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Business pundits and investor analysts have taken to the airwaves to try to explain why so many jobs have been lost in the tech industry. The consensus is that this is a correction to the wave of hiring during the pandemic. Then there was a need to invest in technological solutions to deal with working from home and technical alternatives to systems that would otherwise not be needed if there was no pandemic. Tech companies had to hire more people because their businesses were in greater demand. The extra money going to them led to more bodies being hired.
But by 2022, the business cycle began to return to “normal.” People left their homes without masks and everyday life before the pandemic was slowly but surely returning to life. It also meant that projected revenue growth for tech companies either slowed or was revised lower. For some, incomes have started to turn around.
The loss of revenue for any private company is not great, but these losses are often mitigated by management having a direct stake in the business. Losing revenue for a publicly traded company is another matter. This becomes a disaster for investors who only want or expect steady growth in profits. Therefore, something had to give, and that something was jobs.
After the COVID party of expansion, expansion, expansion came the hangover of downsizing, downsizing, downsizing
Analysts pointed to inflation, which applies to all industries, and most other industries aren’t cutting jobs by the tens of thousands; higher borrowing costs (again affecting all industries); investment ceilings reached; and tech companies are ahead of the “expected” recession when demand for their products falls.
Over the past two weeks, news of massive layoffs from Amazon, Alphabet, and Microsoft seem to echo job cuts at the end of 2022. The cycle began when Elon Musk and Mark Zuckerberg decided that tens of thousands of employees had to leave. Although the job losses were for different reasons—one that didn’t make sense (Twitter) and one that did (Meta)—the cat was out of the bag. The job losses were necessary to “reset” the business. In both cases, it comes from mismanagement in trying to shift their core business to new revenue generating ideas and failure.
In Satya Nadella’s blog to Microsoft employees, the layoffs were necessary to enable the company to double down on its core business while looking for new opportunities for technology investments elsewhere. It looks like Microsoft is trying to have its cake and eat it too. Namely, what he’s saying is that job losses today are necessary to ensure Microsoft’s financial health in the future, with fewer employees. After all, this message is not for people like you and me – it was for the hedge funds, investment houses and banks that have money in Microsoft. The message to investors is that job losses are not a bad thing in themselves if the goal is to return the business to profitability (or in some cases, to greater profitability).
After the COVID party of expansion, expansion, expansion, came the hangover of downsizing, downsizing, all for the greater good of the company’s financial security. When Twitter and Meta cut jobs, investors asked their tech companies, “Well, if they’re doing it, why aren’t we?”
Suffice it to say, the optics don’t look great when many of these multinationals are constantly posting multi-billion dollar profits. This is particularly harsh from Microsoft after it publicly announced that it would cut 10,000 jobs while investing $69 billion in its acquisition of Activision and another $10 billion to invest in ChatGPT. There is also the fact that there is a sort of herd mentality in these corporations. Companies tend to hide their bad news among the clutter of other bad news announcements.
All of which begs the question, is the video game industry immune? The short answer is no. The long answer is that it’s complicated.
We’ve seen layoffs from Xbox teams including 343 Industries, Unity, GameSpot, Giant Bomb, and Riot Games, but so far no mass layoffs have been announced across the board. I think this is because the video game industry has one foot in the tech industries and one foot in the entertainment profession. After all, video game developers, studios, and publishers are in the business of creating hits, a very similar concept to a movie.
Revenue comes from new games, catalog games, microtransactions, live services or subscriptions. Catalog games can be classified as dead investments; namely, the work that went into creating these games is accounted for. Catalog games require less patching and post-launch support, so the staff supporting them is kept to a minimum. Microtransactions and live services can require teams that can range from large to skeleton, depending on what is being worked on. If teams need to expand, contractors are often the best bet to fill short-term gaps.
The games industry has never been shy about cutting jobs, but this has less to do with the economy and more to do with sales performance
Subscription revenue ultimately relies on new game content to keep them relevant. This means that most of the labor in video games goes into creating and maintaining “new content”. This new revenue from game content has not yet been realized until launch (excluding Early Access or crowdfunding revenue). For the majority of new games, revenue is recognized at the point of sale, unlike products that offer technology solutions and have higher booking revenue.
Although video games are emerging in the world of “big tech,” they are also essentially works of art. Video games are inherently subjective. You either like them or you don’t. They are not necessities, but luxuries. They serve no purpose other than entertainment. This means that it becomes difficult to quantify their future earnings.
Some games beat sales expectations, boosting profits, while others can bomb when released, draining the company’s coffers. Most recently, Krafton, the publisher of the highly anticipated The Callisto Protocol, had to significantly lower sales expectations when the game failed to meet its higher-than-expected target. On the other hand, Pokémon Scarlet And Violet broke sales records for the franchise when the game was released with reports of bugs and gameplay issues. Give an account.
Revenue forecasting is becoming less of a science and more esoteric. Hollywood has been struggling with this problem since the 1980s. William Goldman, the screenwriter, put it perfectly: “No one knows anything… Not one person in the entire movie field knows for sure what’s going to happen. Every time it’s a guess and, if you’re lucky, an educated one.” This can also apply to video games. There’s also the added problem that the video game industry is somewhat resilient to macroeconomic downturns.
Historically, the games industry has never been shy about cutting jobs or closing studios, but the reasons have less to do with macroeconomic conditions or what other tech companies are doing, and more to do with the sales performance of a new game. Sometimes, these shutdowns often happen when the economy is doing well and the core tech industry is in turmoil. This is because the video game industry follows its own destiny in revenue planning. Its business cycle is largely driven by console lifecycles, gaming trends, consumer behavior and whether the games are any good.
With 2023 expected to be a great year for gaming, hopefully job losses in this sector will be mitigated
Game publishers and studios can’t cut back too early in development because the games, the only revenue driver, still need to be developed. Often publishers will work to their own timelines and release dates. Sometimes the problem for game studios is understaffing, not too many employees. The “crunch,” when developers work under immense pressure to release a game on a tight deadline, has plagued the industry for some time. If anything, publishers need more people, not less, when the crisis hits, but the time needed to train people to be most effective is also gone.
The problem of employment security in video games is when the game is released and in the public domain, not before. If the promised revenue fails to materialize, then the publisher or game studio will have to make these “painful decisions” (which will most likely affect developers and lower to mid-level management). Given that development time cycles and new game release dates for each publisher will be unique, the job losses could come at any time, rather than the waves of job losses we’re seeing today among the tech giants. companies.
Likewise, new studios and development houses are popping up all the time, and that’s before we dig into the hundreds of thousands of indie game studios. They all create jobs. A look at video game job openings on LinkedIn or Indeed.com will return hundreds of results. In the world of video games, it doesn’t make sense to follow the lead of what the next publisher does or doesn’t do when it comes to hiring and cutting jobs. It’s just that the industry is too dynamic to follow your neighbor.
Ultimately, it comes down to how the revenue is generated. The job cuts in big tech are at companies that make their money, which is fundamentally different from the entertainment sector. These come from online advertising, technology research and development, recurring subscriptions or applied science solutions. They don’t come from art. This is because the video game industry fundamentally struggles between two industries, technology and art, which gives it its strength as well as reveals its Achilles’ heel.
To summarize, job losses in the video game industry will continue to happen, but it won’t be because that’s what investors are calling for, but because games themselves are unhappy. With 2023 expected to be a great year for gaming, hopefully job losses in this sector will be mitigated.
Sam Nagy is the founder of video game analytics and consulting firm SJN Insight
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