Game Over for Video Games?

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1:43When I want to talk about video games, there is one guy at the top of my list.

1:49Jason Schreier: My name is Jason Schreier. I'm a reporter at Bloomberg News and the author of a bunch of books, including the most recent Play Nice, The Rise, Fallen feature of Blizzard Entertainment. And I'm a co-host of the TripleClick podcast.

2:08Jason's probably forgotten more about the gaming industry than I will ever know. So when the news broke that Microsoft was laying off thousands of people in its Xbox division, I called him up. Xbox got a new CEO back in February, Asha Sharma. And by summer, it was clear that she was going to make some big changes.

2:28Jason Schreier: I think around June, it became clear how big the scope of this was going to be. And then I reported at Bloomberg a couple of stories that we did, a couple of big kind of breaking news stories we did. One was that there was a huge cut coming, huge layoffs coming. We reported that shortly after Xbox had their big kind of blowout summer showcase in Los Angeles where they announced the upcoming games for the next year or so. We reported that. And then we reported shortly after that that there were some studios in negotiation to be divesting from Xbox, basically trying to avoid getting shut down by trying to negotiate either independence, trying to find buyers, that sort of thing.

3:14In addition to the job cuts, Xbox is spinning off five development studios. A lot of what's going on is basically a reversal of what Xbox was doing over the last decade under its previous CEO.

3:27Jason Schreier: They went on a spending spree, bought up a bunch of everything from small kind of like indie style game studios to massive publishers like Activision Blizzard, which was the big high profile purchase that they did a few years ago for$69 billion. Something Asha Sharma pointed out in her most recent memo about the cuts is she said that in some division, some aspects of the business, there were like 14 layers of management. And so she was trying to cut down on some of that, she said. But this is a very big organization. And I think she wanted to come in and make these cuts and get it down in size.

4:07It's not just Xbox. The whole gaming industry is under pressure. Hardware is more expensive. Games are too. Plus, there's the RAM shortage.

4:18Jason Schreier: I think over the last two years, we've seen something that is significantly more of just kind of a fundamental problem with the games industry and the way it does business. And I think there needs to be a lot of rethinking. There's been a massive exponential increase in the budgets for games. Games have gone from costing$20 million to make about 15 years ago to now costing$200, $300,$400 million to make. And that has made it so the sales threshold is all the higher in order to actually turn a profit on these games. It's made it so there's no more room for risk. There's very little risk tolerance at these companies.

4:59Jason Schreier: And yeah, it's just caused a lot of problems. And we're just seeing this kind of confluence of factors that has led a lot of pundits to believe that there's something significant happening here and there's going to be some big changes happening in the games industry and the way the games are made.

5:19Today on the show, does the games industry need a hard reset? I'm Lizzie O 'Leary and you're listening to What Next TBD, a show about technology, power and how the future will be determined. Stick around.

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8:01Let's rewind a little bit and talk about Xbox. So a few years ago, Microsoft was clearly like, oh, we have to compete with PlayStation, with Switch. We are behind. What was their strategy then? And how did it lead us to where we are now?

8:20Jason Schreier: We have to go back to 2013 to kind of really identify the beginnings of the end for this era of Xbox. So before 2013, Xbox was in a really strong position. They had the Xbox 360. They were competing with the PlayStation 3 and Nintendo's Wii, and all three of them did quite well. The Wii obviously took over back then as a cultural phenomenon, but the 360 and PS3 both did quite good as well, quite good sales numbers. Heading into what would be the next generation, which would be called the PlayStation 4 and the Xbox One, Xbox made some really big flubs, some really big marketing errors. They positioned the console really terribly, wound up selling it because it would include the Kinect motion sensor device.

9:03Jason Schreier: It wound up selling for$100 more than the PlayStation 4. And that was kind of, that was really a fatal flaw for that console. PS4 got a lot of momentum and never looked back. And Microsoft eventually just stopped saying how many copies of it, how many units of the Xbox One they had sold because it was so much lower than their competition. By some estimates, the PlayStation began outselling the Xbox two to one. So they realized they needed to rethink things. Under Phil Spencer, the previous CEO, they doubled down on this service that they began to launch and really ramp up, which is called Xbox Game Pass.

