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The Gaming Industry Going Into 2018

Posted by on January 4, 2018.

Is the Game Industry Today Mirroring the Landscape of the 1983 Crash?

Given the industry’s early years, the continued strengthening of the economics of video games has enjoyed phenomenal longevity since its last recession. With the industry having survived two severe crashes in quick succession – in 1977 and then in 1983 – the fact that gaming has continued to grow in consumer interest and profitability for thirty-four years and counting makes it easy to believe that the market is effectively invulnerable – “Too big to fail”. But it’s an economic truism that every boom comes with an inevitable, eventual bust, no matter how sturdy the market sector.

While economists perennially suggest that the boom-and-bust pattern isn’t immutable and propound ways to overcome it, real-world economics have so far always eventually proved them wrong. With the video game market in such a strong position right now, suggestions of future crashes are often regarded as doom-saying; opinions from left-field just to gain attention. For the last few years, there has probably been little to no real reason to talk about a gaming crash, but certain parallels are beginning to show – not only to the pre-bust period of global economics, but also to gaming’s harsh crashes in its early years.

The 1977 crash may as well have been called the Pong crash, as in these early days of gaming Pong was the only game which had widespread awareness and demand – and for a brief period, that demand was enough to sustain many manufacturers bringing out their own versions of a home-console Pong game, most almost indistinguishable from each other. What started as a small handful of different companies manufacturing Pong became a big handful, which soon turned into complete market oversaturation, leading many to sell their products at a loss just to clear stock, swiftly bringing about the first gaming crash.

The so-called “Atari Crash” of 1983 is much better known. The advent of Space Invaders helped to revitalise the industry after the first crash, leading to a six-year boom period which saw new arcade games, home consoles and developers spring up and flourish. While the infamous, poorly-received E.T. for the Atari 2600 usually takes all the blame for ending this period of growth, a single game could not have had such a catastrophic effect on the industry without many other poor business decisions leading up to it. Beginning with the disastrous home console release of Pac-Man in 1982, when Atari decided to publish an early prototype which was never intended for retail, consumer trust in the company, and video games in general, took a heavy blow. This was compounded little by little with the lack of any quality control from third-party developers; the Atari 2600 was essentially an open-market platform, leading to many rushed, poorly-made or even unplayable cash-in games to be released unchecked. Believing their market to still be strong, Atari gravely over-manufactured copies of E.T., only for sales to fall well below projections due to the confused and jaded customer base. This produced a knock-on effect, businesses and investors soon losing trust in the medium, sending gaming hurtling into a fresh, more severe market crash.

While the gaming market has experienced smaller periods of recession since then, the general trend has been one of consistent growth, with nothing so severe and shocking that could be regarded as a ‘crash’ since then. In more recent years, the gaming industry has become so big that it eclipses the film industry. Newzoo expected 2017’s annual revenue from games to exceed US$25 billion, and during its release month Grand Theft Auto V was worth more than the entire music industry. While revenues grow, however, so do consumer concerns, fuelled both by the industry’s business practices and the behaviour of other players.

Unrealistic Sales Goals

A particularly prominent feature of the 1983 gaming crash was unrealistic sales expectations – E.T. famously had to have its unsold copies buried as landfill because Atari, for whatever reason, overestimated demand for the product and trust in their brand. Both the 1977 and the 1983 crashes were also preceded by significant over-saturation of low-quality goods – home Pong devices which had little to nothing to distinguish each other in ‘77, and rushed, poorly-conceived third-party Atari games in ‘83. Both these symptoms can easily be seen in today’s gaming economy, and although they are not yet dominating the entire market, they are a rising trend and beginning to spread beyond their original niches.

In the last few years, Square Enix has set a trend for over-optimistic sales projections, somehow finding itself frequently in the top 10 sales rankings for any given year while still failing to meet internal sales projections. Other companies like Capcom have similar issues, with Resident Evil 7 falling half a million short of its four million sales target. For context, across the whole of 2016 only 12 games exceeded 3.5 million sales, meaning by most standards Resi 7 was a runaway sales success.

