With layoffs and continuing poor AAA game sales, it’s worth seeing how this happens and why gaming feels detached from its players.
I’ve been writing about layoffs and the dangers of big-budget AAA games for a decade by this point. It was and is very clear that these huge games just don’t work at scale, but things have really changed following the Xbox 360 era.
Gaming Isn’t Really Paid For By Gamers
The frequent argument I see online is that gaming budgets don’t matter. If the game is good, people will buy it. That’s how business works.
It’s a cogent argument, but only if that’s how the games industry operated. The reality is that a gamer spending their hard-earned cash on a game is only the return on the investment, not really linked to the initial investment itself.
To explain, game budgets are important for two reasons: the first is how much is spent, and the second, and the often overlooked reason, is where that investment comes from.
Most gamers assume that their money goes into a game publisher’s vault filled with money, where execs dive into mountains of gold coins and then use that money to develop new games.
The reality is that as of a decade or so ago, publishers have looked more and more for outside investment. That means the investors for new games aren’t gamers but external and often invisible organizations, and sometimes wealthy individuals, who are paying the bill.
These external investors act as the money layer for publishers and often have close to zero public visibility or accountability. A good example of this is what happened to Embracer Group when a major investor pulled out, causing mass layoffs.
This kind of thing has been happening globally, too, with Japan and Asia being equally affected. The main difference is that in Asia, these layoffs have been kept mostly secret, except for a few instances, as games industry analyst Serkan Toto explains.
“Contrary to popular belief, the wave has spilled over to Asia, too. The layoff data regularly mentioned in media in the West only reflects a small portion of people affected in places like Japan, Korea, and China. In Japan, where labor laws strongly protect employees, some studios try to push staff out via driving people to retirement or straight-up bullying them, taking on fewer college graduates or silently conducting hiring freezes.”
This is also where the size of the budget becomes an issue. During the PlayStation 2 era, most game publishers tended to be more self-financed, with a more direct relationship to their customers regarding where the money came from as the budgets were lower. Once the madness of AAA started in the following Xbox 360 era, the budgets ballooned, and the disconnect with customers began.
Much of the stored capital from the previous PlayStation 2 era paid for this AAA folly, but it still resulted in the closure of hundreds of game studios.
When I started writing about this problem a decade ago, I hoped publishers would return to being more financially sensible and realize that AAA was not viable long-term. Instead, they doubled down on AAA games but had spent most of their stored capital by that point, resulting in having to look for more outside investment.
Layoffs, Layoffs, And Even More Layoffs
Now that these big, decade-long game development bets have not paid off, these external investors understandably want their money back. As a result, publishers have used money that would normally go to pay developers making their games to pay off these investors.
The result is that development studios either go bankrupt or lay off many people to survive, while publishers hoard the remaining cash and try to downsize, although to a much more limited degree.
This is why, to date, we’ve seen around 25,000 layoffs between 2023 and 2024, and the situation is likely to get much worse. Moreover, those are the only layoffs we know about, and the number is likely much higher. In Japan, this kind of thing has been handled far more quietly, but it is also happening on a similarly large scale.
To give that 25,000 figure some context, the Xbox 360-era studio closures measured in the hundreds. Most decent-sized studios back then were about 100-150 people strong. That means these new layoffs are equivalent to thousands of studios going under. What we are now seeing is an order of magnitude greater than what happened the last time AAA games failed, and that’s where the real danger lies in the long term.
The other major issue is that many of these layoffs have not been carefully planned. Instead, those with the highest salaries have tended to be cut first. These salaries are high because those people are the most capable and experienced. As Swen Vincke, the head of Larian Studios, pointed out, this loss of institutional knowledge is not a trivial matter, especially as it is now industry-wide.
Indie Games Aren’t Even Indie
Some have argued that indie games are a self-sustainable fallback from the aftermath of AAA, but unfortunately, that’s not really the case.
