What’s driving the flood of layoffs in the video game industry?

Over the course of the first two months of the year, video game companies have already announced plans to lay off more than 8,000 workers. It’s a big shift from the explosive growth the industry saw during and immediately following the pandemic—and, for many, a puzzling one.

Electronic Arts was the latest to trim its payroll, announcing plans late Wednesday to reduce its workforce by 5%, or roughly 670 people. That followed Sony Interactive Entertainment’s surprising announcement on Tuesday that it planned to cut 900 jobs in its gaming unit.

So, what the heck is going on? As you might expect, the reasons for layoffs vary by company.

In some cases, it’s a matter of overexpansion. Swedish holding company Embracer Group became the poster child for merger (and acquisition) mania, adding over 100 companies to its roster since 2017. Today, it’s selling off holdings and laying off staff after a $2 billion strategic partnership with the Saudi Arabia Public Investment Fund fell apart. The company, which owns Eidos and Gearbox Software, has laid off nearly 1,400 people since last June and canceled more than two dozen games. Gearbox, one of Embracer’s crown jewel developers, is widely assumed to be up for sale. And earlier Thursday, Embracer announced plans to sell Saber Interactive, which is in the midst of a Star Wars: The Knights of the Old Republic remake, for up to $500 million to a private investor group.

Other companies are simply paying for their own missteps. Unity Software’s layoff of 1,800 people in January came after then-CEO John Riccitiello announced a new pricing model that caused a revolt among game developers. The company walked that back, but with the trust broken, it was forced to restructure.

But there’s  another  problem plaguing the sector: the rapidly escalating cost of game development. Before the pandemic, a AAA game generally had a budget of $50 to $150 million. But as technologies have become more advanced and players have come to expect more cinematic experiences, that cost has skyrocketed. A report last year from the U.K. Competition and Markets Authority (CMA) says that the development budgets alone of AAA games today reach $200 million or higher, with some franchises, like Call of Duty, costing as much as $300 million. Marketing costs can double that total spend.

One unnamed publisher told the CMA that development costs for one of its major franchises reached $660 million, with marketing adding another $550 million, bringing the total cost to more than $1 billion.

All of this comes as the industry faces a mid-console cycle slump. Core gamers, who are the industry’s big spenders, already have this generation’s consoles, while casual gamers are waiting for a price cut. The pandemic disrupted the release pipeline to the point that anticipated games like Grand Theft Auto VI won’t be out until next year; Sony will go through all of 2024 with no major first-party game releases.

The overriding problem in gaming, though, is the same one that’s impacting the tech sector as a whole. The spike in interest rates has made it much, much harder for companies to access funding. Public companies are a lot less willing to take on debt, and private companies have found that venture capital has all but dried up (unless, of course, you’re working in the artificial intelligence space).

For private companies, that makes layoffs inevitable. For public ones, the demands of shareholders for growth often result in moves meant to inflate the stock—and cost-cutting is an easy card to play.

It’s a trend that’s not likely to end in the near term. With few big titles on the horizon and business models changing, staff reductions and corporate restructuring are likely to continue for several months.

Here’s a look at some of the notable companies that have announced layoffs so far this year.

January

• Unity Software -1,800
• Twitch – 500
• Playtika – 300 – 400 (10% of workforce)
• Riot Games – 530
• Microsoft – 1,900
• Eidos-Montreal – 97
• Sega – 61

February

• Sony – 900
• Electronic Arts – 670

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