The massive wave of layoffs, studio closures, and corporate consolidations that hit the games industry last year is by no means over, but as we enter the second quarter of 2024, the pace of such announcements is beginning to slow or at least appear to have peaked.
There will still be some sore spots before this is all over, but we are finally seeing signs of recovery, with new studios sprouting from the rubble, and existing ones cautiously starting to expand again.
The scale of this downturn was unprecedented, in part because the overall industry and job losses were much larger than in previous cycles, but the downturn itself was a familiar story: Companies overinvested in an economic environment where capital was easy to come by, betting badly on trends that were never as attractive or sustainable as they had hoped. Then the economic environment changed, reducing risk tolerance, and companies that had voraciously pursued growth for years suddenly became fixated on cutting costs. This cycle has been repeated at various intervals and scales throughout the history of the industry.
But it's a cycle, and the wheel that spins downwards will eventually reach a low point and start moving upwards again. It's a little too early to declare that we've hit bottom, but soon the industry will begin the process of rebuilding the capacity it just lost. Hiring will outweigh layoffs, and studio openings will become more common than studio closures.
The big question then is not whether the lost jobs will come back, but that they will, but where and in what form. The capacity for the industry to rebuild will be different in focus and form from the capacity that has been dismantled over the past year and a half. Importantly, the location may also be different.
“As the wheel turns from contraction to expansion, they will be able to contain costs by building new capacity in less expensive locations than where they were previously operating.”
Finally, keep an eye on the new studio openings and expansion announcements we're starting to see. This week, Amazon announced it's opening a new studio in Bucharest. Riding on the phenomenal success of Baldur's Gate 3, Larian is opening a studio in Warsaw.
The depth of game development talent in Eastern Europe is unquestionable. Long gone are the days when game companies in the region only worked as outsourcing companies for larger studios in North America or Western Europe. But there's also no denying that the costs of running a studio in these regions are much cheaper than in traditional game development hubs such as the West Coast of the US or Southern England.
A cost reckoning will be inevitable as the industry begins to rebuild lost capacity. At the same time that the games industry was undergoing mass layoffs and closures, inflation in high-cost-of-living areas reached its highest level in a generation, and salaries in those areas rose accordingly.
Game development is incredibly labor intensive, requiring many people with a wide range of highly skilled and creative talents. Labor costs are one of the most significant factors that determine the total cost of making a game. Successfully running a studio somewhere like Eastern Europe or Southeast Asia instead of Los Angeles or London could, at least in theory, significantly reduce development costs.
Larian Studios opened a new studio in the Polish capital, Warsaw, this week.
Of course, this cost gap has always existed, and publishers have experimented with opening studios in cheaper regions for decades, but in the current climate, the calculation has clearly shifted in that direction.
This isn't just because expensive regions have soared costs, far outpacing wage increases in cheaper regions; it's also because the skilled labor base with the technical and artistic skills needed for game production has improved significantly in many cheaper regions. Many places, especially Eastern Europe, also have a good base of skilled labor with extensive experience in game development, a key thing these regions lacked in the past. There were plenty of skilled young people, but few with the development experience needed to keep projects moving smoothly, and they were relatively easy to find among the workforces of traditional game development centers.
Many companies reach the same conclusion: as the wheel turns from contraction to expansion, companies are able to control costs by building new capacity in cheaper locations than where they previously operated.
But the question of whether that new capacity can really be brought up quickly and effectively remains a thorny one. While these regions certainly have more experienced staff than before, there are still big gaps, which pose problems when trying to maximize the efficiency of new development resources.
The advantage of experienced staff is that they have made mistakes, seen others make mistakes, and know how to avoid them in the future – that's experience, and a studio that lacks that experience is likely to make a ton of costly, time-consuming mistakes that could have otherwise been avoided.
Additionally, lower-cost regions have a lot of highly skilled staff, but while their skills may look similar on paper to those of existing developers, in practice they are very different. For example, India has a wealth of new game development talent, but it is almost exclusively focused on mobile game development, and even then, it tends to be focused on creating games for lower-spec devices. This is a rare and valuable skill set, but it is not easily transferable to developing for high-end consoles or PCs.
“The gaming industry will add capacity again over the next year or two, but most of it will be in cheaper locations.”
What has often happened in the past is that companies set up studios in cheaper regions with inexperienced staff, while the more experienced staff in more expensive regions raise capital and set up their own studios. Eventually, many of the studios in the cheaper regions end up acting as outsourcing providers for experienced developers who are bought up by publishers when the economy recovers. This is usually a pretty wasteful way to get simple results, but there is a growing realization that this time things may be different. Regions such as Eastern Europe and (at least for mobile titles) South and Southeast Asia now have more local, experienced talent available.
Additionally, the rising standard of living in many of these locations, combined with the growing lack of access to a decent standard of living for many people living in expensive areas of the West, may make it attractive for experienced developers from the West to move and work in these new studios. While this was a very rare trend in the past, with developers generally only moving to such studios once they had reached senior management positions, this time the push and pull factors for people who have worked in areas with extremely high costs of living are significantly different and there is arguably the potential for a sort of “reverse brain drain” to occur, especially for younger, more mobile staff.
At least in the short to medium term, the result is clear: the games industry will start adding capacity in earnest again over the next year or two, but most of that capacity will be located in cheaper locations than before.
What's less clear this time around is what the fate of newer studios in cheaper areas will be. Now, more than at any point in the past, there's reason to believe they could thrive and start attracting experienced talent from other regions.
But for those affected by industry layoffs, this just creates another tricky problem to contend with: When hiring begins to resume in earnest, many may have to face tough questions about whether they're willing to relocate to lower-cost areas to continue their careers.
