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Blame game: What’s causing massive layoffs in video games amid record year?

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Projects are being canceled and studios shuttered amid a wave of layoffs in the video game industry that has put thousands out of jobs. But many are wondering what’s driving these deep cuts after video game revenue hit another record in 2023.

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The new year is off to a rough start for those working in gaming. In January and February alone, Kotaku reports that more than 8,100 people have or will be laid off. This is headlined by EA cutting 5% of its workforce, Sony letting go of 900 employees from its PlayStation division, and Microsoft laying off 1,900 Activision-Blizzard and Xbox employees

The global video game market reached a record $217 billion in 2023, according to estimates from video game data firm Aldora. For context, the music industry generated $28.9 billion last year, according to Barclays, while the global box office brought in $33.9 billion

“It’s both the best year and the worst year for the games industry,” Aldora co-founder and CEO Joost van Dreunen told Straight Arrow News. 

“The expectation for 2024 is a flat year. 2023 was such a blowout year in terms of these big releases that we’re now seeing,” he said. “Everybody kind of took a step back and said, ‘Let’s take it easy because 2024 doesn’t look like it’s going to be amazing.'” 

Behind the company curtain

While software sales have been massive, lagging hardware sales could be to blame for some of the cuts. 

“Sony probably assumed that the PlayStation 5 would trend the same way that PS2, 3 and 4 did,” said Michael Pachter, managing director at Wedbush Securities. “And it’s not selling as many, period. They’re three full years into the cycle and they sold 54 million units. They typically sell north of 20 million a year.” 

Meanwhile, Pachter chalks up Microsoft’s layoffs to its massive acquisition of Activision-Blizzard, which was finalized last year despite objections from the Federal Trade Commission. Shortly after the cuts became public, a lawyer for the government regulator took issue with the job loss. 

“Microsoft, I think, is largely a function of their combination with Activision,” Pachter said. “So it’s probably about 20% of the Activision workforce that they laid off. So there was certainly a lot of redundancy. You don’t need two CFOs or as many HR people or as many legal people.”

Joining forces

Consolidation is a huge part of the current gaming industry. Microsoft’s $69 billion deal to purchase Activision-Blizzard was the Windows-maker’s largest in its history. It also acquired ZeniMax Media for $7.5 billion in 2020, adding the Doom, Fallout and Elder Scrolls series to their stable.

Well before it gobbled up some of the biggest publishers in the business, Microsoft spent $2.5 billion to buy Mojang, the studio behind Minecraft, in 2014.

Sony, for its part, has taken a different approach, picking up smaller studios before they become multibillion-dollar behemoths. Its biggest acquisition was in 2022 when it spent $3.7 billion on Destiny-maker Bungie

“Either you invest a lot of money internally and develop it yourself or you acquire and hope it works,” van Dreunen said of the push to acquire studios. 

Subscription surge

Microsoft’s recent string of acquisitions is an attempt to draw gamers to its subscription service, Game Pass, which offers a rotating list of games. It’s similar to Netflix and Hulu for video games. 

“If you spend enough time in Game Pass, you never have to leave,” Pachter said. “If you spend enough time on Netflix, you never have to leave. Do you miss out on Oppenheimer? Yes, you do. But can you live without seeing Oppenheimer?”

“They rely upon scale to bring down the cost of the components… We’re not seeing component costs coming down as rapidly.”

Michael Pachter

In today’s landscape, subscription offerings are seen as a necessary part of the game. Sony has several tiers of PlayStation Plus, while Nintendo has retro offerings for Nintendo Switch Online subscribers

Subscriptions help to subsidize the business as console makers often take a loss on hardware sales. 

“When somebody goes and they buy an Xbox at their local retailer, we’re subsidizing that purchase somewhere between $100 and $200, with the expectation that we will recoup that investment over time through accessory sales and storefront,” Microsoft Gaming CEO Phil Spencer told The Wall Street Journal in 2022.

“They rely upon scale to bring down the cost of the components,” Pachter added. “But that’s not happening anymore. We’re not seeing component costs coming down as rapidly.”

How live games changed the game

The business behind video games was once a simple proposition: Develop games in the most cost-effective way possible, sell a lot of copies of the game, and come up with a new idea to do it again. 

Today, juggernaut live games boast big player counts and screen time on the platform of the player’s choosing. 

