Are We, Aren't We Crashing

US civil society collapse aside, (just not focusing on it for a moment) the US economy seems to be in a weird spot. There are signs that it is getting rough, but they are buried in the weeds.

RV sales going down is one sign. Rec vehicles are big ticket purchases that retirees tend to enjoy. Less sales of these typically means less new retirees or that the experienced, retired loafers are loafing on a budget. Both are signs that money is getting harder to come by.

But this is a global economy so now we have to look at other economies to see where all the global corporation income is coming from. Instead of looking at all of them, there are two growth economies that, when combined with the US economy, paint a pretty clear picture. 

China and India are the growth sectors in question. They are undeniably linked to the US and developed Euro economies. Video Games, outside of Android and Apple, are really only linked to China for some reason.

If we look at a US economy that is struggling with inflation, we then can look at China's economy and see how they are struggling. If inflation is caused by putting too much money (native and foreign) into an economy then deflation should be caused by too much money leaving an economy. That is what is happening in China right now.

Prices in China are falling because nobody is buying. This isn't money actively leaving the economy, this is money just not showing up. It is like a staffing issue at a restaurant. Someone didn't show up and now there is a section without a server. Wait times increase and customers leave. The end-of-night till isn't as high as expected and the server doesn't plan on coming back, so the customers may as well not show up.

China is an odd foreign consumer economy. So for Chinese factories, the primary worker is actually foreign customers and the primary customer is the Chinese worker. As the foreign customer works to purchase more Chinese goods, the Chinese worker uses the foreign money to purchase more Chinese goods and grow their economy. China is the first country to feel the impact of foreign workers losing their job. 

The Chinese worker is buying less, which is a sign that the US worker is already spending less, and that was happening before tariffs started. This hasn't shown up on the video game indsutry's bottom line yet, but it will. 

Since an tax code change in 2023, Developers have had to claim all of the work they have done as an asset and over five years they could write off the total cost as an expense. It is a weird thing to do, but ultimately it means that studios couldn't claim a years work as a loss in that year. So if video game takes 5 years to develop, the developer is still deducting the cost of the 1st year during the release. This shifts the tax burden to the front, and prolongs the tax benefit into the release years. 

Essentially, since 2023, it has been very difficult to start an independent studio. Like we see in the Chinese economy, there is a weird lag where the worker just doesn't show up and eventually that means there is less money. As independent studios stop being a thing, less of that independent studio money enters the video game economy. That shrinks the investment cap, which then will eventually shink the total market cap. 

The industry doesn't really see the impact of less people buying because the indie studios that were counting those fringe sales aren't there like they were at one time. What we aren't counting is the money that should have moved from these indie releases to major releases. The sales of major titles should be higher than expected, but they are meeting or performing below expectation. Sales aren't shifting so market cap is shrinking, but it is shrinking in a place that wasn't being measured well enough.

Think of games like Devolver's Shadow Warrior. The indie boomer shooter alternative to Doom is absent, but sales didn't move over to Doom: Dark Age. Consider the indie alternative to Final Fantasy, Clair Obscur. The sales are great for an indie studio title, but nothing close to a standard Final Fantasy title. For those quick to blame Game Pass the solution is to look to a non-Game Pass title like Assassin's Creed Shadows. Unofficially the estimated sales of the title is 2.4 million across Xbox, PlayStation, and PC. Officially it did not hit expectations. 

The collapse is happening, but with a lot of lag. Ubisoft needed a Tencent bailout, and Tencent is showing signs of slowdown with Year-over-year net profit loss despite a revenue increase. Share buybacks help stabilize their market image, but as deflation becomes unemployment, buybacks will fail and losses will need to be cut. Ubisoft is in a vulnerable position and may be the first visible, major casualty.

The biggest, most unstable pillar seems to be Rockstar, 2K, and the looming storm that is Grand Theft Auto VI. The obscene budget numbers that are rolling around the rumor mill with the odd, unnecessary risk of a female-lead and a focus on meme references that may be dead-by-release feels like an Ubisoft game more than a Rockstar game. The chance that Rockstar will follow in Nintendo's footsteps and ask for $80, if not more, is almost 100%.

While I once believed Nintendo would survive another collapse, the Switch 2 price and "features" would make the argument that Nintendo needs money. A concerning problem as they are the most stable out of the 4 major companies. The Switch 2 isn't quite Wii U, but perhaps it is more inline with the N64. The N64 didn't need to survive a recession, though, and the Switch 2 is heading into one.

If anything, in the next 2 years we may see a major decrease in stock price at Nintendo and 2K. Xbox could be victim of scapegoating and subject to a spin-off. PlayStation will already be looking for buyers. Valve is riding a dying horse as hardware manufacturers abandon niche X86 gaming hardware. It will result in years of missed growth as the industry sputters and realigns.