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As I attended the Gamescom and Devcom events in Germany this week, I saw so many countervailing trends that were both discouraging and optimistic.
Nvidia reported on Wednesday that gaming hardware revenues — for the graphics chips used in gaming computers — declined 33% in the quarter ended July 31, compared to a year ago and down 44% from the previous quarter. That’s a pretty big cliff to fall off, but it’s not surprising given the effects of the war in Ukraine, inflation, a steep drop in demand in China, and a global recession.
In an interview with me, Nvidia CEO Jensen Huang described the meltdown.
“On the one hand, the macro environment is a combination of all the things around the world that bring that about. It just kept piling on. Although each event, whether in Europe or Asia or the United States, is unrelated to any other, when you keep piling it on, before you know it there’s a breaking point to even the global economy. The macro environment has finally come home to roost,” Huang said.
Inflation concerns prompted Meta to raise the price of its Meta Quest 2 virtual reality headset by $100. And this week Sony also said that it was going to raise the price of the PlayStation 5 across a range of markets (though the U.S. price will be unchanged).
“Console gamers are used to a gradual decrease in hardware costs over the lifecycle of a console, but the unprecedented global economic environment has led Sony to increase the recommended retail price of both models of the PS5 across a wide number of sales territories globally with immediate effect,” said Piers Harding-Rolls, research director at Ampere Games, in an email.
According to Ampere Analysis data, by the end of June 2022, Sony had sold through 21 million PS5s worldwide compared to Microsoft’s Xbox Series consoles at 13.8 million. Sony said the increase in supply chain and distribution costs alongside the strong U.S. dollar forced the price increase.
All of these reports suggest that gaming revenues are going to be under severe pressure in the coming months as the price increases further chill consumer demand and developers face diminished revenues for their contributions in the gaming food chain.
Hypercasual games are taking a hit, based on pressure on advertising revenue.
“There are effects, of course, but generally it’s based on seasonality. The beauty of ad revenue in gaming, though, is that it’s always optimizable,” said Burak Vardal, cofounder of Zynga’s Rollic games, in an interview. “If you see a softness over a couple of days, it’s very easy to get out of that and create new systems behind your game. It’s based on (cost per mil, or ad rates) CPMs. It’s based on other companies paying for it, not individuals. The source of ad revenue is coming from the marketing spend from other companies, whereas in-app purchases come from individual spending. That’s the main difference. The trend differences in ad revenue are much lower than in other monetization systems.”
The good news
At the same time, we have heard some good news. So far, Microsoft is not matching the price increase and it will further press its advantage with the Xbox Game Pass subscription.
At Geoff Keighley’s Opening Night Live, we saw plenty of amazing games coming soon like the new title Everywhere from Leslie Benzie’s Build A Rocket Boy game studio. We also saw the long-awaited Dead Island 2 and Dune Awakening. And for this fall, Sony has a blockbuster game coming with God of War: Ragnarok. We’ll also get to play Gotham Knights, Quantic Dreams’ Under the Waves, Sonic Frontiers, Return to Monkey Island, Company of Heroes 3, Homeworld 3, and Call of Duty: Modern Warfare II. Early next year, Sony has its PlayStation VR 2 virtual reality headset coming.
If anything, it was the sheer mass of humanity at Gamescom — and the 2,500 or so developers at Devcom — that gave me so much faith in gaming’s future. While the show is smaller than the pre-pandemic event of 2019, a sea of gamers came out to show their support for gaming. I had forgotten what it was like to hear them roar with delight as their favorite games were announced.
And while it could be a delayed effect, we haven’t yet seen the weak economic environment crush the wave of investment and acquisitions in gaming that have created some amazing rewards for gaming entrepreneurs. Big gaming venture capital funds have a lot of dry powder to invest. While they will be more cautious going forward and support their existing startups more, funds such as Griffin Gaming Partners, Makers Fund, Galaxy Interactive, Hiro Capital, and others have all raised big rounds. That gives them the ability to invest, and so far they have been doing so based on first-half estimates of game investments and acquisitions per reports from Quantum Tech Partners, InvestGame, and Drake Star.
In our panel at Devcom on predictions for 2023, Xsolla’s investment head Justin Berenbaum said that gaming has been recession resistant in the past and will likely continue to be so. On the micro level, he expects that good gaming startups with strong and fun games will continue to get funding and thrive.
“All the projects we have underway are multi-year investments. They’re already on the path,” said Eddie Chan, chief strategy officer for Tencent Global Games, in an interview at Gamescom. “There’s not a lot of change. Fundamentally I don’t think anything about the game industry has changed, in the sense that–there’s a rising tide that’s going to lift all boats. Gaming is going to continue to grow. More people are going to play games. More people are going to engage with games. The overall industry and revenue trends are only going to continue to grow.”
Indeed, at times like this, games can be good for our mental state, said Stanley Pierre-Louis, CEO of the Entertainment Software Association, in a recent fireside chat. A total of 66% of Americans, or 215.5 million people, play video games, and attitudes toward games have gotten more positive during the pandemic, according to the ESA’s 2022 Essential Facts About the Video Game Industry study.
The report says that 89% of players say video games provide stress relief, while 88% say video games help improve cognitive skills. The survey found that 97% of all Americans (with the exception of some news commentators) now see the benefits of video games.
“If you look at Hollywood movies and upcoming games, most of them are rather dark right now,” said Piotr Babieno, CEO of Polish game developer , maker of Layers of Fear, in an interview with GamesBeat. “It’s nothing strange for us, nothing surprising. Historically, when there are wars, when there are crises, horror does well. As human beings we want to prepare ourselves for things we don’t know. We turn to horror movies, horror novels, horror games.”
We have so much more to analyze among the economic tea leaves and the countervailing trends favoring gaming, and we’ll dive deep into that at our GamesBeat Summit Next 2022 event coming on October 25-26 in San Francisco. See you there.