Tech has seen waves of layoffs in 2023 and gaming is no exception. While the two might seem related, the stated reasons are quite different. Tech CEOs have not made it a secret that they feel emboldened by each other’s drives for efficiency, while announcements that tie layoffs to profit margins are the exception in gaming. Most articles correctly identify rising interest rates as the cause of layoffs in gaming. One difficulty with this explanation is that it assumes a familiarity with monetary policy that can’t be taken for granted. It is a bit like explaining that things fall down because of gravity. Things do fall down because of gravity, but a listener who is unfamiliar with gravity has no more understanding of why things fall down than when they started. This article is a summary of why interest rates have caused the layoffs we have seen this year.
Interest rate basics
Interest rates can be thought of as a price for money. Everyone has either too much or too little money at any given time. A person doesn’t need the amount of money required to buy a car right up until the moment they buy a car. We need a mechanism to get the money from the people who have it to the people who need it and, like many things in society, we allocate it through a market.
How do you pay for money? With money. Interest is just extra money you give someone for using their money for a period of time. Like other markets, when there are more people who want it than are offering it, the price (interest rate) goes up, and the price goes down when there are more people offering it than want it. Higher prices encourage more lenders and discourage borrowing, just as lower prices cause lenders to find other uses for the money while bringing more borrowers in, ultimately creating an equal number of borrowers and lenders.
Money is different from other markets because of its ability to enable many types of productive activity. Someone who can reliably earn 8% on an investment will want to borrow as much as possible at 2%, and won’t borrow anything at all at 10%. Even consumption can spur investment as companies build up their ability to meet the demand. This fact makes it a useful market to intervene in for institutions that are responsible for the proper functioning of an economy.
During an economic downturn there is less activity going on, and the problem is exacerbated by people hanging on to money as a precaution against the slowdown affecting them directly (such as through layoffs). Here a central bank would intervene and cause interest rates to fall. As noted above, lower rates make it less desirable to hold money and makes more projects economically viable. These investments coincide with additional hiring which is expected to improve the economy.
Why would a central bank want to slow down an economy? There is only so much that a given economy can do at a given time, since there are only so many workers and machines for them to operate. Attempting to stimulate an economy beyond this point does not produce a meaningful increase in productive activity, but it does increase the demand for the goods and services the economy is already producing, causing prices to rise. Most people are familiar with this concept through its name: inflation.
Until recently, interest rates were at historic lows, originally decreased in response to the global financial crisis in 2007-2008. People have become accustomed to these low rates and have spent accordingly. The world has changed and a number of factors have impaired the global economy’s ability to produce the things that people want and need, and at a time when people have government stimulus money and a desire to spend after the COVID-19 pandemic. Central banks have been aggressive in combatting the resulting inflation through raising interest rates. The resulting rates are not high from a historical perspective, but they are much higher than they were in recent memory, and few people expected them to rise so quickly.
What this means for gaming
Gaming is a business like any other, and companies are faced with a situation where projects that made sense in a low interest rate environment are no longer viable. The layoffs have been so severe because companies are all responding to the same cause.
The word greed comes up a lot when discussing these topics, but it is rarely a satisfying or useful explanation. If we must use the term greed, it is more useful to assume that companies are maximally greedy all the time rather than assume that rising interest rates caused companies to remember their greed, thus ending the great corporate benevolence of 2008-2022. We expect greed to drive investment when interest rates fall, just as we expect greed to curtail that investment when interest rates rise. It is desirable that these policies remain effective, even while we regret how it affects the industries that are close to us.
It is also common for anger at the layoffs to run the risk of attributing some kind of moral defect to business decisions that do not work out. Any investment involves a degree of risk, and sometimes the projects enabled by low interest rates have a low expected value because of the risk associated with them. Hindsight is useful in improving our decision making for the future, but it is not helpful to look at realized outcomes and declare them obviously sound or foolhardy in the first place. We should reward the kinds of decisions that are aligned with building a sustainable business that makes the best use of the resources available to it, and avoid short term speculation to meet arbitrary targets. In practice, we reward the plans that pay off and do not consider the circumstances under which they were made. It is common to accuse publicly traded companies of short term thinking, but most gaming coverage follows the crowd in this regard simply because success is much easier to measure.
None of this is intended to excuse or encourage a callous attitude towards workers. There can be terrible reasons for layoffs, just as there can be well meaning people who find themselves in a situation where they need to let people go. Layoffs do raise questions about management, even if one is entirely indifferent to the workers. If those affected by the layoffs were truly expendable, why did it take raising interest rates to remove them? If they were not expendable, what led to the circumstances under which the firm lost these valuable resources, and how will it affect its ability to generate future cash flows?
Gaming is knowledge work, and so every layoff doesn’t just lose the firm the talent, but potentially arms competitors with that talent. Even large publishers have said as much in earnings calls when analysts were expecting to respond to a disappointing quarter with layoffs. Clearly there are limits to this reasoning, otherwise we would not be seeing the layoffs we have, but, even among the least sympathetic participants in this market, the situation is more complex than is usually portrayed. The fact that so many participants are doing layoffs does suggest there is a more structural factor at play and that ultimately large firms expect to be doing less in the near term, although less of what remains to be seen.
The indie case
It has been fashionable for a while to say that there are too many games being released. This may or may not be true, but what we are observing right now is what it looks like when an external factor comes in to put a break on game production. Given how many large firms have hiring freezes and layoffs, it is more likely that the displaced workers will need to find work among smaller and independent projects or otherwise exit the industry.
The perspective that says there are too many games says that the industry its too big and people need to leave. The alternative is to say that now is the time to found or expand smaller projects. Not every firm requires the kinds of return that the big companies doing layoffs require. The simplest example would be a profitable project shut down by a parent company. Provided the team was willing to accept the return the parent company wasn’t, they have a good reason to set out on their own and attempt to recreate their earlier success. Higher interest rates make it more difficult to get financing than before, but the point is that smaller firms are not obligated to act like larger ones. In fact, they often benefit form acting differently.
This option is not limited to existing teams. Large companies have already made it clear that they feel that they are at capacity and are not interested in expanding further. It falls to teams that are willing to act differently from the large firms to make up the difference if the industry is not going to contract in terms of employment.
There aren’t any guarantees either way. It may be that there really are too many games and that the past level of employment could only be sustained by uncommonly low interest rates. It may also be that talent has been released that can now be put to better use by being better at identifying opportunities or more efficient at creating games. Time and the efforts of developers will show us which view is correct.
Recall that one function of the policies discussed in this article is to bring the economy back on a more sustainable and productive track. It is clear that leaving the matter to the largest developers means that some people will need to exit the industry entirely. But leaving the shape of the industry to the largest participants seems to be a larger concession than people are willing to make. There is nothing easy about the prospect of operating outside of large publishers, but at least it means operating outside the restrictions and priorities that led to the layoffs we are currently witnessing. The previous levels of employment can be sustained provided that customers are receiving value for supporting that effort. If the large firms are in retreat, then it is up to the independents to make up the difference.
SystemTalk 