Why Your Favorite Game Studios Keep Dying

The video game industry has laid off tens of thousands of people at companies such as Microsoft, Activision Blizzard, EA, Ubisoft, Sony, Riot, Epic, and Embracer in the past few years. The cuts often come right after a company reports record engagement or record revenue. The internet’s explanation is always corporate greed. The CEO wants a third yacht, so he fires the guy who animated Kratos’ beard.

But the greed accusation assumes that wanting to make money is wrong in itself. Frankly, I’d like a yacht. The real explanation is the math of making a AAA, or major, video game.

In 2004, a AAA game such as Halo 2 or Half-Life 2 took 50 to 100 people a few years. Today, core teams average 400 to 500 people. The Last of Us Part II credited more than 2,100 people across Naughty Dog and 14 outside studios. The race toward photorealism demands far more artists, far more programmers, and far longer schedules.

Take a hypothetical game on the scale of 2018’s God of War: about 300 developers working for four years. At an average salary of $120,000, that’s $144 million in pay alone. Benefits and payroll taxes add $43 million. Contractors, motion capture, quality assurance, and localization add $25 million, and offices, hardware, and software another $12 million. Marketing can easily run $50 million. That’s about $274.2 million before a single copy sells.

The game sells for $70, and Steam, PlayStation and Xbox take 30%, leaving about $49 per copy. Just breaking even takes 5.6 million copies.

Most of that budget, $187 million, goes to salaries and benefits. It’s paid out over four years before the game earns a dollar. Someone has to cover that payroll, and that someone is investors. They put up the money because they expect a return, and that expectation is what creates the jobs in the first place.

Breaking even doesn’t satisfy them. An investor could put the same $274.2 million in an index fund earning 8% a year and have about $373 million after four years. To beat that, the game has to sell 7.6 million copies.

So a game can sell 4 million copies, rank among the year’s top 20, and still count as a failure internally. It’s not because the game is bad. It’s because the money would have done better elsewhere.

Ownership matters too. Say I own a studio outright, spend $275 million on a game and earn $300 million. I’d be thrilled with a $25 million profit. If I were CEO of a public company, the same result would have shareholders asking why I tied up a quarter billion dollars for four years to earn less than a Treasury bond.

Public companies aren’t legally required to maximize profit, but they answer to shareholders who can sell the moment growth slows. Executives are mostly paid in stock, too. When the share price dips, the fastest lever to pull is payroll.

Not even Metal Gear creator Hideo Kojima is safe. Last month, it was announced that Sony pulled funding for Physint, his long-running spy thriller, and Xbox picked it up. On the surface that makes no sense. Kojima made Metal Gear Solid, and tens of millions of people played Death Stranding.

But the numbers were thinner than the reputation. Death Stranding cost about $100 million and earned about $243 million. Death Stranding 2 cost $150 million to $200 million, and its sales dropped off after a strong first two months. Analysts estimate the franchise has earned about $413 million, a return of 18% to 38% over roughly six years. Keeping pace with the 8% benchmark would have taken about 59%. With Physint reportedly behind schedule and over budget, Sony walked away.

Then there’s the live service lottery. Live service games continuously update and allow in-game purchases, keeping the gaming experience dynamic and, for the company, profitable. Every publisher watched Fortnite and GTA Online print money year after year and decided it needed one, too. EA, Ubisoft, Sony, and even Naughty Dog all launched live service projects on top of their usual single-player games. The market had room for two or three winners. Concord, Redfall, Suicide Squad, and Highguard were not among them, and each cost as much to make as a AAA game. For every Helldivers 2, at least 10 others die on the vine. Then come the layoffs.

Microsoft tried to escape the math with Game Pass. On a subscription service, a game didn’t need to sell 7.6 million copies. It only needed to keep subscribers paying $10-$23 a month. That funded games that would never have existed otherwise: Double Fine’s Psychonauts 2, Compulsion Games’ strange narrative projects, and Tango Gameworks’ surprise hit Hi-Fi Rush.

But the 8% target just moved to a different spreadsheet. When subscriber growth slowed, the pressure came back for every studio at once. Tango was shut down in 2024, about a year and a half after Hi-Fi Rush launched to great reviews. Compulsion had to buy back its independence from Xbox. Microsoft deserves blame for green-lighting games that were never going to sell — and credit for taking the risks that got them made.

None of this excuses bad decisions. Green-lighting five live service clones at once was foolish, and spending $69 billion on a single acquisition was ambitious, to put it kindly. But trying to make money isn’t evil. It’s what pays for games in the first place.

An indie studio can be happy breaking even. A public company has to keep asking whether its money could earn more somewhere else, and, across the industry, the honest answer is often yes.

So the next time a studio you love is gutted the same month its game tops the charts, remember the math. Making money with art is hard. Getting someone to front you $300 million, then paying it back, is even harder.

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Michael Knipp is a husband, father of five children, and nerd culture enthusiast. He works in IT at The Daily Wire.

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