The video game industry has entered a period of uncertainty. After an era of low user acquisition costs and free money, the industry has witnessed a cascade of layoffs and studio closures. This shift is not necessarily driven by a decline in revenue. While revenue hasn’t been increasing the way it was a few years ago, it hasn’t fallen off a cliff either. Across the board, revenues are flat, if not slightly higher year-over-year.
What has been seriously impacted is profit. Recently two publicly traded studios, Embracer and Stillfront, reported their full 2023 earnings. The results illustrate the industry’s problem:
In 2022, Embracer had revenue of $1.08B and a net income of $139M. In 2023? Revenue of $1.13B and a net income of -$162M. In 2022, Stillfront had revenue of $165M and net income of $19M. In 2023? Revenue of $162M and a net income of $0.9M.
In this article, we’ll dive into the six key factors that are driving this decline in profitability. From the attention economy to the rise of live service games, we’ll explore how these trends are impacting studios like yours and what you can do to adapt and thrive in this new landscape.
Whether you’re struggling to keep up with rising development costs, grappling with the challenges of live service games, or trying to navigate the new era of privacy and advertising, this post will provide you with the insights and strategies you need to stay competitive and profitable in today’s gaming market.
So, let’s dive in and explore the new challenges facing the video game industry — and how your studio can overcome them.
Increased Competition
If we had to rank the factors impacting studio profits, this would probably be number one. Yes, the gaming market is more saturated than ever. But there are also more players than ever. Shouldn’t this increase in supply be balanced by the increase in demand?
The thing is, studios aren’t just competing with other games anymore. They’re competing with every other form of entertainment and distraction out there. Social media, streaming video, mobile apps — all of these things are vying for people’s time and attention, and they’re all just a click or a tap away. Welcome to the attention economy, where the real commodity isn’t money, but people’s eyeballs and engagement.
This means studios have to work harder than ever to create games that aren’t just fun to play, but can hook players and keep them coming back. It’s not enough to get someone to download your game or buy your title. You have to keep them playing, and keep them invested. Because in the attention economy, engagement is everything.
This has led to a lot of the trends we’ve seen in recent years. The rise of live service games that are constantly updating with new content. The emphasis on social features and community building. The integration of appointment mechanics and daily rewards to encourage regular check-ins. All of these are strategies to keep players engaged and coming back in a world where their attention is more fractured than ever.
However, these strategies represent a double-edged sword. While they can be effective at keeping players engaged, they can also be incredibly resource-intensive. Constantly creating new content, managing live operations, hosting events and community initiatives — all of this takes significant resources.
Rising Development Costs
Live services? Vibrant communities? Sprawling worlds and narratives? Many of the solutions to winning in the attention economy have simply made games a lot more expensive to make. These demands have grown in tandem with the expectations for visual quality and technical sophistication. Players expect hyper-realistic graphics, smooth performance, and innovative features that push the boundaries of what’s possible.
Meeting those expectations requires a significant investment in technology and skilled personnel. High-resolution assets, advanced physics simulations, complex AI systems — all of these elements require more time and resources to develop than ever before.
This isn’t to say these investments aren’t worthwhile. The push for greater fidelity, scope, and ongoing engagement is in many ways a response to player demands and expectations. And when executed well, these elements can make for incredibly rich and immersive gaming experiences that keep players engaged for hundreds or even thousands of hours.
But it does mean that the cost of developing and maintaining a competitive game in today’s market is higher than it’s ever been. Managing these costs while still delivering on player expectations is a constant challenge.
Longer Development Cycles
As games have grown more complex, development times have ballooned. It’s not uncommon for AAA titles to take four to five years to develop — or longer. That’s a long time to go without a new release, and it puts a strain on a studio’s cash flow.
This increase hasn’t only been driven by the pressure to push technological boundaries and exceed content expectations. Both of these factors demand more quality assurance and bug fixing. Add in a live service component, and you’ve got a portion of your team that never moves off the project, which strains resources for future projects.