9:41Jason Schreier: Essentially, Netflix for video games is the best way to think about it. You pay a monthly fee and you get access to a catalog of games that you can download and play as long as you are part of, as long as you are paying for that service. So what happened was Xbox Game Pass seemed to be doing really well for a while, and then it plateaued at around 30, 35 million users. Could not really get much higher than that. They had been hoping for eventually 100 million. There was a crazy stat, which is that at this point, right now, they have about 30 million subscribers. They had projected that they would be at 77 million subscribers at this point.

10:17Jason Schreier: So way, way behind their targets, right? So why didn't it work? Well, I think there are probably a few reasons. The biggest is that the way people play games is so much different than the way they watch movies or watch TV. You and I might, after work, go home and flip through Netflix and be like, oh, okay, I'll check this thing out. Oh, I heard this cool thing about this show. And you could just kind of watch an episode that night. Whereas the game is much longer. It's a much bigger commitment. A lot of people don't have the time or bandwidth or interest in playing more than two or three games a year.

10:55Jason Schreier: There's a stat from Serkana, the marketing firm, that essentially the majority of U.S. gamers buy one to two games per year, and that's it. So with gamers, for the most part, it wasn't really like a lack of, it wasn't really a financial issue that was preventing them from buying all these games. It was just that they didn't have the time or the interest in playing all these games. So this idea of a service where you could have access to unlimited games. I mean, it sounds great in theory, but for most people, that is not a winning proposition. But that seems like such a mismatch between an audience and a management's understanding of how an audience actually uses its product.

11:37On the one level, that seems kind of basic.

11:39Jason Schreier: Yeah, I mean, I think there are a bunch of factors there. I think there was also a hope from that previous Xbox leadership. there was a hope that this would be coupled with what's called cloud gaming, which is essentially this idea that instead of buying a console or a computer and playing my games on there, I could potentially log into the servers that Xbox runs and play the games on there. And therefore, I can play even the highest end games on my phone or on my terrible laptop or iPad or whatever. That, for various reasons, never really took off in the way that I think these companies were hoping it would.

12:18But the idea behind that would be it would reach a lot more people who wouldn't otherwise play games, right? So if you're really, maybe you have kind of a slight interest or curiosity in games, but you would never spend$500 to buy a console, maybe you can just log in through the cloud. Maybe if there's some easy way to get on your Roku or something, your TV, if you could just log into Xbox Game Pass, you pay the service, and then you can download a game and play a game on streaming without even having to worry about buying a console, that in theory would open up the market to a much, much bigger audience than just the kind of traditional console audience.

12:53But it never really worked. Same with PC. They never reached the same PC audience that they did on console for various reasons. I think ultimately what they didn't account for is that, as I mentioned before, for a lot of gamers out there, the issue is not really money when it comes to buying games. The issue is time and attention and bandwidth, especially on a place like PC. I think I mentioned this earlier, but on PC, on Steam, which is the big PC store, you can get a ton of games on sale for pretty cheap prices, especially the smaller scale games. So when the best small scale games, a game like, I don't know, Mina the Hollower is a game that just came out and it only costs$20.

13:33One of my favorite games of the year only costs$20. When you get something like that, you're not really thinking like, oh, I need this monthly serviced to really keep up with all the new releases because you don't need to spend that kind of all you need to do is spend 20 bucks, which I think a lot of people see as a lot more palatable. So yeah, there were a ton of kind of forces here. You could certainly be like, well, why didn't they understand the market here? Why didn't they see this coming? But yeah, I mean, I don't know. I think sometimes it's tougher than it sounds. I do have a little bit of empathy there.

14:06Any company leadership is making bets that things are going to turn out in one way, and sometimes they don't. So where does the Activision Blizzard purchase fit in here? Because obviously they were like, okay, we can have Call of Duty. It's a huge deal. That will help us. But that does not seem to be a bet that has panned out either.

14:25Jason Schreier: Yeah. I mean, again, a lot of variables here. So when they announced that they were purchasing, or when they made the decision to purchase Activision Blizzard, it was the end of 2021, beginning of 2022, which if you remember was smack in the middle of the zero interest rate time when everybody was going on these crazy spending sprees and spending ridiculous, like companies' acquisitions were ridiculous at that point. Valuations were through the roof. It was - Money was basically free. Exactly. So it was kind of like, oh,$69 billion, no problem. Then there was this just kind of long and grueling process that they did go through to get through the FTC, court battles, regulations, yada, yada, yada.

