The coming recession will hit the industry hard | Opinion

There's a very solid chance that we're looking down the barrel of a global recession in the coming months -- and by most forecasts it's set to be the kind that seriously impacts on people's livelihoods and consequently on consumer spending. A lethal brew of soaring inflation, asset price bubbles and geopolitical uncertainty is being set loose upon economies that still haven't full digested the impacts of the pandemic, and that's going to cause one hell of a hangover in the morning.

As Brendan Sinclair noted last week, the games business shouldn't be expecting any kind of immunity from the effects of such a recession. For many years, conventional wisdom within the industry stated that video games were a recession-proof sector; then 2008 rolled around and delivered a gut-punch to many major industry players, and now the conventional wisdom has shifted to a widespread acceptance that such halcyon days of casually posting quarterly growth figures all the way through even the toughest of economic downturns are long behind us.

Certainly, all the signs at the moment suggest that the industry isn't in for a soft landing in the coming months and years. Since most of the Western world tacitly agreed to pretend that the pandemic had ended, we've seen seven straight months of declining year-on-year revenues for games in the USA -- which feels portentous given the alarm bells ringing in other sections of the economy.

"Games which rely on a smaller group of people pumping a lot of money into them are going to have a very, very rough time in a recession"

How bad will things actually get, though? And is there really nothing left of the industry's once brash outlook on economic hardship? To answer these questions, we first have to ask whether the games business ever truly was "recession-proof"; and if so, whether it truly has lost that immunity in the past decade or so, and for what reasons. Only on that basis can we start to feel out the shape of how the next couple of years are going to look -- just how badly a serious global recession will hit the industry, and perhaps most worryingly, whether there's a danger that economic downturn could interact with some of the other headwinds the industry is facing, like the semiconductor shortage and the increasingly chilly relationship between China and the West.

So first and foremost; was the industry ever really "recession-proof"?

There were really two factors behind this perception, which was widespread in the 1990s and 2000s. The first and most important was the meteoric growth that the gaming audience was undergoing. Gaming started the 1990s as the preserve of small boys and a handful of adult hobbyists; it was something you grew out of as a teenager, or at least stopped trying to talk about to "normal" people. By the 2000s, it was embraced widely by teenagers and young adults, and growing perilously close to actually being considered mainstream and cool; as the 2000s rolled on, the demographic for games become both older and more female, while new markets around the world also opened up.

This underlying growth -- driven in part by demographic change (existing gamers got older and didn't stop playing) and in part by industry innovation creating games with wider appeal -- was so powerful that it could counterbalance the negative impacts on consumer spending seen in most recessions. Existing consumers might be tightening their belts; but with new consumers entering the market all the time, growth could continue throughout the recession, albeit at a slower pace than it might have in a healthy economy.

That was fantastic, of course, but it means that "recession-proof" was a misnomer; it's not that the games business was immune to the effects of recession, but rather that it was growing so fast that even a recession couldn't offset enough growth to push it into negative figures. By the time the financial crisis struck in 2008, though, this underlying growth had slowed -- especially for the more "core" gaming market, where demographic expansion had essentially been reduced to the point of just being a steady tick upwards from the ageing of existing consumers.

Games had reached saturation among easily addressable markets, and this was exacerbated in the 2008 recession by the fact that innovation aimed at pulling in new demographics was mostly happening away from the industry's big players. New consumers were instead being pulled in by online and mobile games, especially in the nascent smartphone market -- which was woefully mishandled by most major publishers, an error they paid for down then line when it cost them billions of dollars to acquire successful mobile game companies that hadn't even existed a few short years previously.

That problem hasn't gone away; the industry is still growing, but the core markets that most major publishers address are not seeing anything like the pace of growth that would allow them to shrug off the effects of recession. In fact, the opposite may be true -- some of the growth we've seen in recent years might actually make the industry more vulnerable to recession. Many companies, frustrated by the apparent difficulty of further expanding their addressable audiences, have instead become proficient at deploying business models that squeeze more money out of existing customers -- but this makes them by far the most vulnerable businesses in the industry to any economic shock that forces consumers to seriously consider cutting back their spending.

