A reader paints a grim picture of the end game for the video games industry, and how the current financial system is disincentivising innovation.

The video game industry is in crisis, and I don’t see a way out of it. In many ways it is a textbook example of what happens with any industry. As readers often point out, every company is in it for profit. This is a basic truism. But the important thing for any business is that it doesn’t end there. It is essential that to remain in competition and therefore profitable, a proportion of the profits realised must be thrown back into circulation, effectively to enable the company to grow.

Take DMA Design as an example. They started out as a small studio based in Scotland that produced a successful game called Lemmings. As with any company making goods (not, in other words, finance capital which makes profit through interest, or owners of land and intellectual property which make profit from renting them out), an initial investment (startup capital) is required for any idea to get off the ground.

DMA Design would have had a small amount of investment capital (perhaps from a bank or, as often is the case, from wealthy parents) used to purchase means of production (MP) such as computers, offices, and so forth and, crucially, to pay the wages of a labour force (LP or labour power) to make the game.

But the investment is only realised as profit if the game is sold at a sufficient price in sufficient numbers for a return on the investment to be made. In other words, to receive an amount of money that not only recovers the costs but to expand on the original investment. With the additional money now available, they can afford to scale up by purchasing additional MP, hiring more staff, and producing more ambitious games that take longer to make before a return through the sale of the game can be made.

Small companies like DMA Design may be profitable but they’re exceptionally vulnerable to changes in market conditions whereby an unsuccessful product or, as is often the case, changes in the economy that detrimentally impact profit margins make them ripe for acquisition. Even if successful, larger companies viewing them as competitors or wanting an easy way to expand their portfolio, perhaps through ownership of successful IP, have the resources to make a hostile takeover bid or offer enough money to entice the owners to sell.

DMA Design is now known as Rockstar North, a subsidiary of Rockstar Games which in turn is owned by Take-Two Interactive. From video games that took thousands of dollars to make to ones such as GTA 6 which cost many millions and take years to make, the greater the level of investment, the more that is at stake, the larger the market needs to be for profits to be realised. This breeds conservatism. We all want GTA 6 to have vehicles that drive like those in Forza Horizon or gunplay like that in Destiny. Don’t count on it.

Competition does not in itself drive innovation. If anything, as we have seen with Sony’s race to produce the next Fortnite, it tends if anything to lead to conservatism. There is an apparent contradiction here. As we know of Nintendo’s history of (relative) failures, whenever they lose market share, they tend to produce new and innovative products to recover it. Their successes with the Wii and Switch are cases in point.

But rather than leading to more innovative products and cutting-edge software, as we are seeing with the Switch 2, success tends to breed complacency and conservatism. Nintendo is a market leader. By successfully competing against far larger firms, such as Sony and Microsoft, they have a formula that appears to work. So why change it?

In the case of Nintendo, rather than focus on what they do best – make cutting edge software based on innovations in console and controller design – they appear instead to be cashing in on the Switch’s success with more of the same. Worse for gamers, they appear to be shifting focus by cashing in on their brand and IP through movies, theme parks and so forth.

Instead of making what every gamer wants – Half-Life 3, Left4Dead 3, and Portal 3 – Valve, by comparison, have put all their resources into Steam and are seemingly doing well out of it. So why bother making Half-Life 3 if they can turn (more of) a profit with Steam? Or in the case of Nintendo, if they can make huge profits from movies, why bother with video games as it becomes increasingly difficult to make the equivalent profits from them?

These companies are ‘innovating’ but not in the ways that gamers would like them to.

What prompted me to write this piece is the excellent article by Adam Starkey that catalogued all of Microsoft and Sony’s recent acquisitions. This is set to continue. As we have seen with other media industries, there is a tendency towards concentration or monopolisation as the larger companies with vast resources able to withstand broader economic problems buy up competitors. From the perspective of gamers, this would not be such a bad thing if their aim was to inject money into them by supporting the development of software and thereby the labour force that makes it.

But in many instances, it makes economic sense to close the company down, thereby removing a competitor (or the prospect of another company purchasing them), and stripping them of whatever assets they can capitalise on. They may well be able to make a profit on some of that IP, just not as much as they can in the short term in other ways, especially if it increases shareholder value.

If Nintendo are the angel of the big three, it is because they are unable to compete on these terms. As video games are their primary source of income (for now), they need to turn profit on the consoles they make and through their IP, where they do have a competitive advantage, continue to make video games that people will want and can afford to purchase (at least in sufficient quantities to make a profit).

