GamesBeat: You hear similar things coming from the console guys. Phil Spencer talked about the decisions they’ve made to take some games to Sony’s platform, to other platforms. One thing he said was that what everyone needs is for the market to grow. When the market’s not growing, it explains a lot of the suffering going on, and the need to rethink.
Layden: Absolutely. When your costs for a game exceed $200 million, exclusivity is your Achilles’ heel. It reduces your addressable market. Particularly when you’re in the world of live service gaming or free-to-play. Another platform is just another way of opening the funnel, getting more people in. In a free-to-play world, as we know, 95% percent of those people will never spend a nickel. The business is all about conversion. You have to improve your odds by cracking the funnel open. Helldivers 2 has shown that for PlayStation, coming out on PC at the same time. Again, you get that funnel wider. You get more people in.
For single-player games it’s not the same exigency. But if you’re spending $250 million, you want to be able to sell it to as many people as possible, even if it’s just 10% more. The global installed base for consoles–if you go back to the PS1 and everything else stacked up there, wherever in time you look at it, the cumulative consoles out there never gets over 250 million. It just doesn’t. The dollars have gone up over time. But I look at that and see that we’re just taking more money from the same people. That happened during the pandemic, which made a lot of companies overinvest. Look at our numbers going up! We have to chase that rocket!
We’re not doing enough to get heretofore non-console people into console gaming. We’re not going to attract them by doing more of the shit we’re doing now. If 95% of the world doesn’t want to play Call of Duty, Fortnite, and Grand Theft Auto, is the industry just going to make more Call of Duty, Fortnite and Grand Theft Auto? That’s not going to get you anybody else.
GamesBeat: When we get to the subject of why we’re having such a tough time in games, there are things that go way beyond blockchain. I felt like last year, all the layoffs–they were bigger than normal, but it just meant it was a bad year. The layoffs that are continuing this year make me think this is an unusual catastrophe. What’s going wrong here? Why are we in such a funk?
Layden: We’ve been around this tree for a very long time. There are some dynamics that we haven’t seen before. It’s the biggest thing in the world. It’s a $240 billion industry. It employs more people now than it ever did before. During the pandemic, particularly here in Silicon Valley, we saw the Googles, the Amazons, the Facebooks, the Apples just sucking up engineering resources left and right. They were in lockdown, but they were hiring. Nothing fuels this industry like FOMO. If you look around and see that all your competitors are hiring engineering talent, you want to make sure you get some too before it all evaporates.
There was a huge hiring spree, and because of the pandemic, it’s not like you needed to find them a desk or an office or a chair or anything. You just hired them and they sat at home and wrote code or made marketing plans. That exploded. There was the metaverse thing going on. Chief metaverse officer was a job for a hot minute. Money was essentially free. All this money sloshed into the system. All the excitement about what we could do. At the same time, revenues increased across the interactive space because we had a captured audience. They couldn’t leave the living room. They spent more time online. They spent more money in the stores. All indicators, the numbers go up.
Then it was over. Or we called a timeout on the pandemic, anyway. People went back into the world. Consumption dipped to normal levels. It’s dropped, but it’s not lower than 2018. It’s normalized. The big companies laid off tens of thousands of people, whether Amazon or Netflix or whatever.
GamesBeat: It seems like at least those big guys are in a boat where they have to hire them all back, because AI is creating another boom again.
Layden: It’s crazy how you can lay off 900 people and have 300 open recs on your website. There’s a mismatch between what companies think they need and what they actually have. What did they say, 12,000 or 13,000 last year and we’re already up to 7,000 just in February of this year?
GamesBeat: I think it was 10,500 by one set of numbers and then 8,000 already this year.
Layden: Does it stop tomorrow? No. I think we’ll see more. Today was EA, right? Yesterday was Sony. It’s going to continue to occur. What’s remarkable, when you look at the bottom line of these companies, some of them are hitting record revenues, record profitability, and laying off 8% of their workforce. Other than a mad chase for profitability, I don’t understand it.
GamesBeat: It’s maybe made people more suspicious about AI. Is AI causing this? It doesn’t seem like it’s ready yet, though.