A lot of modern indie games are not independently funded, which means they still need outside investment. As external investors are widely withdrawing from gaming worldwide, it again falls to publishers to fund these games.
These being the same publishers that got us into this AAA mess in the first place and are now trying to survive by hoarding what cash they have left.
Yes, there are games made by one or two people and then get self-published. These do exist, but there aren’t enough of them to sustain gaming on their own.
Our current situation has also been fallaciously equated to the massive games industry crash of the 80s, and gaming back then rebounded just fine. The difference at that time was that most games cost very little to make, so a rebound was possible.
Gaming is a far more complex landscape now, and a “small” game still often costs an awful lot more to make, so the rebound isn’t quite so straightforward this time around.
Gaming Needs More Diversity, Just Not In The Way You Think
With all these layoffs and the hollowing out of game development teams across the world, the future of gaming looks bleak.
To understand why in more detail, I found a very good analogy in The Expanse, which I have been re-watching recently. In one episode, after the partial destruction of an agricultural station on Ganymede, a character specializing in botany tries to explain the situation.
Nature has a great deal of biodiversity and a multitude of pathways for a complex system to thrive. If some of those pathways fail, the rest take up the slack. This works because nature is an open, vast, complex system with a great deal of pathway redundancy.
However, this partially destroyed agricultural station is a far simpler complex system with a vastly reduced number of redundant pathways. When these pathways fail, there aren’t enough to take up the slack, and then those pathways fail as well, resulting in a complete ecological collapse.
The games industry is in a similar state. In broader economic terms, it’s a relatively small system, and its structure lacks many built-in redundancies.
Massive developer layoffs are the first pathway to fail, and now publishers are feeling the strain and hoarding resources to survive whatever comes next. However, without developers making games to generate revenue for said publishers, this pathway will also fail in due course.
Put simply, instead of spending $100 million on one game, we need to go back to spending $10 million on 10 games. That way, you have a better chance of making your money back. You also learn 10 times the amount about the market that way, so it’s not all about straight profit, either.
Demand and revenue generation are still huge in gaming, but publishers need to be more diverse in the size and numbers of bets they place.
Gaming will always be a hit business, so instead of relying on one over-stressed pathway, diversify and build more. That way, when one or more pathways fail, the others can take up the slack.
This setup worked during the PlayStation 2 era and can work again, especially since the Switch is driving much of the mid-tier game development now.
This also ties into my theory that games are a kind of cognitive firmware. There’s no such thing as a game for everyone, only for each and every one. This was exemplified by the variety of the PlayStation 2’s software library, and that your collection of games is likely entirely different from mine.
In short, spending less individually on games and making more cheaper functionally diverse games is the way out of this mess.
A Changing Of The Guard
One of the other reasons for the disconnect with the gaming audience at the publisher level, apart from where the investment comes from, is that a lot of execs at big publishers just don’t play or like games.
That means they don’t understand what they are selling, which is equivalent to someone who can’t read working in a literary publisher.
Publishers really need to be reorganized and restructured. What’s required are smaller, leaner, and more agile publishers that focus on the mid-tier budgets that were the mainstay of the PlayStation 2 era, before the AAA nightmare derailed everything.
Not to mention that one of the main reasons for cost overruns in the current publishing model is that executives at publishers ask for top-down changes to games they haven’t played, which upends the production process and creates costly delays and ballooning budgets.
Smaller publishers staffed by people who actually play games and who are focused more on distribution and backend submission support, such as certification testing and localization, would negate many of these costly top-down decisions.
The good news is that we are beginning to see more of these types of publishers pop up. However, what happens next is really up to the current publishers causing all these layoffs in development.
If they finally abandon this clearly unsustainable AAA madness and return to something that has already been proven to work, we may have a chance at salvaging gaming. Otherwise, the future of the medium is most certainly a precarious one.
Follow me on X, Facebook and YouTube. I also manage Mecha Damashii and am currently featured in the Giant Robots exhibition currently touring Japan.