That brings us to the second factor which helped the industry weather prior recessions in better shape than many other comparable business sectors, namely value for money. This was actually a factor in cushioning the blow of 2008 as well, having only really become a major factor as the gaming audience got older. The median gamer is now someone in their mid to late thirties, by most measures, which means that expenditure on video games is something that they're considering as part of a broader household budget.

"The next recession could be the first one that the games industry has truly been fully exposed to, and if so, that's going to be a hell of a rough ride"

Perhaps counter-intuitively, this is something that works in the medium's favour, because video games compare pretty well to most other discretionary items in terms of value for money. Depending on the game, a $50 to $60 expenditure can easily net you a hundred hours or more of entertainment, effectively lasting for weeks or months. Compared to other leisure expenditures -- travel, going out, concerts, cinema tickets, etc. -- the cost per hour of gaming entertainment is easy to justify; the only other thing that really comes near is a streaming service subscription (or a good book).

That factor is still working in gaming's favour now, and it should help the industry weather the upcoming recession... But there are caveats. Firstly, the value for money argument falls apart if someone is a "whale", or honestly even a markedly smaller sea mammal -- as I mentioned above, games which rely on a smaller group of people pumping a lot of money into them on a monthly basis are going to have a very, very rough time in a recession.

Secondly, a lot will depend on how the industry responds to the rampant inflation being seen around the world, which is a discussion that nobody really wants to have just yet, but it's going to have to happen sooner or later. Video games have, in real terms, been getting cheaper for years; even the $10 price hike that AAA games saw at the outset of the current generation doesn't come close to matching the inflation that's occurred since the last time prices went up, way back at the advent of the PS3, meaning that video game software remains cheaper than almost any time in the past. With inflation running high and the industry's costs rising to match, there's going to be significant economic pressure to hike the prices of both hardware and software in response.

That's a tough call, though, because games -- despite their strong value for money case -- remain incredibly price sensitive, and the closer they come to that psychologically challenging $100 mark, the tougher it's going to be to make a case for price rises.

In no small part that's because of the demographic distribution of different parts of the audience. For all that the gaming audience has grown older, the most engaged parts of that audience -- by which I mean 'by far the loudest ones online' -- tend to be younger male consumers, and in most countries that cohort has seen their earnings stagnate at best, meaning that it's now falling dramatically in real terms. A price rise will be hard to sell to this cohort. It may also be unavoidable. How it's handled will be vital to how the industry comes through the next couple of years; there's definitely a case to be made for eating some losses until the broader economy starts to recover, waiting to raise prices when consumers are actually better-placed to afford them.

So the industry never really was "recession-proof", and the one remaining piece of armour it may have against economic downturns -- the value for money offered by its products -- could be undermined both by its own recent business practices and by the problem of inflation. None of that sounds great -- but there's also the question of interactions between the recession and other effects.

On the plus side, a recession may actually help to ease the semiconductor shortage issues we're currently facing by tamping down demand a little bit, but there's a (hopefully small) risk that the problem will shift to the other side of the equation -- with PS5s and Series X' finally available on shelves, only to gather dust and stuff up the supply channel because nobody has any money to buy them.

The China situation, meanwhile, remains a wildcard, but certainly companies should not be hoping for major revenue growth from any operations in China in the coming years -- and any company with significant business interests there should be steeled for the market to become unavailable to them at a moment's notice.

A bigger factor, arguably, is simply the fact that this recession comes on the heels of a pandemic -- meaning that consumers have another factor to consider as they tighten their belts. It's hard to measure or operationalise in an economic model, but the fact that that they have been cooped up in their homes with only digital entertainment (and sourdough bread making) to keep them company for a couple of years is a real consideration that is going to change the decisions people make. A lot of consumers will decide to prioritise money for going out or travelling in their budgets simply because they miss those things after years stuck at home -- which could be a huge blow to the industry's usual ability to survive household budget cuts.

Buckle up, in other words; the next recession could be the first one that the games industry has truly been fully exposed to, and if so, that's going to be a hell of a rough ride.