What does inflation mean for the games industry?

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I’ve recently been asked to think about what rising inflation (8.2% in the UK in June; 9.1% over the last 12 months in the US) means for the video game industry. There are three areas to think about:

• the impact on prices
• the impact on costs
• the effect of the wider political and economic situation

My current TL/DR is that prices for consumers will go up, but not enough to offset the increase in development costs (salaries, energy, and to a lesser extent physical distribution). This means that both consumers will be hurt (higher prices) and so will producers (thinner margins).

The impact of inflation on video game prices

There are three major ways that we, as consumers, spend money on video games:

• We subscribe to services such as Gamepass, Apple Arcade or Netflix
• We buy “boxed product” games, for example: AAA titles in physical boxes or indie games on Steam
• We buy virtual currency or virtual items in free-to-play or service games

Subscriptions

Of the three, I think subscriptions are the most at risk. As the cost of living crisis hits, consumers will evaluate their discretionary spending carefully. Subscriptions are not “one-off impulse buys” that you can spend (and then either value or regret). They are ongoing commitments to spend monthly. As consumers trawl their bank statements looking for ways to save money to pay for energy, subscriptions will come under scrutiny (aided by a number of banks highlighting recurrent subscriptions and offering to cancel them on your behalf).

There are also more entertainment subscriptions than ever, as the great unbundling of cable continues, but subscription services exploding (Netflix, Disney+, Paramount+, CNN as well as all the game services). Consumers can (and will) cull a lot of these as the cost-of-living crisis deepens.

I suspect that the response from firms will be to increase the monthly cost. It’s a tricky balance between encouraging churn – an increase in prices is a reason to cancel – and increasing revenue by gaining an extra couple of dollars per subscriber per month.

Boxed products

Boxed products are already premium products. Gotham Knights from Warner Bros. Games is $69.99 as a pre-order on Xbox. With inflation running at nearly 10%, and prices having been stagnant for a while, can we imagine prices going up?

AAA boxed product pricing is not my area of expertise, but with such a continued background noise of “inflation is high” at the moment, I would imagine some companies will try to nudge the prices up. I think we will see the same on Steam. Indie purchases are price sensitive, but mainly to the discounts offered at launch and during sales. I could imagine a permanent increase in the “standard” price, possibly partnered with steeper launch and sales discounts to attract the price sensitive.

My prediction here is small price increases, but it will be against the background of consumer pain and the risk of being painted as taking advantage of people who can’t afford it. I think this one is harder to call.

F2P and service games

F2P and service games (i.e paid games with a meaningful revenue stream from in-app purchases) operate in a different economic model. Each F2P game is a monopoly: the stores of Apple and Steam and Microsoft and Sony are hyper-competitive, but once a player is inside a game, the only person who can sell anything to that person is the developer. They have a monopoly – and hence monopoly pricing power – within their own game.

That is why F2P games are perhaps less price sensitive. They can raise prices, as Eve Online and League of Legends have done (to be fair, it was Eve Online’s first price increase since 2004), and despite predictable public backlash, it may not affect sales.

Or it might. F2P is very complicated. Headline prices for virtual currencies can go up. If that squeezes conversion rates too much, total revenue would fall. Or studios will offer better value within the game for those virtual currencies as they convert to other desirable items, making a true understanding of the price increase hard to identify.

My prediction here is that F2P and service game bundle prices will visibly increase. I suspect that this WILL lead to increased revenue, but for some games, the corresponding drop in conversion rates means that they have just annoyed their customers without actually making more money overall.

(I saw that Eric Seufert wrote something about IAPs being “luxury goods” and hence likely to move in lockstep with disposable income two years go, so I may be being optimistic here.)

The impact of inflation on video game development and salaries

The most striking impact of inflation is likely to be on the cost side. The COVID pandemic accelerated the work-from-home capability such that I was able to lead a team of over 30 people as Game Director at Electric Square on Warped Kart Racers entirely remotely, starting in May 2020 (two months after the pandemic hit) and launching in May 2022. For the first year, I had not met many of the team in person. Running such a complex, creative endeavour entirely remotely would have been seen as close-to-impossible until necessity forced it.

The consequence of this is that the “staff retention moat” of having a nice office in a nice location near the places where people lived and sent their children to school has vanished. The team at Electric Square was distributed throughout Europe in the UK, Belgium, Spain, Malta and Switzerland. Well-paying US companies can poach UK staff, so UK teams poach from cheaper regions and so on. It has never been easier to switch jobs.

And now we have a cost-of-living crisis with inflation running at 10%. Pay demands will increase (possibly alongside unionisation) and the cost of making games will go up.

Factor in the increasing costs of energy (thanks to Putin’s war in Ukraine), rent (due to increasing interest rates in an attempt to tackle inflation) and other costs (thanks to the slowdown or even reversal of globalisation following the pandemic, the war and tensions with China) and costs for studios are going up.

The wider economic situation

When everything is going well, inequality often widens because if you are getting richer, it doesn’t bother you so much if someone else is getting MUCH richer. But when there is less to go around, like during a recession, the political battles for how that wealth is shared become much more intense. The Western world has had a benign 10 years, where much income inequality was masked by a combination of gig economy work (allowing people to say “get on your bike and work if you want more money”), continued benefits of globalisation reducing the cost of goods and the decline in unions meaning that the pendulum had swung convincingly away from those who sell their labour and towards those who make money by using their capital (homeowners, shareholders, business owners).

The pressing financial needs right now make it likely that labour unrest will be significant over the next several years. Calls from “fat cats” for pay restraint won’t be heeded. The political environment is not conducive to restrained wages, especially in a very tight labour market.

Games industry margins will fall

My conclusion is that prices for consumers will rise, but there may be a fall in conversion that means the overall revenue growth is muted. Salaries and other costs will continue to rise. The consequence is a fall in margins, meaning video games companies will be less profitable. Some might even go bust.

Of course, this is only a guess. I have shown my workings. I’d be interested in your thoughts.

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