15:04And it wound up taking like 18 months for the deal to close. By the time it closed, interest rates were no longer zero. And we were at a very different climate for the industry.

15:14Jason Schreier: That said, I mean, I think the decision was made for a few reasons. Activision Blizzard includes a few different components. One is Activision Call of Duty, getting Call of Duty on Game Pass. The idea was you would see this huge surge in growth because you have the biggest game in the world on your subscription service. So that was one idea. You also have Blizzard as part of that. Blizzard makes World of Warcraft, a very big PC game that a lot of people play and makes a ton of money. That would also be just a helpful thing to have. Plus, Blizzard has a lot of really good IPs that could be turned into films, TV shows, etc.

15:45Jason Schreier: And then you also have King, which is the maker of Candy Crush. That is also part of Activision Blizzard. And so then you have a big presence on mobile phones in a way that you never had before, because Xbox had never managed to take on the mobile market in the past. And so that was another big part of the equation as well. And so they saw it as complementary to their business in those ways. And I think if they could go back in time, maybe they would not still make that call. But that was their thinking at the time. We are obviously in a very different monetary policy environment you were talking about before and how that keys into business decisions.

16:23But then also an inflationary environment and one where things are just more expensive for a lot of different supply chain reasons. So if we were to talk about PlayStation, for example, Sony said their consoles are going to be more expensive. A lot of things are going to be more expensive and they're not going to sell discs for games released after January 2028, I think. So for the normies listening, I count myself as one of them in this subject matter, like this all seems like a lot of headwinds for an industry that was making big directional bets in the middle of a pandemic with cheap money and now is unwinding a lot of those.

17:05Jason Schreier: Yeah, let's isolate those two. So the hardware issue. So traditionally a game console, it's called a console generation. Traditionally, you have a new console. It lasts for about seven years. When you buy it at launch, it's the most expensive it will ever be. And it gets cheaper over time as hardware costs get cheaper, as it's longer on the market. You start seeing discounts. Maybe there are new iterations of the hardware. It goes through all these different cycles. This generation has been very different because of AI. So AI companies, as they make their data centers all over the world, they are buying up all of the chips, memory, storage, and that has made hardware pieces more expensive and harder to find.

17:51Jason Schreier: And that has led to, for the first time in history, game consoles getting more expensive years after they launched than they ever have been before. That is, the headwinds there are humongous, and we still don't know what the ripple effects are going to be, and we still don't know how much longer this is going to last. and if it's going to affect the next generation because we're now almost six years into this current hardware cycle. And so usually it takes seven years or so to get to the next one. Are we going to get to the PlayStation 6 era and see that consoles are now$1 ,000? Like that is going to be, it's almost hard to fathom how that's going to work out for them.

18:32So yes, massive, massive headwinds there. Thank you. thank you to ChatGPT for that one. Well, there's a huge irony here, right? Like, if we're talking about Microsoft, Microsoft invested$10 billion in OpenAI. They are on both sides of this particular issue. Oh, yeah. But I mean, to Microsoft, the question of like AI versus Xbox is not much of a question at all. Xbox is a very small part of their overall business. And I would say more of a headache for them than anything else at this point. So AI is their big bet. And then, I mean, who knows what'll happen if the AI bubble bursts

19:07Jason Schreier: and it turns out that these are not the kind of industry transforming technologies that everybody is banking on them being. Who knows what's going to happen there. But yes, major headwinds there for Microsoft's gaming division, for Sony's gaming division, for Nintendo too, which even though Nintendo seems to be doing well right now, they've also had to raise the price of their console. Everybody has had, anyone in the hardware space has had to raise the price. Anyone who's, I mean, even cars are affected by this because you need chips for the kind of internal computer systems that they have. So yeah, it's really headwinds all around.

19:46When we come back, gamers are mad.

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20:55mobile in the past 180 days.

21:00Where do you put the physical versus digital media question for gamers now? Because there is like some minor backlash. There's a secondary market for physical discs. Like, how does that start to shake out?

21:16Jason Schreier: Yeah, I would say more than minor backlash. The backlash has been pretty deafening, actually. Although it's always hard to tell with these things, how much of the market is actually impacted by, or how much of the market actually cares versus a lot of angry people on social media. It's always a little tough to tell. That said, so yeah, so Sony announced a couple of weeks ago, they will be no longer selling discs for the PlayStation in January of 2028. That is a humongous change. I mean, maybe they would say it's not a humongous change because they would say, actually, the majority of people buying games are doing it digitally anyway.

