The Big Story

The game industry experienced an earnings reality check after the pandemic boom

The video game industry came back down to Earth last week after a record 2020 that saw unprecedented jumps in revenue and profit for gaming's biggest players. We're in the middle of the late summer earnings season, and the fiscal first and second quarter results for the biggest hardware makers and game publishers made clear that last year's pandemic boom is finally slowing down.

The biggest companies in the industry all showed lagging growth. The industry grew at a rapid clip last year to more than $175 billion, eclipsing the North American film and sports industries combined, and jumping by double-digit percentage points across console, mobile and PC. But while mobile continues to shine, the other sectors are slowing.

• Sony reported a substantial year-over-year profit drop of more than 40% last week. The company's sales are still growing considerably, thanks to demand for the PlayStation 5, but the company experienced a rare quarterly dip in subscribers of its PlayStation Plus service.
• Nintendo saw Switch and software sales decline by 22% and 10%, respectively, and big drops in sales and profit. The company hasn't released a major first-party game since last year's Animal Crossing: New Horizons, and doesn't have much else planned for the remainder of 2021.
• Major third-party game publishers Electronic Arts, Take-Two Interactive and Ubisoft posted either drops in sales or profits last quarter. Take-Two in particular said last year's growth wasn't repeatable as critical game delays will cut its profits in half in Q2.

The reality check was expected. Video game publishers and analysts have been warning against treating 2020 results as the new normal. It wasn't sustainable growth, and a number of other factors have made it difficult for the industry to repeat last year's numbers.

• Microsoft and Sony released new consoles last fall to immediate sold-out inventories, but ongoing chip shortages have constrained supply and hamstrung sales. Console sales are still surging compared to last year, but not well enough to offset drops in software and services.
• Third-party game sales are down across the board, the console makers said. This is in part due to delays; the list of games pushed to 2022 and beyond continues to grow as game makers try not to repeat the mistakes of CD Projekt Red's Cyberpunk 2077.
• Back in May, analytics firm Newzoo forecast a 1% contraction in the game industry for 2021. "It is unique, at least in our history, that we project the declining markets for this year," Tom Wijman, Newzoo's games market lead, told VentureBeat. "This year is basically the year where we slightly correct for what was a crazy 2020 for the games market."

There are clear bright spots for the game industry, though. While we might not see numbers like those in the spring and summer of 2020 again, there are evident signs the industry is healthier than ever, and that its best days are still ahead.

• "We're gratified to see that as we expected, post-pandemic demand was higher than pre-pandemic demand, and the moderation we expected was not as severe as we expected," Take-Two CEO Strauss Zelnick told GamesIndustry.biz. "As we hopefully get out of this difficult time — it's hard to know given what's going on with the delta variant — it's nice to see the new normal for our business is much stronger than the old normal."
• Sony is still on track to sell 14.8 million consoles by March 2022, and its PS5 with a disc drive is now profitable. Microsoft's hardware sales were up 172% last quarter, and its biggest game in years, Halo Infinite, is coming out this holiday season. Nintendo is also releasing its Switch OLED model in October, and preorders are already sold out.

The game industry may not ever experience the surge in growth and mainstream popularity that it experienced last year, as everyone began looking for new hobbies and rekindled old ones during the shelter-in-place era of the pandemic. But 2020's watershed moment for gaming has pushed the industry into a new era. All game makers have to do now is ship more hardware, release new games (polished ones, without so many bugs), and keep winning the contest for our attention, especially once we're leaving our living rooms again.

A version of this story first appeared on Protocol.com.