“We’ve sort of seen this inversion over the last five years, where it used to be that the platform was the biggest thing and the games would sort of tuck in within the platform,” Microsoft President of Gaming Content Matt Booty said during an episode of “The Official Xbox Podcast” in February. “Today, big games like Roblox or Fortnite could actually be bigger than any one platform. And that really has changed the way that we think about things.”

More and more, companies are looking to games as a service, which offers studios a continuing revenue model rather than relying on the initial purchase. 

“You could also sort of shape the experience according to the likes of the audience.”

Joost van Dreunen

This can be done in various ways. Some of the most popular include subscriptions for playtime, a feature seen in many large-scale, multiplayer online role-playing games like World of Warcraft.

Microtransactions, low-cost purchases that can include cosmetic items or power-ups, appear in a good portion of games these days and are most prevalent in mobile games.

See SAN’s piece on Kim Kardashian: Hollywood shutting down for more insight into this model. 

Then there are season passes, where users pay to have access to a progression tree that features in-game items that could be worth double or triple the player’s initial investment. 

“The real rationale for season pass is not to collect the $10 for the pass, it’s to keep the player engaged with daily tasks,” Pachter said. “Because the player who comes back every day to make sure he gets his money’s worth and earns his little thing tends to stay an extra 10 or 20 or 30 minutes. And more engagement just necessarily translates to higher in-app purchases.”

“The idea is to convert monthly active users into daily active users and that conversion goes up with a season pass,” he added.

A constant stream of revenue is just part of the benefit of live service games. 

“It’s much better to have live services and ongoing engagements where we build the game to 40% completion and then we just iterate on the model as we go,” van Dreunen said. “This gives you two benefits. One of them is you sidestep the issues traditionally associated with demand uncertainty.”

“But at the same time you could also sort of shape the experience according to the likes of the audience,” he continued. “So it’s much more of a back and forth rather than, ‘We develop this pristine experience right here. It’s secret and now we hope that it works.'”

“Some people like to watch movies in a theater, be entertained for two hours and go home and talk about the movie for a week,” Pachter said of the difference in models. “And others like to watch reality TV shows and watch dating shows and guess who the bachelorette is going to pick. So those are completely different experiences. Live services is far more analogous to reality TV than it is to a self-contained film.”

Exclusive game viability

Since the dawn of modern video games, console-exclusive titles have driven sales for any specific platform. 

“They’ve built their fan base very strongly around these exclusives,” van Dreunen said. “Sony and Microsoft have really put together a marketing plan for the devices that have a particular personality. And so people identify very closely with.”

In February, rumors swirled that Xbox would be offering its exclusive titles to competitors PlayStation and Nintendo. In response, the gaming media painted the situation as the end of the brand. 

“The gaming press plays to that stupid, infantile approach by saying, ‘Oh no, no, Microsoft, our understanding as gaming press is all console-first party titles should be exclusive. And you’re violating our preconceived notion of how it should be,'” Pachter said of the reaction. 

The perceived drama culminated with a special episode of “The Official Xbox Podcast” featuring Spencer. 

“So we’ve made the decision that we’re going to take four games to the other consoles, just four games, not a change to our kind of fundamental exclusive strategy,” Spencer said.

Those games are Pirate-sim Sea of Thieves, Grounded, Hi-Fi Rush and Pentiment, a far cry from Halo and Gears of War leaving Xbox. 

“I actually think Microsoft’s overarching goal is to sell Game Pass subscriptions,” Pachter said. “And their strategy is to hook the consumer. And I think that they’re acknowledging right now that they don’t have everybody.”

“What makes Fortnite so successful, makes Minecraft so successful, is that they’re available on any platform,” van Dreunen said. “And increasingly, we’ll be moving in that direction. And then we become much more platform agnostic.”

But even with these changes in the gaming industry, decades-long console wars are not heading for a peace treaty. 

“I just think sales get cut in half next cycle, not to zero,” Pachter said of the next console generation. “And then they get cut in half again the next cycle, and they get cut in half again the next cycle.”

“It’s a little bit the equivalent of having really, really expensive headphones or really, really, really high-definition televisions and there’s always going to be an audience for that,” van Dreunen said. “And then there’s everybody else.”

While this year’s gaming layoffs are on track to far outpace 2023’s numbers, it doesn’t appear to be a warning sign for the industry that has seen significant growth in recent years. 

“I would expect all these companies in 18 months to be rehiring a lot of the people that they just laid off,” van Dreunen said. 

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“Layoffs at Microsoft’s gaming division. 1900 employees at Activision Blizzard and Xbox are losing their jobs.”

