The game industry's earnings slump comes for PlayStation and Xbox - Protocol

Hello, and welcome to Protocol Entertainment, your guide to the business of the gaming and media industries. This Tuesday, we’re looking at the console game industry’s rough second quarter and the road ahead as a potential recession sets in, as well as Sony’s lavish praise for Call of Duty and the mystery of a hidden church that took the JRPG community by storm last week.

Console gaming’s market whiplash

Market research firms had been ringing alarm bells for the better part of the last month about a downturn in the video game market, and Microsoft and Sony last week both confirmed what analysts had been forecasting: After two years of record growth, the game industry is trending downward. And it may not recover until next year.

A complex set of factors — including supply constraints on new hardware, major game delays across the board and macroeconomic pressure from a looming recession — has created a precarious environment for even the industry’s biggest and most insulated players, many of which enjoyed record growth during the pandemic’s early years.

But it’s not all bad news. This is likely temporary, both game makers and analysts are saying, even if it means there are not that many exciting new games on the calendar for 2022.

Microsoft’s bittersweet quarter. In many ways, the Xbox business symbolizes the current moment in the games business through its short-term pains, but also its long-term bets that seem poised to pay off starting next year.

The company reported fiscal fourth-quarter earnings July 26, showing declines across the board in its gaming business. It’s a far cry from January, when Microsoft was riding high off its planned Activision Blizzard acquisition, and March, when Xbox enjoyed its best sales month in 11 years.
Xbox software sales were down 6% year-over-year, while hardware was down 11%. Overall, the Xbox division declined by 7% since this time a year ago.
Part of the reason for the dip is supply constraints on new Xbox hardware, but the drop in software is also attributable to big game delays. Microsoft delayed both of its big fall exclusives, Bethesda’s Starfield and Arkane’s Redfall, to 2023, and many other studios have also pushed big releases to next year.
Microsoft has a lot to look forward to in 2023 beyond its delayed games: The Activision Blizzard deal is expected to close by next summer (and potentially sooner), which would make major releases like Diablo 4 and this fall’s sequels to Overwatch and the Call of Duty: Modern Warfare reboot part of the Xbox’s growing business.
Market researcher Ampere Analysis, one of the first to predict a decline for the global games business in 2022, said in its recent forecast that one area of strong growth remains subscription gaming, for which Xbox Game Pass is the market leader.

Sony is in a tougher position with PlayStation. Sony’s console gaming business model relies heavily on a mix of exclusives, strong hardware sales and high consumer spending on third-party hits like Fortnite, Call of Duty and others.

This year has been tough on all of those fronts — and especially so because the latest Call of Duty massively underperformed and has hurt Activision Blizzard’s earnings (and by extension Sony’s) for the past two quarters.
The PlayStation maker cut its profit outlook last week for the current fiscal year ending next March, in part due to its $3.6 billion acquisition of Bungie, which closed last month, but also sales declines in both gaming hardware and software.
Sony reported a 37% decline in operating profit from its games unit, with a 26% decline in the number of games sold (down to 47.1 million).
The company sold 2.4 million PlayStation 5 consoles last quarter, an increase from the last quarter but millions of units short of how its predecessor performed at this stage in its life cycle. Sony executives have promised a ramp up in PS5 production this year to get the device back on track.
Sony also lost subscribers to its PlayStation Plus subscription service, though we won’t know until next quarter whether its revamp of the platform that launched widely in June will help it return to growth.
Despite its current situation, PlayStation also has some bright spots that will likely help it bounce back in 2023. The platform is enjoying a new exclusive, Annapurna’s Stray, that’s helping bolster its new PlayStation Plus Extra subscription tier. It also has one of its most anticipated exclusives, God of War Ragnarök, coming in November.
Sony plans to launch its updated VR headset some time in the next year or so, and this fall’s new Call of Duty game, one of several that Microsoft has committed to keeping multiplatform even after its Activision Blizzard deal closes, will also help boost third-party revenue (so long as it’s a return to form and not a flop, like Vanguard).

Is the game industry recession-proof? A lot has been written over the past two years about the game industry’s resilience, from the transition to remote work to its adaptability when faced with rapid and unprecedented changes to consumer behavior since the start of the pandemic. But the jury is still out on whether gaming is in fact “recession-proof.”

Market research firm Newzoo has taken a somewhat outlier position by predicting modest growth for the games business, even after forecasts from fellow analysts point to a decline. Newzoo revised its market forecast for 2022 last week by $6 billion, saying the game industry would now grow up 2.1%, to $197 billion, instead of 5.4% to $203 billion.
“To some extent, the gaming market is ‘recession-proof,’” Newzoo’s report said. “Even more so than in previous times of economic turbulence, gaming’s varied monetization methods and price points, as well as the role that gaming plays in many people’s lives, mean that we expect gaming engagement and consumer spending to continue even if the economy takes a downturn.”
But Newzoo conceded that record inflation, at least in the U.S. market, means “many price-sensitive consumers will spend less on games.” NPD Group forecast last month that U.S. spending on games would decline 8.7% this year, due in part to a “return of experiential spending” and “higher prices in everyday spending categories such as food and fuel.”

