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The $200bn video games industry is reckoning with its biggest slowdown in 30 years, as the huge growth driven by smartphone gaming and the latest generation of consoles reaches its limits.
Hardware sales are slowing, with Sony cutting its forecast for PlayStation 5 sales this week. Consumer spending on mobile gaming declined last year, down 2 per cent to $107.3bn according to Data.ai, which forecasts low single-digit growth in 2024.
The sense of crisis across the games sector is in sharp contrast to growth achieved during the Covid-19 pandemic, which allowed many locked-down consumers to spend their excess time and money on games. That peak marked the culmination of a winning streak for the digital entertainment business that began with the original PlayStation in the mid-1990s and was accelerated further by Apple’s iPhone.
Many in the gaming industry expected to bounce back quickly after 2022’s post-pandemic decline, last year did not deliver the growth initially hoped.
The latest quarterly numbers from some of the biggest publishers, including Electronic Arts and Take Two, has underwhelmed investors. Meanwhile, games developers have been forced to cut thousands more jobs this year after already slashing as many as 10,000 in 2023.
“There’s a lot of commercial anxiety: about growth, about profitability, about keeping budgets in check and about making an impact in the market when there are so many established products,” said Piers Harding-Rolls, games research director at Ampere Analysis, a market researcher. “We are in a much slower growth era.”
Concern surrounds the lack of new gaming devices being sold to expand the market. The uplift from the latest generation of PlayStation and Xbox consoles that were released in 2020 has waned and the global fall in smartphone sales means there are fewer new players coming online in what has become the most lucrative part of the industry in recent years.
After the PlayStation 5 surpassed 50mn units in December, Hiroki Totoki, Sony’s group president and interim head of its gaming unit, said this week that it was “entering the latter half of the console cycle . . . so we anticipate a gradual decline in unit sales from next fiscal year onwards”.
Heavy discounting of the PS5 in 2023 has already contributed to what Totoki called a “significant” drop in Sony’s gaming operating profits. He warned that Sony does “not plan to release any new major existing franchise titles” in the fiscal year starting in April, depriving it of any boost from bankable, big-budget games such as Spider-Man or God of War.
Microsoft, whose Xbox has been left a distant third behind Nintendo and Sony, said this week it was looking to sell more of its own games on rival consoles, as it looks to tap new sources of growth in an increasingly saturated market after paying $75bn for Activision Blizzard last year.
The widely anticipated launch of a new Nintendo console later this year may only accelerate the drop-off in PlayStation and Xbox sales, as players save up for the next new thing.
“There is a console-specific problem in the games industry: nobody is buying an Xbox, PS5 has peaked at the cost of significant discounting and everyone is waiting for Switch 2.0,” said Gareth Sutcliffe at Enders Analysis. “Consoles have proven that they are not a growth model for gaming — they top out at a very clear number.”
Phil Spencer, chief of Microsoft Gaming, pointed to a recent report by tech author and investor Matthew Ball, showing that the games industry grew by less than 1 per cent last year.
“That’s slower than inflation, slower than most GDP growth, which kind of means [gaming’s] relevance shrunk last year relative to what has happened in other [entertainment] categories,” Spencer said.
He added that the “fundamental opportunity” for the sector was finding new sources of growth among players who cannot afford a $500 console or a $70 packaged game. “How do we deliver games to people who don’t play and can’t play today?” Spencer said. “That’s as an industry where I think we should be focused.”
Cutting prices is a double-edged sword. The huge popularity of free-to-play online games such as Fortnite and Roblox consumes hours of playtime that had previously been spent on $70 titles. The strong network effects of multiplayer games, such as Call of Duty, also make it harder for new entrants to succeed. “Thousands of titles are hitting every month and the success rate is very low,” he said. “You’re faced with significant challenges in trying to break new product into the market.”
The rising costs of developing blockbuster games has also raised the stakes. “When you’re talking about a budget that’s $100mn plus, even for a big company, if you miss with two or three of those then commercially you’re on the ropes,” Harding-Rolls said.
That has driven a Hollywood-style dependence on rebooting the same big franchises by Sony, Microsoft, Electronic Arts and other big games companies. At the same time, entertainment giants are showing a renewed interest in gaming — adding new competition for existing players in a shrinking market.
Disney made a $1.5bn investment in Fortnite’s creator Epic Games this month to create what the studio’s chief Bob Iger called “a huge Disney universe that will be for gaming and for play”, while Netflix is also expanding its games offering.
“Just as we take our IP from our movies and our television and have them expressed in our parks, this is a great way to do it in games,” Iger told analysts after the Epic deal was announced, pointing to demographic trends that showed younger consumers were spending just as much time on games as they do on TV and movies.
“The conclusion I reached was we have to be there, and we have to be there as soon as we possibly can in a very compelling way.”
