[In this opinion piece, SuperData Research founder Joost van Dreunen looks at the state of the game industry in late 2018 & predicts a markedly darker future for the game industry.]

The past few years have been a great ride. All boats have been going up. Time and money spent on video games has been at consistent high and the addressable audience has expanding enormously, allowing the industry to grow consistently for years.

That’s about to change. 

Specifically, interactive entertainment revenue will soon start to flatline and, possibly, decline. Here’s some of the writing that’s currently on the wall.

First, several of the biggest growth drivers have started to slow. Mobile gaming is showing saturation across different markets, including in China.

Big handset manufacturers can no longer rely on the continued momentum and are switching their focus to extracting greater rents from their existing user base in lieu of fueling ongoing growth.

Next, we’re at the end of the current console cycle. Sony and Microsoft have both done well, but are now starting to consider the future (PS5? Cloud gaming? Electronic game cartridges? What?).

Investors are actively doubting Nintendo’s ability to deliver on its ‘stretch goal’ of 20MM units sold by end March. Not in the least because Nvidia reported weaker-than-expected sales of its Tegra chips, which are predominantly used for the Nintendo Switch. Any changes in Nvidia’s sales indicate a change in Nintendo’s prospects.

This, in turn, spells no uncertain doom for GameStop. The US-based specialty retailer has been going through a series of challenges as spending on interactive entertainment has shifted largely to digital channels. More so, its C-suite is a mess, resulting in a letter from one of its largest shareholder, Tiger Management, to get its sh!t together (aka perform a strategic review).

It’s been unable to find a buyer and now finds itself forced to essentially abandon the diversification strategy it initiated in 2014 by acquiring retail chain in parallel market segments. Just this week GameStop sold off Spring Mobile and is likely to use the money to pay off its debts and improve the likelihood of some private equity firm or Amazon to buy it (see below). 

More broadly, this is all taking place against a backdrop of tech stocks losing value. The last few weeks have been a wild ride resulting in the decimation of all of 2018’s gains. Big tech has gone from loved to loathed as firms like Google and Facebook are repeatedly hit with lawsuits and regulatory fines. Apple has stopped reporting some of its key sales figures, and Amazon is increasingly toying with divestiture. 

During earnings season this quarter a lot of the publicly traded firms were hit with drop in share value despite posting solid figures. Investors, it seems, had been holding onto their shares and had waited to sell them off immediately following the major releases scheduled for the end of the year. 

Sure enough, in some cases the decline is situational. Tencent, for instance, has suffered a great deal as a result of its close ties to the Chinese government. After growing up without really having to worry about foreign competition, the hand that fed it is now taking its share. The recent regulatory changes and, more so, delays are costing the firm dearly.

If nothing else, risk has increased greatly, which means that Tencent will be looking for ways to diversify its current portfolio of activities and reduce its reliance on gaming (which it did, btw, by making up the difference with advertising).

The future is cloudy. On the one hand several major firms like Google, Amazon, Microsoft, Tencent, and others are investing heavily cloud gaming but, on the other hand, the prospects remain foggy. If they build it, will consumers come? 

One interpretation here is that the games industry which was previously thought to be anti-cyclical, is now in sync with the rest of the economy. Consider it a by-product for having become a mainstream industry, finally, after three decades on the fringes of the entertainment business. Games are seemingly more vulnerable to high-level economic fluctuations, prone to fickle investor sentiment, and much less insulated.

Let's see how things hold up.

[This editorial was originally published as part of Joost van Dreunen's weekly newsletter on innovation and interactive entertainment. You  can subscribe to the newsletter here.]