Layden: AI is a convenient throwaway line. I think it has nothing to do with what’s happening at all. Maybe around the margins, around places where private equity is getting skittish and VC doesn’t want to go because they don’t know about the AI component. But deep down in the companies that have been building stuff for decades, that are experiencing layoffs, it’s not an AI thing. It’s just, “We took on a lot of capacity because we thought we were going to build all these things for a population that was stuck in their living rooms.” Then that growth curve dropped when the world came back.
Look at live service gaming. I can’t imagine a game industry where you have 20 live service games, all of them incredibly successful. There’s just not enough energy around that. Remember back in the day when we played Ultima? Then Everquest came, and everyone left Ultima to play Everquest. Then everyone left Everquest for World of Warcraft. It’s difficult for multiple titles in a service or a persistent world category to be successful.
GamesBeat: I don’t know whether I’ve become overly optimistic, but I feel the need to remind people that it’s not going to be a complete disaster. Things are going to get better after we hit bottom. For a lot of people, they seem to think this is bottomless, that it will go on forever. But every week I write about companies raising money. Amir Satvat is one of the people who’s been monitoring jobs. He’s tracking 2,000 companies now, and they do have job openings. I think he thinks that hiring is going to exceed layoffs by September. At some point in the pipeline it will make sense to have an improvement in the overall situation. Do you think people have been overly pessimistic? At some point do we have a recovery?
Layden: Layoffs are always a lagging indicator. Layoffs occur trying to solve a problem that happened a year ago. You had this plan and it didn’t work out. You feel you have people now who aren’t in line with the new course correction. Layoffs don’t address today’s problem. They address decisions made in the past that may not have been the right decision. Let’s understand it’s not taking the temperature of today.
I agree with Amir’s point. We talked about this earlier. All these thousands of layoffs over here, all these open recs over there across the industry. It’s a mismatch of talent to requirements. That will level out over time. The demise of the industry has been predicted so many times in the last 20 years that it’s almost a joke. We’re fine. I don’t want to sound like a broken record, because I’ve been saying this for five years, but it’s the rising cost of development. That’s the existential threat. It’s not “live service gaming is tricky” or anything else. When we’re in the $250-300 million to make a game world…
I’m giving a talk about this tomorrow at Stanford. Gaming is reaching its cathedral moment. There was a world hundreds of years ago where they built cathedrals, massive edifices to God, throughout Europe and around the world. Eventually, indentured labor only takes you so far. Then it stopped. It became prohibitively time-consuming and expensive. They were wonderful and beautiful. You can look at any of them across Europe and think, “That’s a marvel.” But we don’t make them anymore. We don’t make them because the math doesn’t work. If you have four walls and a roof, you can call it a church, and God will come visit. You don’t need the cathedral anymore.
I’m afraid that we’ve bought into the triple-A, 80 hours of gameplay, 50 gigabytes of game, and if we can’t reach that then we can’t do anything. I’m hoping for a return of double-A gaming. I’m all for that.
GamesBeat: Matthew Ball’s most recent essay had a few good points that helped paint a picture for people. We have 10% inflation. We have larger teams than we used to. We want to put all these cool new things in games and make them bigger, 100 hours of gameplay or more. But we’re still selling them for $60.
Layden: Crash Bandicoot, back in 1998, cost $49.99. But it probably cost less than $7 million to make. It sells 10-15 million units? Well hey. In today’s world, God of War costs more than $100 million to make, and yet you can only charge $59.99. What happens to your break-even point? That’s why, back in the late ‘90s, there were a lot more Ferraris in the parking lot at game developers. The profit sharing explodes. Price elasticity has been a huge problem in gaming.
GamesBeat: I remember people saying, many years ago, that the games business is better than movies, because you could make a game for $10 million and get $100 million back. At the same time Hollywood was making movies for $90 million to get the same $100 million. Now games have caught up.
Layden: Right. Profit sharing ain’t what it used to be.
GamesBeat: What do you see as the solutions to drive for?