The issue of over-saturation is not yet a unilateral issue for the gaming industry but is certainly a big problem on certain platforms – particularly Steam. We’ve already seen the problem of large amounts of low-quality games releasing via Steam Greenlight that Valve was hoping to address with Steam Direct, but little to nothing seems to have been accomplished in terms of quality control, with more than 1,000 games released via Direct in less than two months after its release.

Players Abusing and Losing Their Voice

In a previous article I talked about the practice of ‘review bombing’ and how it can be a positive consumer tool to express dissent with a publisher’s decisions – the reduction in review score can threaten the bottom line without directly damaging it. Especially with recent trends making big-spending individual “whales” more influential than the majority of regular consumers, it’s one of the few ways for gamers’ voices to stand a chance of reaching larger publishers. This becomes less valid, however, when review bombs are done for reasons of tabloid politics rather than as a consumer protest.

In September 2017, prolific YouTube gamer PewDiePie saw controversy – very shortly after the controversy over an alleged anti-Semitic joke in another livestream – for using a term of racial abuse while streaming gameplay of chaotic multiplayer shooter PlayerUnknown’s Battlegrounds. In response to these two incidents, Sean Vanaman, Firewatch developer and cofounder of Campo Santo Games announced that any of his company’s products appearing on PewDiePie’s channel would be subject to DMCA takedowns.

Whatever Vanaman’s intentions with this move, the YouTube DMCA takedown system is notoriously open to abuse and is often used by publishers – big and small – in an attempt to censor criticism or comment on their games, so gamers are on high alert for instances of copyright censorship in any form. This resulted in Firewatch’s Steam page being hit with a review bomb from PewDiePie fans and those who simply disagreed with the use of DMCA in this way. While Vanaman’s actions may have been symptomatic of a flawed, abusable system, and the discussion point over censorship remains a valid one, using review bombs to target a small, indie developer over a reaction to an internet entertainer’s distasteful language doesn’t help the practice to be taken seriously.

Compounding the frivolousness of this review bomb, at the beginning of October PlayerUnknown’s Battlegrounds, despite being a secondary subject of defence for the prior one, was the subject of another review bomb. On this occasion, the protest was more legitimate: the developer of PUBG started to implement in-game advertisements despite the game still being an early access title, diverting resources from development of the game to increasing profitability before it was even finished. Serious concerns over industry behaviour like this are only diluted by the trigger-happy nature of some gamers. In response to the Firewatch review bomb, Steam has already taken some admittedly ineffectual steps to reduce the influence of review bombs; if this continues to the point that the effect on a game’s score is no longer taken seriously at all, consumers are in danger of losing one of the few tools they have to exert any kind of influence over gaming’s big businesses.

Especially with some recent developments in the industry, it’s becoming especially important that consumers retain whatever influence they have. Customer satisfaction, at least in the eyes of big publishers, is becoming less and less important as economic systems from the mobile gaming sector are being brought into traditional console and PC gaming. An unsettling warning for this change in how publishers view their user bases came as recently as May 2017, when Strauss Zelnick, CEO of Take Two Interactive, said that the company was “under-monetizing” its players, specifically in the context of microtransactions.

Microtransactions’ Role in Mobile Gaming

The economics of microtransactions in free-to-play games – especially mobile games – are founded on the concept of “Whales, Dolphins and Minnows,” three strata of players defined by their spending habits. Minnows make up the majority of a game’s player-base – as much as 99% of all users – but spend little to nothing on in-game purchases. Whales and Dolphins, between them, do not usually account for more than 2% of players, but their in-game spending makes them responsible for 98% of revenue.

All this results in an economy which only needs to cater to a very particular minority of its players. In terms of pure profitability, it’s in the publisher’s best interest to alienate or mistreat its userbase, if that will encourage more monetization from the Whale and Dolphin players. This works in the mobile gaming sector, so it probably seems reasonable to AAA publishers and their bottom lines to use these economics in their games as well, but a few key differences between mobile and traditional video gaming make this a dangerous path to walk.