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Overheard

• "The difference between the mobile internet and the metaverse is that we will exist and interact with the internet through simulation … where the most sophisticated simulations that exist today, the most sophisticated virtual recreations of a synthetic environment, today those use cases are almost exclusively in gaming." ―Venture capitalist Matthew Bell, one of the most prominent voices helping demystify the metaverse, explained on CNBC's "TechCheck" the advantage game companies have in helping develop a next-generation internet.
• "Last week more than 3,000 current ABK employees signed an open letter asking, among other things, for Fran Townsend to step down as sponsor of the ABK Women's Network. We are glad she listened, and hope that this will be followed by leadership addressing employees' other demands." ―The group behind the Activision Blizzard walkout comments on its first big win after executive Fran Townsend stepped down from the company's women's advocacy group. Townsend, already under pressure for calling California's lawsuit "meritless," last week deleted her Twitter account after pushback for sharing an article critical of whistleblowers.

Lootbox

• Chinese state media takes aim at online gaming. Shares of Tencent and other Asian online gaming giants tumbled last week after a state-owned newspaper published, and then deleted, an article reference calling the pastime "opium for the mind." Tencent said it would introduce new rules to curb game addiction, but state regulations could be on the horizon.
• Amazon's new MMO is delayed, again. New World, the new online multiplayer game from Amazon Game Studios, has been pushed by one month to Sept. 28, marking the game's fourth delay since May of last year. The good news: It appears to be quite popular among fans of the genre and prominent Twitch streamers.
• Borderlands' parent company acquires eight new studios. Embracer Group, the owner of Borderlands developer Gearbox and other major names in gaming like THQ Nordic, has acquired a handful of new studios for around $313 million. Those including Slipgate Ironworks and Crazy Labs, reported GamesIndustry.biz last week.
• New reports of Activision Blizzard's sexist workplace culture. Yet more reports of misconduct at the World of Warcraft publisher were published by Axios, Bloomberg, The Washington Post and Vice last week, detailing the failures of the company's HR department and other harrowing stories of mistreatment, sexism and discrimination. A number of advertisers, including Coca-Cola, Kellogg's and State Farm, have cut ties with the company's esports division, too, The Washington Post reported.
• Xsolla lays off staff using big data. The Russian payments company, used by many of the most popular online games, laid off about 150 employees last week using productivity metrics gleaned from remote work data, according to Game World Observer.
• Super Mario Bros. shatters the most expensive video game record. A sealed copy of Nintendo's original Super Mario Bros. sold for $2 million last week, The New York Times reported. The sale broke the previous record set last month, which at the time broke another record set just days prior.
• Darling indie developer Fullbright reckons with its toxic co-founder. Fullbright's Steve Gaynor, who helped the studio make beloved breakout hit Gone Home, has stepped down as creative lead on the company's new game. Gaynor's management style caused the departure of numerous Fullbright employees, many of them women, according to an in-depth investigation from Polygon.
• PUBG undergoes a peculiar rebrand. PUBG parent company Krafton announced last week it was rebranding PlayerUnknown's Battlegrounds (which PUBG is short for) as PUBG: Battlegrounds, which sounds a bit redundant. Krafton says the move is the first step in "actively expanding the PUBG brand through a variety of new experiences set in its universe."
• Zynga continues its buying spree. The FarmVille developer is spending big on new studios, including $525 million for Golf Rival maker StarLark last week, reported VentureBeat. The company has been scooping up mobile developers left and right since CEO Frank Gibeau took over in 2016.
• On Protocol: Epic Games' antitrust complaint against Google revealed last week via newly unsealed court documents that the search giant allegedly contemplated purchasing the Fortnite maker to squelch Play Store competition. Google said the allegation "mischaracterizes our business conversations."

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Look Out For

Live esports and gaming events pump the brakes

As U.S. vaccination rates began to climb in the early summer, a number of esports events and gaming conventions were more than happy to put live gatherings back on the schedule, including a major League of Legends tournament in New Jersey that was slated for later this month, as well as PAX West and Gen Con next month. Now, with the delta variant tearing through the population, event organizers are pulling back.

Riot Games last week moved its LCS finals closer to its headquarters in Los Angeles and will refund ticket holders who hoped to see it in person. PAX West and Gen Con are still on, but more strict COVID-19 restrictions are now in place. Gamescom, a major industry event held annually in Germany, is back again in an all-virtual format starting Aug. 24.