21:50So this is only going to affect a minority of our customers. For them, the logic makes sense. They see much higher margins on digital sales than they do on physical sales. Don't have to worry about retailers and manufacturing costs and all that jazz. For Sony, PlayStation, they also operate the digital stores. So if another company like EA or Activision or Ubisoft, if one of those companies sells a game digitally, they have to pay a much bigger cut to PlayStation being as part of the store, selling through that store. So that's a big part of this. Yeah, people have not been thrilled about it. And there are a lot of good reasons for that, I think.

22:31One is, as you mentioned, the used game market is going to disappear. There's a concern over game preservation when games are only digital and just being unable to potentially just kind of like preserve some of these games. A lot of games just wind up getting pulled from the store, made obsolete. There are a lot of examples in history of game companies just like no longer selling their games, in which case it can be very difficult to preserve them and preserve that part of history. For me personally, I'm personally a huge fan of libraries and libraries have big physical game collections that will now no longer be possible for them.

23:09Jason Schreier: And that bums me out because libraries are already kind of underfunded and facing struggles as it is. So that's a big factor. Yeah, there's a lot of components to this that has led to a lot of consumer outrage as a result. So where does that put gamers right now? I mean, that's a huge, broad question there that encompasses so many millions of people. but it seems like people who love video games are increasingly under pressure by both big companies and economics. Yeah. I mean, the ironic part of this whole thing is that it's never been a better time to play games because there is still, I mean, one of the problems, one of the forces that is kind of one of the currents under all of these problems is that the game market is oversaturated because there's so many games coming out every single year.

24:00Last year, I believe on Steam, the PC market, there was something like 21 ,000 games released, which is a jump of like, I don't even know, it's a jump of hundreds of percentages, exponential jump from a few years ago as it's gotten easier and easier to make games and release them on these platforms. So in other words, if you're a player, you have more choice, you have like more variety, you have better quality games, especially in the smaller scale space. In the big budget space, I think things have gotten a little bit more dire. And that's a lot of what we're talking about. Because when we talk about the industry, we're talking about these companies that are employing people to make games, as opposed to a lot of the stuff that is on Steam.

24:42A lot of those 21 ,000 games I mentioned are made by people just kind of like as a side gig, as a hobby thing. Maybe they're hoping to win the lottery by like making the next big hit game. But a lot of the times it's just people just kind of doing it for fun on the side. And if they hit, great. If they don't, no problem. So that has created an environment where there's more stuff to play than there's ever been before, more good stuff, an entire backlog of stuff to play. And yet at the same time, the industry is failing. Another important factor here that we haven't mentioned is the rise of so-called live service games, which are games that are created to be played indefinitely and monetized indefinitely.

25:24So these include games like Fortnite and League of Legends and other just kind of big online games, Counter-Strike, that essentially they want to take players and keep them playing not just after they launch, but for months and years afterwards. words and so um those games can be very lucrative for the company but companies behind them but the problem is that if you are making new games and trying to release a new game and get people to buy it you are not only competing with like all the new games that come out every year you're also competing with these old games that are just competing for people's time like imagine um imagine a world where every new movie had to come that came out was not only competing with whatever else is in the box office that weekend, but also competing with Marvel's Avengers, which just was like indefinitely running and taking up some of those screens.

26:17And people just kept going to see it over and over again, no matter what you did. So that like throws an entirely new wrench into the gears here and makes it even more difficult for new games to stand out. So I consider you the best video game journalist in the country, and I don't want you to like give away all your secrets, but most really good beat reporters have string, right? Like a few stories that they are watching at all time. And I'm wondering if you could give us like a couple of strings that you are following in the near term that you think are big story arcs to keep watching about the health of the industry.

27:01Sure.

27:02Jason Schreier: Two big ones I'll give you. One is GTA 6. Grand Theft Auto 6. Yes, Grand Theft Auto 6, which we've somehow gone 31 minutes without mentioning. Without talking about it. Yeah, right? Because that's going to be the biggest game on the planet. That's going to be potentially the biggest entertainment launch of all time. We're expecting it to be astoundingly humongous. The previous game, GTA 5, Grand Theft Auto 5, has sold 230 million copies, which makes it the second best game, second best selling game of all time. So this one is going to be big. And I'm very curious to see how that impacts the overall industry.

