The Recession vs. the Console Cycle
April 7th, 2009 by worldblee

Game publishers and developers have been laying off workers right and left. Game stocks are depressed. EA, Activision Blizzard, and THQ, among others, have announced quarterly losses. But game sales are not down—in fact, US sales were up 19% in 2008 compared to 2007.

The old adage says that entertainment performs well in recession compared to consumer goods. And it’s true. While I wouldn’t want to launch a pricey new console in today’s economy, there is a vibrant market for quality games.

Recession advertising

Recession advertising (and yeah, I am linking to a stock image)

Let’s look at our situation in 2009 compared to the environment of 2005-2006 when the Xbox 360, Sony PlayStation 3, and Nintendo Wii launched. During that period game publishers and developers faced a falling curve of demand for PlayStation 2 and Xbox titles while the market for so-called ‘next-gen’ titles had yet to materialize. That meant that R&D costs were up while revenue for titles based on that R&D investment was still low.

You’d think that the stock prices for game publishers would have been lower during that time, wouldn’t you? But if you look at the record you’ll see that companies like Electronic Arts had a robust stock price of around $60, more than three times its current price of $15-20 per share.

So what is going on?

One factor is that the large publishers haven’t created healthy studio systems on par with the Hollywood studios of days of yore. They want a large staff around when it’s time to make a hit game, but when production is done they want those costs eliminated, pronto.

And as publicly traded companies their CEOs and Boards of Directors answer to shareholders (including themselves) who want to see stocks go up, up, up. At the hint of financials that are not rising at a healthy clip—and remember that while industry numbers were up, the numbers at individual companies were not necessarily as healthy—their answer is to cut costs. Capitalism doesn’t care if profits come from rising incomes or cost cuts; profit is profit.

So that means layoffs for internal development teams and a continuing reliance on outsourcing for development. This will bring development costs down since external studios pay their workers less and offer fewer benefits than the big US publishers, especially if they’re located in countries with lower living costs and/or government tax subsidies. It also lowers fixed costs since you’re only paying people when they’re working on a project, and if the contract is milestone-based, you’re only paying if you’re getting the game you want.

This means the situation for creative workers is worse now than it was in the last platform transition even though the market for games is larger now than it was then. The economic meltdown gives game companies a plausible reason to cut their staffs while slowing salary growth or even implementing wage reduction. Because we’re at the point in the cycle were console technology is well known and game development risks are lower, publishers don’t need as much experienced talent as they would if they were preparing to launch PS4 titles. Thanks for your help; don’t let the door hit you in the ass on your way out.

This is not to trash game publishers; they’re merely acting in what they perceive are their interests. But for creative workers and for game developers it offers opportunities as well as challenges. If you’ve saved your pennies and can subsidize starting up quality IP that appeals to a sizable audience (remember the Concepticate adage of the right game with the right message for the right customer at the right time) you are in the driver’s seat, no matter what’s happening with game publisher stock prices or the overall economy. Know what your partner on the other side of the table is thinking, make sure your business case is sound, and seize your opportunity.

And should you fail, you can always go back and work for the man when the next generation of consoles comes around. This business goes in cycles and your experience will still be needed.

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