Why Global Stock Markets Collapsed, and What Does It Mean for the Gaming Industry?
Written by Michail Katkoff, founder of Deconstructor of Fun and a games industry veteran with 15 years of experience in building, operating, and scaling games and game companies.
He’s also something of a protein smoothie sommelier. Now you know what’s the best way to “grab a drink” with this lad…
Why are we talking about the Digital Markets Act?
Last week global stock markets collapsed, leading many to question the root causes and implications for various industries, including gaming. It is true that the stock market and economic performance are not always aligned. Yet significant changes in stock prices have effect on our industry, which is why I find it important to understand why these changes occur.
To understand the current situation, we delve into a confluence of factors that have shaken investor confidence and stoked fears of a looming recession. More importantly, the article discusses how a looming recession could influence the gaming industry.
The Spark That Ignited the Sell-Off
Last week two pivotal events recently jolted the markets:
Rising Unemployment and Sluggish Job Creation in the US: A report showing an increase in unemployment (+16% since January) and a disappointingly low number of new jobs created was a major red flag for investors. This data hinted that the US economy is losing steam, which naturally led to concerns about future consumer spending and overall economic health.
The Federal Reserve’s Decision Not to Cut Rates: Many had hoped that the Federal Reserve (The U.S. Central Bank) would cut interest rates to stimulate the economy. The Fed's decision to keep rates unchanged shows that inflation is still a top priority. Rather than aiming to boost short-term economic growth, they’re concentrating on controlling inflation, which has sparked concerns about a possible recession.
Simultaneously with the actions in the U.S., the Japanese market lost around a fifth of its value signaling its largest drop in the Nikkei index (Japanese stock exchange) since 1987.
This was driven by a sell-off as investors grappled with dropping value of U.S. Dollar against the Japanese Yen (Japanese goods became more expensive for U.S. companies) and a faltering global economy (demand outlook for Japanese exports weakened). Although the Nikkei has partly recovered from the drop, the episode underscores the fragility of global markets, particularly those heavily reliant on U.S. demand.
The Tech Sector’s Wobble Due to the (potential) AI Bubble
Adding to the market’s woes is a noticeable slowdown in the tech sector, compounded by growing fears that the AI boom may be a bubble. With hundreds of billions invested into AI, investors are expecting the revenues to grow exponentially. This hasn’t happened. At least not yet.
The investments into AI are in hundreds of billions. Yet the revenue generated from AI can be counted in tens of billions. The widening of the gap between revenue and investments is worrisome. Chart: How Much Are Companies Investing in AI? | Statista
The initial frenzy around AI-driven companies is cooling, and with it, the once sky-high valuations. This sector’s decline is particularly troubling because tech has been a major growth driver in recent years.
The “Magnificent Seven” stocks (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla), account for a third of the US stock exchange value (S&P 500) compared to a decade ago when the top 7 stocks accounted only for 14%. Given that these 7 tech stocks have all benefitted significantly from the AI speculation their decline can bring down the whole market as much as their upswing has boosted the stock market.
The combination of a sluggish economy and waning confidence in tech could spell trouble for industries that rely on innovation and consumer spending.
read more: What happened to the artificial intelligence revolution? (the Economist)
The Root Causes: Inflation, Interest Rates, and Economic Fundamentals
To understand why these events are having such a profound impact, we need to look at the underlying issues:
Inflation: The inflation problem we’re facing today has deep roots in the pandemic era. Massive money printing during lockdowns, coupled with ongoing supply chain disruptions and global conflicts, has led to persistent inflation.
Rising Interest Rates: To combat this inflation, central banks have raised interest rates, making borrowing more expensive for both companies and consumers. This has dampened economic activity, as businesses cut back on investments and consumers reduce spending.
The situation is eerily reminiscent of the 1970s, often referred to as the “lost decade”, marked by high inflation, high unemployment, and slow economic growth—a trifecta known as stagflation.
During my presentation in Istanbul back in March, I drew parallels between the 1970s and our current economic environment. With ongoing wars and hindsight questionable economic decisions made during the pandemic, we, unfortunately, have all the ingredients to enter another lost decade.
Though this can all be avoided as the economies of today are more flexible and the shocks caused by global conflicts haven’t had the same magnitude effects on commodity prices as in the 70s. The de-escalation of armed conflicts in the Middle East and East Europe would have a profound effect on avoiding the most negative scenario. Not to mention all the human tragedy that the wars keep causing.
Implications for the Gaming Industry - Survive till 2030
So, what does all of this mean for the gaming industry? Unfortunately, the outlook isn’t rosy:
Games Are No Longer Recession-Proof: Unlike apps, that can offer essential services, games are a discretionary expense. As disposable income declines, so does spending on entertainment, including games. The industry, which once seemed impervious to economic downturns, is now feeling the pinch.
According to Data.ai, the decline in disposable income correlated with teh decline in in-app purchases in games all while spending in apps continued. During the same timeframe, according to Newzoo, the release of award winning AAA hit games failed to grow console market.
Stagnation in Market Growth: With reduced consumer spending, the gaming market is unlikely to grow in the near term. This stagnation will have a ripple effect, leading to fewer opportunities for new game launches, slower innovation, and a more cautious approach to investment.
Investment and Acquisitions on Hold: High interest rates and a stagnant market mean that investors will be more hesitant to fund new projects or make acquisitions. This could slow the pace of industry consolidation and make it harder for startups to secure the funding they need to grow.
Venture Capital funding continues with smaller check sizes at early stages. Late funding has largely stopped, which means that companies have search for alternative funding sources to grow. Source: Konvoy Ventures
And as if all this wasn’t enough, even Bitcoin—once touted as a safe haven from traditional financial turmoil—saw its value plummet in parallel with the stock market. The message is clear: there’s no escape from the economic reality.
Conclusion: A Recipe for Catastrophe?
Objectively speaking, all the ingredients for an economic catastrophe are present: high inflation, rising unemployment, stagnant growth, and geopolitical instability.
For the gaming industry, this means continuing facing a harsher environment than many of us have experienced before. Companies will need to adapt quickly, finding new ways to engage players, optimize costs, and navigate a market that’s unlikely to return to its former growth rate anytime soon.
Only time will tell how deep and long the impact will be. The next few years will continue to be challenging, and those who can weather the long Winter will be the ones who’ve prepared for the long game.
