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Blaming the Crunch

Layoffs and closures have little to do with the recession.

Dark blue icons of video game controllers on a light blue background
Image credit: Eurogamer

Published as part of our sister-site' widely-read weekly newsletter, the Editorial is a weekly dissection of one of the issues weighing on the minds of the people at the top of the games business. It appears on Eurogamer after it goes out to newsletter subscribers.

Predicting the short-term future of the games industry is a messy business, but there's one prediction for 2009 which requires no crystal ball and in which I have absolute confidence. It is this - that by the end of this year, you're going to be absolutely sick of hearing the words "credit crunch" and "recession" drop out of the mouths of videogame executives to explain studio closures and job cuts.

In fact, you'd be entirely justified in feeling a bit sick of hearing those terms already. They tend not to be phrased quite so blatantly (at least, not yet), but "difficult times", "tough macroeconomic conditions", "tightened consumer spending"... All of these, and a dozen other increasingly eyebrow-raising permutations, have been rolled out in the past few months by games companies or those commenting upon them.

Hang on, though - isn't this the games industry, the wonderful recession-proof industry whose hide should be unmarked by the slings and arrows of economic misfortune? Has that concept gone out the window so quickly, with our newfound state of recession only months old?

The simple answer is no, it hasn't. In fact, just about every metric going suggests that videogames continue to be in absolutely rude health in spite of the tough conditions in the wider economy. In the UK, for instance, high street retailer GAME bucked a downward trend in Christmas spending, while the US market overall grew to $21 billion last year, up 23 per cent from the economically sunny months of 2007.

There is, quite simply, not a shred of credible evidence so far which suggests that the conventional wisdom of the market - that videogames won't be significantly hit by recession because they're viewed as an economical form of "stay at home" entertainment - is showing any cracks.

With an enormous audience of market newcomers for whom gaming is arguably not yet established as a key form of entertainment, Nintendo's Wii is the canary in the coalmine - the first whiff of economical toxicity will hit the Wii market before it goes anywhere near the more established "hardcore" end of the games sector. The Wii, however, is still singing its heart out. If this recession is going to stunt Nintendo's growth spurt (and that does remain a distinct possibility), it certainly hasn't done so yet.

In other words, on an industry-wide level, things are pretty good. Very good, in fact. So why are we seeing job cuts, and why is each fresh announcement of a studio closure or workforce cutback either accompanied by, or greeted with, dark rumblings about the state of the economy?

There are two reasons for this - one legitimate, one rather less so. The legitimate reason is that while the games business isn't seeing a contraction in its sales in line with the contraction in overall consumer spending, it is certainly affected by the other major aspect of the recession - the "credit crunch" itself, which has led to many banks slashing the credit available to businesses.

A lot of modern businesses rely heavily on credit agreements with their banks to finance their day to day operations, allowing them to continue meeting regular obligations in markets where income fluctuates wildly from month to month. Indeed, a large number of businesses are so reliant on credit that, like many unwary consumers, they end up financing everything they do - including payroll and property rental - from credit, with their income being diverted into repayments.

It's not a terribly secure arrangement, but when banks were handing out huge credit deals to practically everyone who walked in off the street, it was secure enough to persist with. Today, with those lines of credit much harder to find, businesses which haven't had liquid assets in years are finding themselves in serious difficulties. It's hard to say if any of the games industry closures and layoffs we've seen in the past six months are a result of this situation, but it's a problem that can afflict companies in any industry, and is a legitimate reason for blaming the "credit crunch" for shutting a firm's doors.