Layden: Granted, I’m an old man. We have our own nostalgia. But I look back at the PS2 era, and there was so much variety. You had God of War and Assassin’s Creed. But you also had Loco Roco and SingStar and Dance Dance Revolution. You had this entire spectrum of entertainment opportunities. At $7-12 million a throw, why not make a bet and see what happens? Katamari Damacy, for Christ’s sake, you couldn’t get that built today because you can’t even explain what it is. But now, when every bet is triple-digit millions, risk tolerance is super low. You end up with copycats and sequels and not much more.
GamesBeat: I look at what’s structurally different about the industry now. We have these big co-development companies, like Streamline and Keywords. Keywords is more than 10,000 people. There are 3,700 people at Virtuos. Those didn’t exist before. Maybe game companies should make use of them. I think they are making use of them, but the big companies still seem caught in a hire-then-fire cycle. Perhaps not as much as they used to, but they’re still doing it.
Layden: Less, actually. If you look at the growth of Keywords or Streamline or Virtuos, getting more business all the time–if you look at the credits at the end of an Assassin’s Creed or The Last of Us or any of these big games, you used to be able to get through the credits in about 30 seconds in the PS2 days. Now there are thousands of people in the credits, and you’ll see all of these outsource companies, supplemental VFX houses, supplemental graphics houses. They’re outsourcing a lot of it. That happens more and more. For a company that’s great. It’s talent that doesn’t sit on their P&L. It’s not an FTE. You don’t have long-term employee liability. That has expanded, and those sectors are growing dramatically.
There’s going to come a time, in my lifetime, where game development becomes more like movie development. When you make a movie, you hire all the components in. You create the Fast and Furious company. All these people come together. You make the movie. Then everyone disperses. I think that’s the only way to work in the future. The idea of having 300 people sat in a massive warehouse waiting for the workflow to come by them is just not going to be efficient anymore.
GamesBeat: Waiting for Neil Druckmann to say, “This is the next game.”
Layden: There’s always going to be the creative core. You can’t get away from the creative core. But it’s like movie studios. Movie studios used to have screenwriters, actors, musicians, composers, carpenters, electricians, all on salary. They’d punch in every day at MGM and wait to build the set. In the meantime they’re having coffee.
GamesBeat: There’s a role for another structural difference now, too, which is VC. The game VCs are here. They still have money. But they’re getting gunshy. They’re investing 75% less than they did last year.
Layden: And they want to go late round. I talked to a lot of VCs at DICE. They’d rather come in late. Guys, private equity is supposed to come in late. VC is supposed to come in first. That’s not venture capital.
GamesBeat: They should be funding the original IP.
Layden: Absolutely. That’s why you come in early. You get a better back end. But they say, “We’d rather come in late and get a smaller back end with more predictability.” Aha, okay. Then you’re private equity now. You’re no longer VC.
Some of the VCs are telling me they’re getting pressure from their LPs. “We gave you a bunch of money in January. It’s November now. Have you invested it?” “Well, we’re still looking for opportunities.” “Then I could have just put that money in T-bills.” There’s pressure coming from the LP community. They want their money put to work. They’re paying fees, but the money isn’t going to work.
GamesBeat: One problem I’ve heard about, maybe they’ve started funding things in tranches. Maybe three rounds will get you to finishing your game, but now we won’t give you the second and third round because we’re afraid. All you get is that first round. That’s not going to work.
Layden: No. We have to scale back the ambition. Not the creative ambition, not the entertainment ambition. Again, I want 15-20 hour games. As the average age of the gamer has increased over time, from early 20s to early 30s, we’ve seen the swap between people who are time rich and money poor to people who are time poor and money rich. That person can’t fit an 80-hour game into their lifestyle. I still have Red Dead Redemption 2 in shrink wrap on my shelf. It’s way too much.
GamesBeat: We have Palworld and we have Helldivers 2 right now, though.
Layden: The big change isn’t going to come from the big franchises. The change will come from the outsiders. The change will come from a place we’re not even looking at right now.
Interview With Shawn Layden on the Industry
Last edited by Ryuu96 - on 08 March 2024
