they invest.? Many studios that got their first few rounds of funding have difficulty finding the funding they need to get their games to market. Publishers are returning to their catalogs, investing in sure bets, and developing very few or no original IPs. ?Minimal third-party deals are happening.

In contrast, the B2C side of our market?is very healthy. Quite a few games have done very well this year, which shows that players will come if you have a great player experience. I don’t see consumer demand going away. So, why are there still layoffs, studios shutting down, and little investment in games?? I feel there are five core reasons for this.

1.????? Cost of Development - Base salaries in North America have risen by ~ 40% since 2021. Since 80% of development costs are labor, this has increased the risk for publishers and investors. Those costs have not seen much of a reduction this year. ?Creating the content for a competitive AAA game takes significant time and resources. Internal team sizes range from 150 to 600 people, not including outsourcing or co-development. Average budgets for single-player games range from 150 to 250 million dollars

2.????? Cost of Money/Over Investment—The cost of money is no longer cheap, and the market is still adjusting to the over-investment that occurred during and shortly after the Pandemic. Many Web 3-based investments have not seen the expected return, causing investors to reduce or stop funding. ?

3.????? GTA 6 is coming next year, and publishers want to avoid its release window. Depending on when GTA 6 launches, publishers will avoid launching any of their games near that date. This will force them to extend their project release dates, reducing revenue for next year. Therefore, they need a buffer to extend their runway if needed.

4.????? Significant releases have not met revenue expectations. This has made publishers and investors more cautious, causing third-party deals to dry up.

5.????? Go-to-market. How games are marketed has significantly changed over the past few years, and most publishers still need to learn how to reach their target audience effectively. They are stuck in ways that no longer work to build awareness. IMHO, that is one primary reason you don’t see publishers investing in new IP. There are a few examples of recently released new IPs that have broken through and done very well, but those, IMHO, are lightning in a bottle. ?

There is a silver lining here. According to industry salary surveys, base salaries peaked at the end of last year and have flattened out this year.

IMHO, large teams building AAA games are not sustainable business models when development costs are high. It is not uncommon for AAA games to have to sell 5 to 10 million units to cover costs. Our industry will need to find ways to produce high-quality experiences with smaller teams.

One promising technology, AI generative tools, should help reduce team size, make teams more efficient, and allow them to iterate faster in the future. However, they are still in their infancy, and it will take a few years before you see any signs of impacting team size and time to market in game development. I don’t see AI generative tools as the silver bullet execs have spoken about on shareholder calls. ?I see AI tools helping teams become more efficient and helping with mundane tasks like LOD creation, basic code creation for gameplay, quality assurance for maps, and code hygiene.? IP issues with these tools still need to be figured out, and until that is sorted, using AI to generate game assets will be a barrier to entry in game development. Also, AI will never replace the creative element that goes into making a great player experience.? That craftsmanship still requires the human touch. I do see these tools giving developers the flexibility to iterate on their ideas quickly to find the right path forward in creating a compelling player experience. I want to stop here because this could be an entire article.

Incorporating UGC elements is another tool that would help developers extend the life of their games without continually producing massive amounts of content. This generation of players grew up playing Minecraft and Roblox. Providing a compelling toolset would allow players to extend a game's content. They could build experiences far faster than the development team. However, the quality level of the content today is not the same as that of the developers. I feel that AI-generated tools will help close that gap in the future.

In summary, our industry will see the B2B side improve later next year due to solid consumer sector demand for good, quality player experience and the market pressure for publishers to focus on fewer games that fulfill the player's fantasy rather than just unique gameplay.

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