  1. Mobile economics are designed around the base game experience being free. This is the very reason the term “freemium” was coined – players can try out the basic gameplay with no investment, but to get the most out of their experience they will need to spend money on the game.
  2. One game’s minnow may be another game’s whale. Because freemium economics encourage players to drop in, try out a game, then either start spending or drop out and move on to another game, it’s feasible to have more games in the market and spend less resources on marketing, while a game selling for £50 or $60 needs to compete with other games for players to make that initial investment.
  3. Mobile games are far less resource-intensive to make. While a feature-rich, cutting-edge mobile game can cost up to $2 million to make, most casual games with simple but appealing content will only require a budget of around $50,000. Compare this to the AAA gaming industry, which frequently has budgets of hundreds of millions of dollars across development and marketing (2013’s Grand Theft Auto V had the infamous total budget of $265 million) and it becomes clear the two markets cannot operate on the same basis.

More crucial than any of this, however, is that mobile gaming currently exists in a bubble economy. While the mobile gaming market is certainly profitable, providing plenty of incentive for publishers to buy in and invest, this profitability is largely based on enthusiasm, rather than the intrinsic value offered by the products. The customer-base for mobile games may be willing to support the market now, but all bubbles eventually burst when enthusiasm wanes. If the aspects of mobile gaming focused on extracting money from players while offering as little as possible of actual value in return become widespread in other gaming markets, console and PC gaming risk becoming bubble economies as well.

Mobile Economics in Traditional Gaming Mediums

There can be no doubt that game publishers are willing to push for this increased monetization of players despite economic risks. On October 17th 2017, Rolling Stone’s gaming Section, Glixel, discovered a patent from Activision which outlined a system for online games to punish non-spending players. The patent set out an online matchmaking process which would cause players who had spent money on in-game items to be more likely to be matched to players who had not.
This was suggested to be specifically geared towards pitting players new to the game or of a low skill level against more experienced, high-scoring players in an effort to encourage newer players to make similar micro transactional purchases. While Activision has said that this system is not in use in any of its games, the very existence of the patent shows that the company has been pursuing research in this area; and even if its implementation is not being considered for the near future, the option to implement is there.

A more practical example of publishers pushing more mobile economics in full-priced, big-budget games has been seen in the recent, controversial release of Shadow of War from WB Games. Already courting controversy with the decision to include an in-game lootbox system (a system which allows players to purchase randomised items from simulated crates or other containers, similar to buying a pack of collectable trading cards), Shadow of War soon faced further criticism of its gameplay. Many players felt that towards the end of the game, mechanics were specifically designed to frustrate players into purchasing more lootboxes in order to accelerate gameplay, with some going as far as saying that the best ending was locked behind a paywall. This may be a slight exaggeration, but even those who claim that lootboxes do not influence gameplay often criticise the late-game portion of Shadow of War to be tedious and repetitive – problems which can explicitly be “solved” through in-game lootbox purchases.

Crashes aren’t directly caused by bad business, poor sales or even customer alienation, but by loss of trust from investors. Trust in gaming is still very strong, thanks to the sheer size, value and popularity of the industry, but the 1977 and 1983 crashes both showed that it was consumer trust that vanished before investor trust – all the home Pong products and Atari games were expected to sell very well, right up to the moment that customers stopped buying them. Customers losing trust will not immediately or directly cause a market crash, but once it’s gone the investor trust is on borrowed time.

The industry still has time to turn itself around, and there’s no guarantee that a crash will happen any time soon. However, publishers’ unrealistic sales expectations, Steam saturated with low-quality products and increasing customer alienation should certainly be ringing some warning bells. It’s easy to ignore the possibility, but the surest way to bring about a crash is to believe a crash could never happen.

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Submitted in: Expert Views, Josh Townsend |