“Sony is laying off 900 employees at its playstation division. The cuts include the closure of an entire studio.”

“EA has announced plans to layoff 5 percent of its staff, continuing its initiative to never appear in positive news coverage.”

SIMONE DEL ROSARIO:

It certainly sounds like the gaming industry is in trouble.

JOOST VAN DREUNEN:

“It’s both the best year and the worst year for the games industry. Right?”

“So last year, we saw, you know, a total of 10,500 announced layoffs in the industry. It’s now the end of February, we’re already up to 7100, or something like that.”

SIMONE DEL ROSARIO:

But the global games market reached an estimated record $217 billion in 2023, according to video game data firm Aldora.

“New High score? Is that bad? What’s that mean? Did I break it?”

SIMONE DEL ROSARIO:

So what’s with all the layoffs?

MICHAEL PACHTER:

“I think that Sony probably assumed that the PlayStation five would trend the same way that PS two, three and four did. And it’s not selling as many, you know, period. I mean, they’re, they’re three full years into the cycle, and they sold 54 million units, they typically sell north of 20 million a year.”

SIMONE DEL ROSARIO:

Meanwhile, Microsoft’s layoffs came following its huge acquisition of Activision-Blizzard, and the FTC isn’t too happy about it after it failed to block the deal.

MICHAEL PACHTER:
“So there was certainly a lot of redundancy, you don’t need two CFOs or as many HR people or as many legal people.”

SIMONE DEL ROSARIO:

The torrent of job cuts, then, seem to point to a transition in the industry, not necessarily turmoil.

Microsoft’s $69 billion Activision-Blizzard acquisition is an exclamation mark on a trend seen for years from console heavyweights. They’ve been gobbling up studios and publishers to strengthen their stable in competition to be a gamer’s top hardware choice.

Before its blockbuster Activision deal, Microsoft bought ZeniMax Media for $7.5 billion in 2020, adding the Doom, Fallout and Elder Scroll series to its catalog. And back when these big deals were just a pipedream in 2014, Microsoft still spent $2.5 billion to buy the studio behind Minecraft.

Sony’s feeling the pressure to up the acquisition game. They dropped $3.7 billion on Destiny-maker Bungie in 2022, but most of their meals are smaller studios.

JOOST VAN DREUNEN:

“Either you invest lots of money internally and develop it yourself, or you acquire and hope it works.”

SIMONE DEL ROSARIO:

Microsoft’s recent acquisitions are an attempt to attract gamers to its subscription service Game Pass, which offers a plethora of first party, Triple A and indie games that rotate in and out. Like Netflix or Hulu for the gaming world.

MICHAEL PACHTER:

“If you spend enough time in Game Pass, you never have to leave. If you spend enough time on Netflix, you never have to leave. Do you miss out on you know, Oppenheimer? Yes, you do. But can you live without seeing Oppenheimer?”

SIMONE DEL ROSARIO:

Strong subscription offerings are crucial to the bottom line, considering making money off consoles is like trying to squeeze blood from a turnip.

“It’s no secret that Sony and Microsoft are willing to sell their hardware at a loss to lock you into their ecosystem of accessories, subscription services and software.”

PHIL SPENCER:

“So when somebody goes and they buy an XBox at their local retailer, we’re subsidizing that purchase somewhere between a hundred and 2 hundred dollars. With the expectation that we will recoup that investment over time through accessory sales and storefront.”

MICHAEL PACHTER:

“They rely upon scale to bring down the cost of the components. So, you know, years ago, I mean, 2005, flash memory was super expensive. And by 2013, it was cheap.”

“But that’s not happening anymore. We’re not seeing component costs coming down as rapidly.”

SIMONE DEL ROSARIO:

Before every console was connected to the internet, the business model was simple.

Develop a game in the most cost-effective way, sell as many copies as possible, and try to come up with another idea to do it all over again.

MATT BOOTY:

“We’ve sort of seen this inversion over the last five years where it used to be that the platform was the biggest thing. And the games would sort of tuck in. Within the platform today, big games, like a Roblox or fortnight could actually be bigger than any one platform. And that really has changed the way that we think about things.”

SIMONE DEL ROSARIO:

Now, games as a service, known as “live games,” are king. These are games that have a continuing revenue model rather than just the initial purchase.

This can be done in lots of ways.

“For the Horde!”

SIMONE DEL ROSARIO:

There are monthly subscriptions for playtime, something you’ll see in World of Warcraft.