The source of what adds value to their IP, making it cutting edge, is their highly skilled and talented labour force. Unlike Sony and Microsoft, they cannot afford to lose them. If, however, they continue to shift focus towards monetising their IP through movies and such like, and are successful in these regards, they too may go the way of Sony, Microsoft and Valve and shift their focus entirely.

Their business model, which has proven so successful and in many ways is the linchpin of the whole industry, is vulnerable. Ultimately, they, with a market cap of approximately $75 billion, could go the way of their competitors and become ripe for acquisition too, perhaps by Microsoft (with a market cap of $3 trillion) or Disney.

Things are only going to get worse. The combination of tariffs and the rising prices of rare minerals, RAM chips and so forth, is a threat to the entire industry.

It is worth distinguishing here between the mass and rate of profit. To make themselves more competitive than rivals, larger companies can afford to lower their margins. To simplify things, if the cost of MP (machinery, plant, raw materials and so forth) and LP (the cost of employing labour) to produce 1,000 units is $1,000 dollars, it costs $1 per unit – the commodity such as Super Mario.

If each unit is sold on the market for $3, the mass of profit is $2,000 dollars for the 1,000 units sold with a rate of profit (not accounting for other costs such as taxation) three times the cost of production (MP and LP). By reducing the price of the commodity to $2, they still make a profit of $1,000 on 1,000 units sold. The more units that are sold, the easier it is to lower the margins to the point that only a fraction of profits are realised for every unit sold.

So, if 10,000,000 units of Super Mario are sold, even with a rate of profit at a tenth of the cost of production the mass of profits is still relatively high. In other words, larger companies can afford to lower their margins to fractions, thereby undercutting their competitors and still generate healthy profits.

The problem is that their competitors will sooner or later be forced to do the same, lowering margins to the point that any change in the economy, such as an exponential increase in the price of RAM chips affecting the whole industry, quickly turns profit making companies into loss making ones. While Microsoft has access to vast amounts of investment capital to weather such loses, smaller companies don’t. They either go under or get bought out by the larger ones, leading to further concentration. This is happening today.

It gets worse. Trillions of dollars are today being invested in AI (in the US) on the speculation that this will eventually enable companies to cull their labour force and thereby lower the costs of production (although gaining hegemony over China will be driving a lot of this investment). Not only does this create the immediate problem of rising costs of RAM chips and, unable to get a return on the vast investments, the likelihood of the AI bubble bursting, leading to a global depression, but even if ultimately integrated into the productive economy to reduce labour costs (assuming that is an incentive), another problem arises.

As more people are replaced by AI there are fewer consumers to purchase the goods, making it harder for companies making things to realise profits. It is an obvious point that the more naïve investor seems oblivious to, namely that to realise profit consumers with the wage capacity are needed. AI may eventually replace workers (up to a point), but it cannot replace consumers. This is one of the many contradictions that ultimately lead to the kinds of crisis we are now in.

Where does this leave the video game industry? To put it in colloquial terms, up the proverbial creek. While Japan has tighter regulations on acquisition than the US, which may afford some protection to Nintendo, without (further) state regulation and protection of their industries, it is hard to see how the industry in its current form can survive.

Small independent studios struggle enough as it is, but they are exceedingly vulnerable to any change in the economy that increases the cost of production or diminishes the capacity of consumers to purchase their games. Even those that remain profitable are vulnerable to acquisition through the further consolidation of big tech companies whose monopolies have far greater ramifications for society than they do the video game industry. But they too risk becoming victims of their own success as more people are thrown into poverty.

It is human labour that the economy ultimately relies on. More precisely, it relies on productive labour, the sort that makes things like video games. Finance capital does not produce anything. As with rentiers, it leaches on the productive economy. Profit ultimately relies on the sale of things produced by human labour and purchased through the wages they receive which, in the case of video games, needs to be above subsistence levels. In a cost-of-living crisis set only to get worse, something must give. The video game industry is a microcosm of a general crisis and perhaps one of its earlier victims.

I say all this as a wage earner able to afford the hotly anticipated Resident Evil Requiem. But I wonder for how long I will have a job or a wage sufficient to enable me to fund my hobby. Moreover, I wonder for how long there will be games like this or Super Mario when it is becoming harder to realise profit on such vast expenditures (or easier to make quick profits from financial investments and the renting of IP as platforms, such as Steam do).

Those produced for a fraction of the cost by so-called indie developers, which some see as a great white hope, are even more vulnerable to all the things that today make the headlines and is causing so much hardship and grief. Brace yourselves. Nobody is immune.

By reader Ciara

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