Lower-cost regions are key to the industry's rebuilding | Opinion

The enormous wave of layoffs, studio closures, and corporate consolidations which hit the games industry last year is by no means over – but it does appear to have crested, at least, with the pace of such announcements starting to slow down as we've entered the second quarter of this 2024.

The knife will still fall in some painful places before this is over, but at last we're also starting to see early signs of recovery – green shoots amidst the rubble, with new studios being formed and some established ones cautiously starting to expand again.

The scale of the downturn this time around was unprecedented – not least because the industry overall is so much larger than in previous cycles, so there are more jobs to be lost in the first place – but the downturn itself was a familiar story. Companies over-extended in an economic environment where capital was easy to come by and made some bad bets on trends that didn't turn out to have the appeal or longevity they hoped; a shift in economic climate then dampened risk appetite and companies that had voraciously pursued growth for years suddenly found themselves obsessed with cost-cutting instead. This cycle has repeated throughout the industry's history at various intervals and at different scales.

It is a cycle, though, and the wheel that turns downwards eventually reaches its nadir and begins to move upwards again. It's a little too early to proclaim that we've bottomed out, but at some point fairly soon the industry will start the process of rebuilding the capacity it has just lost; hiring will outpace redundancies, and studio openings will become more commonplace than studio closures.

The big question, then, isn't whether the jobs that went away will come back – they will – but where and in what form they'll come back. The capacity the industry will rebuild will have a different focus and form to the capacity it tore down over the past year and a half. Crucially, it may also have a different location.

"When the wheel turns back around from contraction to expansion, they'll be able to control costs by building up their new capacity in cheaper places than those in which they previously operated"

To that last point, keep an eye on the trickle of announcements of new studio openings and expansions that we've started to see coming through. Just this week, Amazon announced that it's opening a new studio in Bucharest. Larian, high off the extraordinary success of Baldur's Gate 3, is opening one in Warsaw.

The depth of game development talent in Eastern Europe is unquestionable – the era when game companies in that region were almost exclusively working as outsourcing houses for major studios in North America or Western Europe is long gone – but it's also undeniable that the cost of operating a studio in those regions is much cheaper than in traditional game development heartlands like the West Coast of America or the South of England.

As the industry begins to rebuild its lost capacity, that cost calculation is going to be a tough one to avoid. At the same time that the games business was carrying out mass layoffs and closures, inflation in high cost of living areas was running at its highest level in a generation, and salaries in those areas have gone up significantly in response.

Game development is incredibly labour intensive, requiring a lot of people with a wide range of advanced technical and creative skills; the cost of labour is one of the most defining aspects of the overall cost of creating a game. If you can successfully operate a studio somewhere like Eastern Europe or South-East Asia rather than in Los Angeles or London, you can bring down development costs significantly – at least in theory.

That cost gap has always existed, of course, and publishers have been experimenting with opening studios in less expensive regions for decades – but in the current climate, the calculus has shifted quite resoundingly in that direction.

That's not just because costs in expensive regions have soared, far outpacing wage growth in less expensive regions; it's also because the skilled labour base with the technical and artistic skills required to build games has improved significantly in many cheaper regions. In many places, especially in Eastern Europe, there's also now a base of skilled workers with significant game development experience, which was always the key thing that was lacking in these regions in the past; there were tons of skilled young people but few who had the kind of experience of development that's required to ensure that projects run smoothly, and relatively easy to find in workforces in those traditional game development heartlands.

The conclusion a lot of companies are going to reach is the same; when the wheel turns back around from contraction to expansion, they'll be able to control costs by building up their new capacity in cheaper places than those in which they previously operated.

However, the question of whether that new capacity will really be able to get up to speed quickly and effectively remains a thorny one. There are certainly more experienced staff in these regions than in the past, but there's still a major gap – and that's problematic when you're trying to maximise the efficiency of your new development resources.

The advantage of experienced staff is that they've made mistakes, and watched others make mistakes, and know how to avoid those mistakes in future; that's experience in a nutshell, and a studio lacking that experience will probably make a ton of costly, time-consuming mistakes that could have been avoided otherwise.

Moreover, many of the staff available in less costly regions, while very highly skilled, are skilled in ways that may look similar on paper to what staff in an established developer would be like, but are very different in practice. For example, there is a new wealth of game development talent in India, but it's almost exclusively focused on mobile game development, and even at that tends to be focused on creating games for lower-spec devices – a valuable and worthwhile skillset, but not one that's easily parlayed into developing for high-end consoles or PCs.

"The games industry will build up capacity again in the next year or two, but a large proportion of that will be in cheaper locations"

What has tended to happen in the past is that companies establish studios in cheaper regions using less experienced staff, while the experienced staff in more expensive regions find funding and establish their own independent studios; ultimately, many of the studios in cheaper regions simply end up functioning as outsourcing providers for those experienced developers, who have been bought up by publishers on the upturn of the cycle. It's generally been a fairly wasteful way to reach a straightforward outcome – but there's a growing sense that things could be different this time, as regions like Eastern Europe and (for mobile titles at least) South and South-East Asia now have some homegrown experienced talent available.

What's more, rising living standards in many of those places – combined with many people in expensive regions in the West feeling increasingly priced out of a decent standard of living – could make it appealing for experienced developers from western countries to move there and work for these new studios. That's something that has tended to be very rare in the past, with developers generally only moving to such studios when they were taking on senior management roles, but the push and pull factors for people who have been working in extremely high cost-of-living areas are markedly different this time around, and a kind of "reverse brain drain" is arguably on the cards, especially for younger and more mobile staff.

In the short- to mid-term, at least, the outcome is clear; the games industry is going to start to seriously build up capacity again at some point in the next year or two, but a large proportion of that capacity is going to be located in cheaper locations than previously.

What's less clear this time around is what the fate of those new studios in cheaper regions will be; more than any point in the past, there's reason to believe that they could thrive and even start to attract experienced talent from other regions.

For those affected by the industry layoffs, however, this just introduces another thorny issue to grapple with; as hiring begins to ramp back up in earnest, many people may have to face tough questions about their willingness to move to lower-cost regions to continue their careers.