Then there are microtransactions, low-cost purchases that include cosmetic items or power ups. While these appear in all kinds of games, they are most prevalent in mobile games. We did a whole piece on Kim Kardashian: Hollywood, that really breaks this down.

Then there’s the season pass…

MICHAEL PACHTER:

“The guys who invented Season Pass were the Epic guys with Fortnite. And, you know, it’s brilliant.”

SIMONE DEL ROSARIO:

For a season pass, you might spend 10 bucks and get 20 bucks worth of stuff. But the boost only lasts for a short period of time.

MICHAEL PACHTER:

“the real rationale for Season Pass is not to collect the 10 bucks for the pass, it’s to keep the player engaged with daily tasks. Because the player who comes back every day to make sure he gets his money’s worth and earns his little thing tends to stay an extra 10 or 20 or 30 minutes. And more engagement just necessarily translates to higher in-app purchases.”

“You know the idea is convert MAUs into DAUs and that conversion goes up with a season pass.”

SIMONE DEL ROSARIO:

Along with constant revenue streams, live games give developers the chance to keep building out the game as they go, instead of presenting a finished product up front without knowing what demand for it might be.

JOOST VAN DREUNEN:

“But at the same time, you know, you could also then sort of shape the experience according to the, like, likes of the audience, right. So it’s much more of a back and forth rather than we develop this pristine experience right here. It’s secret and and now we hope that it works.”

MICHAEL PACHTER:

“Some people like to watch movies in a theater, be entertained for two hours and go home and talk about the movie for a week. And others like to watch reality TV shows, and watch dating shows and guess who the bachelorette is going to pick. So those are completely different experiences. Live services is far more analogous to reality TV than it is to, you know, a self contained film.”

SIMONE DEL ROSARIO:

But let’s talk about those self-contained films.

Since the dawn of the modern video game industry, it’s been console-exclusive video games driving sales to a specific platform.

“It’s Me Mario!”

JOOST VAN DREUNEN:

“they’ve built their fan base, very strongly around these exclusives.”

“Sony and Microsoft have really put together a marketing plan for the devices that has a particular personality. And so people identify very closely with.”

SIMONE DEL ROSARIO:

But, in February, as rumors swirled that Xbox may be offering some of its exclusive wares to its competitors, the gaming media acted like it was the end of the brand as we know it.

MICHAEL PACHTER:

“The gaming press plays to that stupid, infantile approach by saying, Oh no, no, like our understanding as gaming press is all console first party titles should be exclusive. And you’re violating our preconceived notion that you know that of how it should be.

SIMONE DEL ROSARIO:

All that drama culminated with a “special edition” of the XBOX podcast featuring Microsoft Gaming CEO Phil Spencer.

PHIL SPENCER:

“So we’ve made the decision that we’re going to take four games to the other consoles, just four games, not a change to our kind of fundamental exclusive strategy.”

SIMONE DEL ROSARIO:

Those games include Pirate-sim Sea of Thieves, Grounded, Hi-Fi Rush and Pentiment…a far cry from Halo and Gears of War leaving XBOX.

MICHAEL PACHTER:

“So I actually think Microsoft’s overarching goal is to sell Game Pass subscriptions. And their strategy is to hook the consumer. And I think that they’re acknowledging right now that they don’t have everybody.”

JOOST VAN DREUNEN:

“What makes Fortnite so successful, makes Minecraft so successful, is that they’re available on any platform. And so increasingly, we’ll be moving in that direction. And then we become much more platform agnostic.”

SIMONE DEL ROSARIO:

Despite these notable changes to the gaming industry, don’t expect the traditional console war to end in a peace treaty.

JOOST VAN DREUNEN:

People have been questioning the continuity and the the extent of the console that it’s going to be around, circumscribe, for much longer, the death of the console is sort of the new year is not a new conversation.

MICHAEL PACHTER:

“I just think sales get cut in half next cycle not to zero. And then they get cut in half again, the next cycle, and they get cut in half again, the next cycle. “

JOOST VAN DREUNEN:

“It’s a little bit the equivalent of have a really, really expensive headphones are really, really, really high definition televisions and you’re like, there’s always going to be an audience for that. And then there’s everybody else.”

SIMONE DEL ROSARIO:

The reasons behind the job cuts vary. This year’s gaming layoffs are on track to far outpace last year’s. But it doesn’t appear to be the canary in the coalmine for an industry that has seen substantial growth in recent years.

JOOST VAN DREUNEN:

“I would expect all these companies in 18 months to be rehiring a lot of the people that just laid off.