27:38If it's just kind of one of those flashpoints where people just buy that game and only play that game and it has no impact on the rest of the industry or if it helps sell more consoles and leads to just kind of like a ride, like it buoys other games

27:53Jason Schreier: and other companies as well and other stocks as well. I'm keeping a very close eye on that one. The other one is the question of how do game companies get their games made at lower budgets? How do games get cheaper to make? Because that, I think, is really the existential question here of the video game industry is if games just continue to rise in development costs, it just doesn't seem like only the GTAs of the world will be able to survive. if nobody else can pull it off because it's just too risky to spend a billion dollars on a game and then have to sell tens of millions of copies just to break even.

28:30That is not going to happen anymore. So I think certainly some people believe that AI can help with that. I'm a little skeptical of that. There are other questions of how to make games cheaper. A lot of companies have just been moving outside of North America and making games in countries where they can pay people for less to make games. Other companies are trying other things, trying new methods to find a solution to this problem. And I'm keeping an eye on what companies are doing and how that's going to look, how game making is going to look moving forward because I just don't see a world where the costs continue to go up every year and companies just continue to tolerate that.

29:14My last question for you is, for people who are listening to this, who don't play video games, who don't think about them a lot, and want to understand why these stories are such a big deal and why they should be paying attention.

29:33Jason Schreier: It's interesting you ask that question because I've wondered for a little while now why games have still not risen to the same level of cultural impact, broader cultural impact, as Hollywood or sports despite having more money attached. I think there are a lot of complicated reasons for that. I think a lot of people just grew up at a time where games were seen as like toys for kids and hobbies for kids. And I think that's starting to kind of cycle out as people in maybe their 30s and 40s. Now, they all grew up playing games and some of them kept playing games. So that's part of it too. But yeah, I mean, it's interesting.

30:13I think that if you care about culture, it's certainly something to pay attention to. A lot of just kind of, I don't know, a lot of memes come from the world of games. There is certainly kind of subtle cultural impact. Arguably, our current political moment, you could dial back to certain. Yeah, I'm a little bit skeptical of that particular argument. But I've seen people People draw a line between Gamergate in 2014 and the rise of Donald Trump. I've definitely seen that. And obviously Steve Bannon, who was Donald Trump's campaign manager for a bit, he was pretty closely involved with some of the forces of Gamergate.

30:55And in fact, he at one point, he had either a company or he was involved in some way with what's called World of Warcraft gold farming, where you like hire a bunch of people in China to play the game for very low wages and just like earn this gold. And then you sell it on the market to people for real money. And it like turned, it was, became a whole business involved there that Steve Bannon was involved with. So yeah, definitely some, some interesting connection points there. What should we be watching for in the near term that will tell you like crisis point or we have gotten over this moment of layoff crisis?

31:38Jason Schreier: Yeah, I don't know. I kind of I don't know what the next kind of big, I don't know, domino to fall will be or if there will be one. It's hard to say. Like, I don't know if there's going to be kind of a Lehman Brothers style like, oh, this game company collapsed and now we're seeing the beginning of the dominoes falling and better get the government to step in and save them all. I don't know if we're going to see that sort of thing or if it's just going to be this kind of slow whittling away of the industry as we know it. And we'll just see some sort of new model emerge to make up for that. I'm not sure.

32:15But I'll certainly be looking at the console market and how that changes. Because if Sony and Xbox come out with new consoles that cost$1 ,000 or more to buy, it's very difficult to imagine them still reaching that audience of 100 million people or so who have been buying consoles pretty steadily over the last few years. So if consoles become a premium product for people, a luxury product for people, then I don't really know what's going to happen next.

32:51Jason, it's always great to talk to you. Thank you so much for coming on. Thanks for having me, Lizzie. Jason Schreier is a reporter at Bloomberg News covering the video game industry. And that is the show. What Next TBD is produced by Rob Gunther, Evan Campbell, Madeline Thames-Ducharme, and Patrick Ford. Paige Osborne is the senior supervising producer for What Next and What Next TBD. Nia Lobel is the executive producer of podcasts here at Slate. Ben Richmond is the Senior Director of Podcast Operations. I'm Lizzie O 'Leary. Thanks for listening.

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