Despite the release of numerous highly anticipated games last year, the game industry as a whole struggled to achieve significant growth.

In this blog post, we'll delve into the underlying factors contributing to this stagnation, examining issues ranging from market saturation and competition to changing consumer behaviors and industry practices. By understanding these complexities, we can gain valuable insights into the dynamics shaping the contemporary gaming landscape and explore potential pathways for future growth and development.

Big thanks go to Newzoo for their reports and eagerness to join the Deconstructor of Fun podcast and discuss their findings in detail.

Let’s start with the positive: the market looks to have bottomed out and is recovering at a projected growth rate of just 1.3%. The problem is that at the end of 2024, the market is still noticeably smaller than it was three years ago in 2021. This is partly the reason for the layoffs as the companies are rightsizing to the market of today.

*The market numbers are also not inflation adjusted. The growth rate should be at least above the inflation for the industry not to be shrinking. The inflation in EU and US is above 3% today.*
source: Newzoo reports

Despite the unprecedented slate of blockbuster titles, console games grew at a slower pace than inflation. PC games grew driven by dominating live service franchises and a slew of innovative AA titles. Mobile continued to search for growth in the post-IDFA world.
source: Newzoo reports

The miserable growth rate doesn’t make sense when considering all the fantastic titles that came out last year. Diablos, EAFC, Madden, Hogwarts Legacy, Baldurs Gate 3, Zelda Tears of the Kingdom… 2023 seemed like the year for consoles with all those blockbusters launching back-to-back. And originally Newzoo reported that the Console market would grow by 7%. Yet this did not materialize.

What happened was that selling and playing all of the blockbuster games of 2023 hurt live service games and stalled the growth of subscription services. In fact, according to Newzoo, hours played on the console went down last year.

The console business is not growing in terms of audience and time spent on platforms. The premium games are only getting bigger, the subscription catalogs are getting beefier all the while at the same time games as a service (GaaS) need more engagement from players.

This doesn’t mean that the console market is capped. However, there is serious economic and time investment pressure on the current audience. With hardware and software being so expensive, the console expansion is not going to turn on until the economy is growing again and people have more disposable income.

This is exactly what we warned about last year in our Console Gaming Triple Threat analysis. We just never thought that the impact would be so quickly visible in the data.

Please listen to the full conversation with Newzoo’s Lead Analayst Tom Wijman about the state of the PC and Console market on YouTube, Spotify, or Apple Podcast.

2024 will be a lean year for gaming companies

Executives, according to Newzoo, are expecting there to be even more releases this year than there were last year. At the same time, they are, perhaps for the first time in history, expecting development budgets to decrease. All while the investment environment is set to stay at the current ‘challenging’ level.
source: Newzoo reports

The engagement and spending boom ended in 2022 and was replaced by high inflation, high-interest rates, a careful investment environment, layoffs, and wars. The macroeconomic factors exposed that games are not recession-proof anymore.

In a more practical sense, there’s a clear correlation between the decrease in disposable income and spending on games. And there’s a correlation between inflation and decreased spending on microtransactions inside games.

How high interest rates affect the game industry:

limited consumer demand for games
fewer new games in development
fewer investments into new studios
fewer exits through mergers and acquisitions
focus on profitability instead of growth, which leads to layoffs

Given all the negative impacts of high-interest rates, most industries, gaming included, pray for interest rates to go down. Yet I don’t believe that will happen in 2024. The central banks, whose mission is to keep inflation down with the help of interest rates, have clearly stated that even if inflation goes down, they will continue to hold higher interest rates. Just to make sure the inflation doesn’t roar back up.

While there are many other macroeconomic factors affecting the industry at large, the effect of interest rates is most direct and undeniable. As long as interest rates remain high, austerity and profitability will supersede growth and expansion.

On the bright side, the lack of investments in new content will lead to an unanswered demand in a couple of years when the market turns around once again.

The Outlook for Subscription Services Looks Grim

Subscription services are economies of scale. What that means is that they rely on the growth of subscribers to be not only successful but to be viable.

Think of it this way: The more subscribers a service has, the cheaper the content becomes to produce because you’re dividing the cost of content by the subscribers. When your subscriber base grows, you can push for better and more frequent content, which creates a snowball effect as new and better content attracts new subscribers and retains existing ones.

In regards of this economic principle, it’s worrisome, to say the least, that it has been two years since Microsoft officially reported Xbox Game Pass subscriber numbers. Xbox Game Pass should be in the early exponential scaling phase. Yet I’d bet my PS5 that they are not doing so because of the speed of growth of the subscriber base. I think it’s exactly the opposite that pushed them to not disclose this essential KPI anymore.

According to Newzoo, the price increases to the subscription tiers have stabilized the revenue numbers. But the price hikes are also potentially masking the problem, which is the subscriber numbers.

