More layoffs hit the video game industry: Analyst explains why

Microsoft (MSFT) is cutting about 650 employees from its Xbox gaming unit. It's the latest in a string of layoffs that have impacted the video game industry.

Wedbush Securities Managing Director, Equity Research Michael Pachter points out that in Microsoft's case, these jobs are redundant, stemming from its acquisition of Activision Blizzard last year. As for the broader industry, he said hiring increased during the pandemic when people were at home playing video games. Now, these companies are "right-sizing," though Pachter thinks they may be cutting too many jobs.

Pachter also points to a broader shift in the industry, away from one where people buy the game once at a high price to one where there are in-game purchases. As a result, game makers don't need to make as many games to gain revenue and customers are playing existing titles for longer.

Watch the video above to hear what Pachter thinks of Sony's (SONY) new PlayStation 5 Pro and why Take-Two Interactive (TTWO) "has a lot of momentum."

For more expert insight and the latest market action, click here to watch this full episode of Asking for a Trend.

This post was written by Stephanie Mikulich.

Video transcript

Microsoft, cutting, cutting about 650 jobs from its Xbox Gaming division and what's been a tough year for the video game industry.

But there is a lot to look forward to including Sony's Playstation five Pro console and some much anticipated games you might be able to play on it here to help us navigate the latest trends in the video game space is Michael Pachter, managing director of Equity Research at Wedbush Securities Michael, always great to see you, my friends.

Let's get right to this headline, this report that Mi that Microsoft is gonna be cutting about 650 jobs in its Xbox unit.

I, I'm curious what you made of that headline Michael and this is more broadly, you look at the gaming industry this year, we've, you know, seen some significant layoffs.

What do you think explains that trend, Michael?

Well, Microsoft's a bit unique because they've been acquisitive.

So, you know, they bought Activision last year and uh these 650 jobs are primarily redundant corporate positions.

And again, I don't mean to discount what these people do, but you know, how many hr people do you need or legal people or marketing people.

So they're, you know, they're just consolidating the division, the act division 8000.

So employee division into the overall Xbox division.

And these are the jobs that they found that had, you know, that were duplicated what's going on in the industry.

And we've had many, many, many more layoffs.

Uh The industry got fat during shelter in place.

So, you know, in 2020 2020 21 game revenues went crazy high and it was much like Netflix went high.

We were stuck at home while we were entertaining ourselves and everybody overstaffed, you know, kind of building more content assuming it would last forever.

It came crashing down to 23 to 24 and I think most companies are right sizing.

Uh I actually think they're probably cutting too much and I think they'll regret it, but they're trying to be good stewards of capital and trying to manage their expenses the best they can.

And Michael when we talk, you know, you always teach me about how the model of the video game industry is changing.

Explain that and how that could be impacting these trends as well.

You know, we're seeing, uh maybe for the last 15 years, uh a migration from, you know, buying a game to a paid purchase 50 60 70 bucks to ongoing in app purchases and it's not all or nothing.

Um, we still buy games but you had games like FIFA back in the day or Grand Theft Auto back in the day, the only thing you can do is buy the game.

Now you have ultimate team that is almost as big as, as, you know, first year sales of the underlying now called E sports football club game.

And you have, you know, GT a online doing four or 500 million bucks a year, um, that keeps people engaged.

So when they stay engaged for longer than just a couple of months playing the game, they buy fewer games.

So it's kind of a self fulfilling vicious cycle where, uh, you can buy fewer new titles and you play the ones that you purchase much longer, which means you make fewer games yet, you make a lot more money.

We saw that with the movie industry.

It's happening in the games industry.

Uh, at the same time, you got Microsoft, you know, rolling out a subscription service, we'll see if that works, but they're certainly buying up a lot of content in order to support it.

And I think they're serious about making it into a giant business.

So ultimately, I think that succeeds and also replaces new game sales.

Uh, I wanna go on a different topic, Mi Mike, get your thoughts on this new Sony console, what they're trying to achieve, uh, with this console, Michael and whether it shows us whether it's just really that somebody is kind of doubling down on consoles here Yeah, that's exactly the right term, Josh uh doubling down, you know, Microsoft and Sony are two very different companies.

So Microsoft, I think their vision of the future is that that consoles are gonna ultimately just be a specialist purchase.

You know, it's gonna be a super Fanboy purchase and most people are gonna get their games from the cloud.

So they're heading that way, Sony, I think is hanging on and managing its future strategy by looking in the rearview mirror of what got them there and they're embracing consoles now and forever.

So, of course, you know, the $549 playstation five, which is not really selling that well, isn't enough.

Let's let's offer a $700 PS Five Pro that doesn't even have a hard drive.

So if you want that 770 who's gonna buy that?

You know, they're soaking the fan boy.

So sure the guy who has to have that is gonna buy it just like you went out and bought a 3d TV, 10 years ago.

Uh The problem is that there's no content that really justifies the purchase.

Ultimately, this thing is gonna die on a buy.

I think publishers are unlikely to embrace the PS Five Pro.

I think the market is gonna be very small, maybe 1020 million units overall.

And I don't think you're gonna get in games, you know, many games that really justify the giant purchase like that.

Uh your thoughts on two names as well, Michael.

I want to get those for viewers.

E A take two.

You got buys on both specifically.

Let's drill down on a take two though.

Why is that?

A buy here?

Big two.

really got big in the mobile game business by buying Zynga.

So they're, they're pretty successful and then, and then since they purchased the, the Zynga assets, Zynga launched a game called Match Factory.

That's on its way to being a $500 million annual title.

Really crushing it there.

Uh They're big in, in, in, in app advertising, which is a big growth business and then had the biggest franchise in gaming history with Grand Theft Auto coming out next year.

So you just got a lot of momentum uh from a company with a relatively small market cap.

Uh It's just, it's, I think it's heading to, you know, 3040 50% higher in the next year.

Do they integrate features of GT six into the online offering, Michael?

And when do you think that happens?

Yeah, I think that's kind of the, the, you know, worst kept secret on the planet.

Um When they launched GT A five back in 2013, you know, they watched GT A online around the same time, but the games were built separately.

This time GT A online has been in existence for over 10 years, 12, by the time they launch GT A six.

So I think that they've been incorporating features of GT A six into GT A online for the last several years.

And I think they'll unlock content for one in the other, which is good to just drive a lot of synergy between the two games.

I think.

Ultimately, that means GT A online revenues double from about 400 million a year to about 800 million a year just by managing the two assets together.

So very, very thoughtful question.

And I think that that drives a lot of revenue and profit growth to take too, Michael.

Always love seeing your brother.

Thanks for being on the show, Josh.