When games take half a decade to make, studios feel the financial pressure. They’re essentially betting the studio’s future on each major release. If a game underperforms after a long development cycle, it can be devastating.
Changes in Consumer Expectations
If increased competition is the driving cause of sliding profits, changing consumer expectations is a close second. These expectations encompass both the size, scope, and quality of games players are devoting time to, and an expectation of what a game should cost. Especially on mobile, that initial cost is almost always zero.
Player expectations for features, monetization, social integration, and even graphic style can shift dramatically over the course of a long development cycle. What felt fresh and exciting at the start of development might feel dated by launch day. Additionally, with live service games, player preferences can continue to evolve post-launch. A feature that players love at release might become a point of contention months down the line as the meta evolves. Staying responsive to these shifting preferences is a constant challenge.
To meet these expectations, studios have leaned heavily into market research and iterative development — staggered releases, competitor analysis, focus groups, playtesting, etc. But as many of those studios have found out, it isn’t enough to meet expectations. In order to thrive, consumer expectations need to be beat. That’s why we’ve seen more and more studios adopt audience understanding as a core principle, and developing a player-centric vision around that understanding. With this approach, the best studios aren’t just meeting players where they are, but where they’re going.
Targeting Challenges
We’ve written extensively on how tracking is not what it used to be. Between Apples App Tracking Transparency (ATT) policy and Google’s decisions to phase out third-party cookies, the effectiveness of targeted ads has decreased significantly. Mobile revenue that came from targeted advertising has been declining; CPIs and ROAS are both heading in the wrong direction.
Beyond the direct financial impact, these privacy changes have also made it more difficult for studios to understand their players. Studios used to rely a lot on user data analytics to make design decisions, optimize game balance, and target marketing efforts. With less data to work with, they’ve had to find new ways to gain insights into player behavior and preferences.
As a result, many studios are doubling down on audience understanding, and optimizing marketing creative based on these learnings. This takes the reliance away from big tech to supply the data, and empowers studios to reach their high LTV audiences in a far more efficient way.
Monetization Challenges
The rise of free-to-play and games as a service has completely upended traditional monetization models. Players expect to be able to try a game for free, and they’re often reluctant to pay upfront for a game they might not enjoy. And with the privacy changes we just talked about, targeted advertising is becoming less viable, especially on mobile. That’s a big hit, as ad revenue was a major monetization pillar for many free-to-play mobile games.
As a result, studios have had to get increasingly creative with how they generate revenue. The challenge is finding a monetization model that feels fair to players, but still generates enough revenue to sustain game development and ongoing operations.
There’s no one-size-fits-all solution with monetization challenges. Some studios have found success with battle passes, others are experimenting with blockchain and NFTs. What works for one game might not work for another. This is because every game has a unique audience, and the most effective monetization model aligns with the intrinsic motivations of each game’s specific player base.
At the end of the day, if you can create a game that players truly love and are willing to invest in, the monetization will follow. But if you prioritize monetization over gameplay, you’ll quickly lose the trust and loyalty of your player base.
Conclusion
The video game industry is facing a new set of challenges that are putting pressure on studio profits. From increased competition and rising development costs to changing consumer expectations and targeting challenges, studios must adapt to this new landscape in order to thrive.
One key strategy is to focus on acquiring and retaining high-LTV (lifetime value) users. These are the players who are most engaged with your game, most likely to make in-game purchases, and most likely to stick around for the long haul.
However, acquiring high-LTV users is easier said than done. With so much competition for players’ attention and the challenges of targeting in the new privacy landscape, studios need to be strategic and data-driven in their approach.
That’s why in our next article, “Why Acquiring More High-LTV Users Is Difficult and How to Do It,” we’ll dive deeper into the challenges of user acquisition in today’s market and provide concrete strategies for identifying, targeting, and retaining high-LTV players. If you’re ready to take your studio’s profitability to the next level, read more here.