So why is Game Pass facing such turbulence so early in the lifecycle? There are three fundamental issues at play:

Lack of exclusive must-play games: The marquee titles, such as Starfield and Halo Infinite, that were expected to be the equivalent of House of Cards (Netflix) and Game of Thrones (HBO) for the service failed to deliver the desired impact.
Lack of time: How many games do you play per month? One game takes about 50 hours. Most of us play just a couple of games every year. And a lot of us revert back to the few multiplayer GaaS franchises (Fortnite, EAFC, Madden…) after we’ve played through the latest Metacritic hit.
Lack of accessibility: Console games are nearly impossible to play on the go and in short chunks. They also require players’ full attention and expensive hardware. The lack of accessibility limits consoles to a limited demographic of around 200M aging gamers, whom the publishers attempt to win over with ever higher production (expensive) titles.

The outlook for game subscription services is grim. And that is a good thing for the industry!

Game Pass is easily the most aggressive bundle in the business because it gives away top-tier premium content on launch day. There is no way that the cost of the subscription recoups the revenue that its component titles would have otherwise earned. This would be unthinkable for virtually any publisher.

Not only does this give Microsoft incredible competitive leverage, it harms the video game format as a whole.

The subscription model, and Game Pass in particular, lowers consumer price expectations and drives the devaluation of gaming content in a cannibalistic race to the bottom. Frontline premium games will suffer as they begin to seem expensive in comparison to what is available in bundles. The sunk cost will weigh on every purchase decision outside of the ecosystem.

Why pay an additional $70 to gamble on a new IP when you already have access to 3-5 new games in the same genre? For the same reasons, this will overload bundle subscribers with a ton of content and compete for attention with all other business models.

Content overload combined with ecosystem lock-in would have pernicious spillover effects on industry-wide engagement – less playtime per game, shrinking game communities, and weaker attachments to IP.

Premium Games with Microtransactions are Optimal for Most

*Buying a game and continuing to pay for added content and cosmetics via microtransaction will be the optimal solution for most PC & console titles.*
source: Newzoo reports

The success of premium games was record-breaking in 2023. The hits kept on rolling on consoles all while PC players were treated with Steam-hits.

There were two factors enabled this record year for premium games:

The lockdown-infused hardware bottlenecks were cleared, allowing us to buy those coveted PS5s and high-end PCs.
Transitioning to remote negatively impacted the productivity of most game studios causing delays. That is why many titles ended up launching in 2023 rather than earlier when they were expected.

The success of so many premium titles failed to grow the market as a whole, due to cannibalization. Players seemed to have canceled their subscriptions or time spent playing their favored live-operated titles to play the latest blockbuster.

Nevertheless, the success of those premium titles caused large publishers to reconsider their strategies.

For the past years, large AAA publishers have been shifting their strategy to produce Games-as-a-Service (GaaS). The promise of titles like Fortnite, Bungie, and World of Tanks is that they produce revenue every month, unlike premium titles that produce most of their revenue during a couple of launch weeks.

The downside of GaaS is that there are enormous risks. They cost the same as a AAA title, they don’t generate any launch week sales, and their costs only ramp up post-launch as the gigantic team creates content to retain players.

With the limited market getting ever more competitive for user’s time and money, in addition to the entrenched position of established titles, the allure of GaaS is rapidly evaporating.

As a result, we are seeing publishers leaning into a hybrid model. They are pivoting their in-development GaaS titles into premium games with microtransactions. This way they hope to reach immediate payback on the investment with a combination of a good game with good marketing and a fair price. And they expect to continue generating revenue from these titles through microtransactions that are incentivized by the social nature of these games.

Will this be a winning strategy? We don’t know yet. While games like EA FC are the poster boys of this strategy, we should keep in mind that titles like Battlefield Star Wars created controversy with their microtransactions on a paid game.

One thing is clear though: The market is very saturated with live games and the console and PC audience is not growing at a pace to support many new live titles. For publishers to put all their eggs into multiple GaaS titles seems like a very dangerous proposition.

The Path Forward

In summary, the console gaming industry is facing a complex landscape characterized by a sluggish market recovery, cannibalization of games-as-a-service (GaaS) titles by blockbuster releases, and economic pressures such as high inflation and interest rates.

Despite the release of highly anticipated titles in 2023, the market has not experienced the growth initially projected. This stagnation has led to layoffs and a shift in strategy among gaming companies, with a focus on profitability over expansion.

Not to mention subscription services, once seen as a promising model for growth, are facing challenges due to stagnant subscriber numbers and pricing strategies.

However, amidst these challenges, there is optimism for the future as companies navigate the current economic climate and explore new strategies, such as hybrid models combining premium games with microtransactions. As the industry adapts to these changes, it remains to be seen how emerging trends such as AI adoption will further shape the future of console gaming.