Gaming remains one of the cost-effective forms of entertainment; many of the world’s most popular games are free, and a single $20 or $40 or $60 game can yield hundreds of hours of play. To that point, Newzoo said it expects “players will pick up where they left off in terms of spending” once the economy — and the new release schedule — stabilizes.

— Nick Statt

Overheard

“The harassment we’ve spoken to isn’t just rude replies on Twitter or vague comments. There have been real threats towards our people and our studio. We’re taking them seriously, which is leading to an amount of reduced communications as the team plans future protections/strategies to help avoid these sorts of things.” — Bungie community manager Dylan “dmg04” Gafner opened up on Reddit about his decision to take personal time following threats and harassment and the company’s new policy of reduced transparency in light of the attacks.

“I guess there weren't a lot of key people interested. And it shows the health of the value of the potential of Eidos, unfortunately … It was a train wreck in slow motion, to my eyes, anyway. It was predictable that the train was not going in a good direction. And maybe that justified $300 million. That's really not a lot. That doesn't make sense." — Stephane D'Astous, the founder of Deus Ex developer Eidos-Montréal, spoke to GamesIndustry.biz about his time overseeing the studio and his bafflement when Square Enix sold it and other Western studios to Embracer Group earlier this year.

In other news

Diablo Immortal races past $100 million. Blizzard’s free-to-play mobile take on the Diablo franchise has earned more than $100 million in revenue in just eight weeks, Sensor Tower reported last week. That’s faster than Fortnite (12 weeks), but not as fast as Pokémon Go (two weeks).

Roku warns investors: It’s early 2020 all over again. The company warned of a “significant slowdown in TV advertising spend,” and withdrew its full-year guidance due to economic uncertainties.

PlayStation’s experiment in kindness ends in failure. Sony discontinued a feature called Accolades that encouraged players to reward strangers for good behavior in multiplayer games. The reason? It hadn’t “seen the level of usage we anticipated,” the company said Monday.

Xiaomi releases its own take on Google Glass. The Chinese brand’s new Mijia smart glasses don’t offer full AR, but combine simple projection with a headworn camera.

Linear TV viewing is declining. The time people spent watching old-fashioned TV declined across all markets in 2021, according to a new Omdia report.

“Cyberpunk: Edgerunners” arrives next month. Combining the visual talent of esteemed anime maker Studio Trigger with the world of CD Projekt Red’s Cyberpunk 2077, the trans-media series Edgerunners airs on Netflix this September.

China’s game approvals tick up. The number of licenses China has issued to game developers more than doubled last month, a positive sign for the rebound of the country’s struggling game sector after a fierce regulatory crackdown, Niko Partners analyst Daniel Ahmad reported.

Sony sings the praises of Call of Duty. In a regulatory filing, transcribed by VGC, Sony told the Brazilian government that Microsoft’s acquisition of Activision Blizzard may harm its console business, arguing Call of Duty “has no rival” and commands unique influence over the market.

The mystery church of Nier: Automata that captivated the internet

A curious snippet of video featuring a never-before-seen section of the 5-year-old Japanese role-playing game Nier: Automata sent the gaming community (or at least a very specific corner of it) into pure pandemonium last week. On Friday, the masterminds behind the plot revealed it was all a very polished software mod, putting to bed one of gaming’s more enjoyable Easter egg puzzles in recent memory.

Nier, created by the mad genius Yoko Taro, is known for playing with convention. When fans were confronted with a secret church hidden inside one of the game’s more enigmatic environments, known as the Copied City, they thought perhaps Taro had pulled off his greatest magic trick yet: keeping a secret hidden in the game for half a decade. The fervor surrounding the church took over virtually every Nier-dedicated forum on the internet and spilled over onto Twitter, Instagram and TikTok.

It was a testament to the modders’ technical prowess that their secret area, equipped with its own cutscene and even a combat encounter, could pass as the real deal. Some fans thought it was an Easter egg pointing to an upcoming game reveal, or just another of Taro’s mischievous pranks left hidden away in the launch version of the game and patched out later.

But the modders, a trio of quite capable 3D artists and mod designers, had had their fun and pulled the curtain back with a live Twitch stream and joint statement after about four days. For a full breakdown of the saga, check out GamesRadar’s interview with one of the tricksters in question and revel in just how devious the whole performance was. Taro would be proud.

— Nick Statt