Another industry recession warning light just flashed red | Opinion

Amidst the chaos and upset of Microsoft’s sweeping Xbox layoffs this week, it’s probably been easy to overlook the fact that another of the warning lights on the wider industry’s dashboard has just started quietly flashing.

According to Circana market data reported in the Wall Street Journal, spending on video games among young American consumers is dropping off hard, with average weekly spend down by almost a quarter year-on-year.

That’s part of an overall belt-tightening in the 18-24 demographic group, but games are the most hard-hit segment in terms of spending declines – and while some other areas of discretionary spending like electronics and sports equipment saw an uptick in spending by older groups that compensated for some of those lost dollars from younger consumers, video games saw a much smaller but still notable spending decline with older consumers as well.

Tightening belts is pretty much an inevitability, and the expectation that there will be a demand-led recession sooner rather than later is baked into a lot of forecasts at the moment.

Incomes have risen a lot in the US during the period of high inflation over the past five years or so, but the rises have been very unevenly distributed and many workers have seen their real income fall as price rises eat all of their earnings growth and then some.

This situation is even worse in some places outside the US that have seen similar inflation but without the corresponding wage growth – though America’s very high consumer debt numbers mean a lot of its citizens don’t have much financial headroom to deal with this kind of income squeeze. Hence, belts tightened, budgets scrutinised for what can be cut – and this time, games seem to be right there on the chopping block.

I’ve written before about how this recession, should it materialise, will essentially be the first “real” recession the games business has experienced. In previous tough economic times, the industry’s strong underlying growth overcame the wider economic climate – when you’re adding swathes of new consumers every year, an overall downturn in spending hurts a lot less.

Even if most people have stopped repeating the “recession-proof” mantra that was common about games for several decades, you can look at the economic shocks of the late 2000s for a good example of how fortuitous the games business was overall; while the rest of the world struggled with the fallout of the financial crisis, the smartphone gaming boom was just entering its meteoric growth phase.

This time, there’s no booming new sector to tide us over – but perhaps more worrying is the fact that consumers also seem to have soured on video games’ other great superpower in recessions, namely their value proposition.

For decades, games have had a very sound argument to make in tough financial times: a video game console, gaming PC, or even a video game itself may not necessarily be cheap up front, but it’s arguably the best value for money of any form of entertainment when you consider the number of hours of engagement you’ll get for that expenditure.

It’s a simple and effective argument that has seen plenty of consumers continue to spend on video games even as they draw back on their other discretionary spending categories.

Consumers also seem to have soured on video games’ other great superpower in recessions, namely their value proposition

The fact that Circana’s data shows exactly the opposite thing happening among younger consumers now is a genuinely serious warning sign that the industry should not be ignoring, especially if we start to see corroboration from other data sets in the coming months.

The problem here is an especially tough one precisely because it’s a problem with narrative and image. It is not a coincidence that games are getting hit especially hard relative to other consumer sectors right at the point when a narrative about games being expensive and overpriced has reached a fever pitch.

Consumers loudly and angrily point to example after example of negative value-for-money: consoles not only failing to drop in price as they age, but actually getting bumped in price instead; PC graphics cards soaring in price despite offering increasingly marginal annual upgrades; and of course, the steady drumbeat of AAA games going from $60, to $70, to $80, with whispers that GTA 6 might even experiment with a $100 price point.

There is, of course, a technical argument for why all this has happened – I’ve made it in this column before, and it’s technically right, which unfortunately is the absolute worst kind of right.

Yes, the price of games is actually historically low in inflation adjusted terms: consumer price inflation has outstripped the relatively fixed cost of games software and hardware to a far greater extent than any of the industry’s price bumps have been able to keep pace with. The price of a game or a console today is significantly lower in those terms than in the 1990s or the 2000s.

Technically, the value for money has never been better. Technically.

That’s a technical truth that feels very real if you’re running a company in the games business and watching your costs soar while the unit prices you can sell at fail to keep pace. It’s not, however, a truth that feels remotely real at all if you’re a consumer – and while industry execs and spokespeople (and columnists, I guess) are no doubt technically right in pointing it out, doing so does little but make things worse.

Selling things to people – especially entirely discretionary things like video games – is all about how you make them feel, which means that winning an argument with your own consumers on an annoying technicality is the hollowest of victories. Enjoy being technically right, because you just lost a consumer.

The very thing that used to protect games from recessions, the sense that they were an incredibly cost-effective form of entertainment, is the sector’s Achilles’ Heel this time

In fact, if you dig into this economic argument, it’s not even quite the technical slam-dunk it appears at that outset. Many people’s salaries, especially those of young people, have not actually kept pace with inflation either, so “inflation-adjusted” is a bit of a misleading calculus.

What we’re actually talking about is “what fraction of the average person’s disposable, discretionary income does this cost”, and inflation in essentials has actually reduced that discretionary income to a sliver for many people. Moreover, the rather meagre saving grace of decades of real incomes being massively detached from living costs has been that global trade has driven a dramatic decline in the cost of many goods formerly seen as luxuries, like consumer electronics.

For games to try to break out of that trend and reposition themselves at their old price points was always going to provoke a disproportionate and highly emotionally driven backlash, against which all arguments about inflationary economics are entirely futile.

Figuring out a way around this problem is going to be very hard, and bluntly, some companies aren’t going to make it. These figures hint that not only is the industry going to get caught up in the coming consumer spending recession, it’s going to be one of the places where the hammer falls hardest – with the very thing that used to protect games from recessions, the widespread sense that they were an incredibly cost-effective form of entertainment, instead being the sector’s Achilles’ Heel this time around.

Regardless of historical price comparisons, games are seen as expensive right now, and that belief is what will drive consumers’ choices as they choose spending cuts in tough times. For some (but not all) of the biggest companies, a powerful brand will give them price-setting power even under that pressure – but for many other companies, the key route to surviving this slump may lie in finding ways to innovate flexibly around pricing in the coming years.