It is very well reported that the UK games sector is going through some growing pains at present - with significant layoffs from large developers having repercussions throughout the industry. According to GamesIndustryBiz, there have been 6,000 jobs lost in 2023 so far and the useful report from Games Job Live shows a consistent drop in roles currently being advertised through the year (thanks to Colin McDonald). So what has happened? Without trying to re-hash the same commentary from other, far more knowledgeable sources, we have taken a look at the largest corporates and read across to the wider market.
Source: Games Job Live, Colin McDonald
The games market boomed through covid, transformed by significantly increased console sales and engagement levels. In the same way that covid accelerated long term trends (such as a move from a cash to cashless economy), gaming habits changed too - consumers moved to digital purchases far quicker and a wider consumer base changed the market outlook. This led to a realisation that the addressable market was bigger than previously thought and the growth opportunities were significant. Naturally, this led to a flood of capital into the sector - through M&A (EA/Codemasters, Embracer/Gearbox, Tencent/Sumo) but also through IPOs (TinyBuild and Devolver) and significantly more private capital.
Post covid, the sector has continued to be strong but perhaps not quite as much as some hoped - we have seen some fantastic recent successes (Starfield, Zelda, Spider-Man 2) but publishers are also seeing more misses - games which were anticipated to be popular but never quite hit their major milestones. In the indie world, a lot of this can be attributed to the issues of discoverability - how do consumers get to know more about the game, how can anyone guarantee a success? This has led to some dramatic moves - the share prices of the listed business have fallen considerably - including the market’s darling, Team17. impact of the global economy slowing, consumer discretionary spending falling and price increases have led to lower than anticipated sales numbers for some games.
The game developer business model is hard to justify - as there is considerable risk as to whether a game will be as popular as hoped. The developer is often unable to finance the full production so looks to use a publisher, who are increasingly delaying decisions until they can near guarantee their downside. Self publishing is definitely easier now than it was 10 years ago but unless a developer already has some proven successes, it is difficult to produce new IP solely from its own balance sheet. The change in valuations and investor sentiment has also now made it harder to access equity. So what are we seeing?
First - nearly all developers we speak to are being pushed to develop games and audiences further - publishers want to see a significant amount of wish lists, Discord followers and game development. This all has cash requirements so we are seeing an increasing amount of developers looking to extend their runway through VGTR loans or alternative finance solutions, including bridging to significant cash catalysts such as Microsoft GamePass transactions or Meta payments.
Second - more developers are looking at self publishing solutions so that they can recoup more from their own games but are looking at ways to cash flow this. Again, we can help here by providing debt rather than equity type solutions where we recoup interest rather than a percentage of game revenue. Similar to publishers, we will need to understand the game potential and address wishlist figures etc, but for those developers, this is a way to maximise their return from own IP.
Finally, we see more developers struggling to access previously available Work For Hire deals where they effectively subcontract to lead developers on an IP. As the sector recovers from the over-exuberance post covid, and with recent job cuts etc, these type of transactions are less available, we are finding.This makes it harder for game developers to build up cash resources.
When will the sector recover from the current cold it has? It is hard to say - for AAA games, we expect to see strong sales figures for proven IP (if you weren’t aware, the new trailer for GTA VI comes out in December - you will undoubtedly see this). However, the issue of discoverability will not go away quickly - the supply of new games will continue to be high and the demand may not meet all expectations. Juicy offers from platforms won’t be as forthcoming meaning that we will see sub-forecast revenue for some time, in our opinion. The biggest change that we forecast here will be more engagement with audiences prior to launch and perhaps, a change in the strategy of early access.
In a truly cyclical sector, debt can often be portrayed as the downfall for companies - however, it is our view that debt can play a very practical solution in the kaleidoscope of funding solutions for developers.