Tumultuous game industry rocked by wave of studio closures

The sad truth of the modern video game industry is that regardless of how talented (or lucky) a game maker is, nobody has unlimited lives.

January was certainly proof of that. A one-time powerhouse publisher was ripped to shreds. A legendary developer was handed a pink slip. If things don't radically reverse course, the next month or two could see another studio and another game god meet the same fate.

And as bad as it is to be a game maker right now, gamers could find themselves in for a rough period as the effects of this wave of closures hit shore.

"Any time you have consolidation, it's bad for consumers," says Wedbush analyst Michael Pachter. "They're going to have fewer games to choose from."

The toll of this belt tightening has been notable. Longtime game publisher THQ, founded in 1989 and once the third largest publisher in the business, saw its assets divided among a handful of other studios two weeks ago. No one made any bids at the time for Austin's Vigil Entertainment (makers of the critically-acclaimed Darksiders games), which was forced to close, or the team that works on the WWE games due to contract issues.

Then Disney, as part of its ongoing evolution in the games business, shut down Junction Point Studios, the home of famed developer Warren Spector and the birthplace of the Epic Mickey games.

Lining up for the slaughter seem to be Zumba developer Majesco, whose stock is trading below $1, putting it at risk for a delisting by NASDAQ. Gas Powered Games, the boutique studio run by game design luminary Chris Taylor, is also in dire straits, taking to Kickstarter in an effort to keep operations running.

Even Nintendo, fresh off shipping the next-generation Wii U home console, is having issues, posting a loss for the second straight year as sales for the new system lag behind expectations.

The causes of these closures and sales woes are numerous, but whether you point to the lucrative mobile games business, the unprecedented length of the current console cycle or simply the tightened economy, one thing is certain: the traditional video game business is going through major upheaval.

A glut of new systems is poised to enter the fray and challenge next-gen consoles from Sony and Microsoft, both expected by the end of 2013. The free-to-play market has become big business. With so much uncertainty, it’s scary out there for the folks who make games.

Spector and Taylor could open new studios, of course, but they'd still have to find a publisher to fund their next title. And that's even harder today than it was a few years ago.

"Companies are taking a more risk averse approach to content – doing more sequels and doing more products where they feel comfortable with the potential return on their investment," says Edward Williams of BMO Capital Markets. "You'll see less – I don't know if innovation is the right word, but less risk taking."

That caution could extend into the next generation as well. The non-AAA game has all but disappeared this generation, thanks to a combination of the recession and the long length of this console cycle. And it's not coming back.

Publishers who are willing to risk new IPs will largely want to ensure they're positioned to earn most of the revenues from them, which could squeeze out independent game makers.

"You're not going to see EA bring out 10 IPs a year," says Pachter. "They're going to bring out something like two."

That may mean a shift in the way those affected by these layoffs and closures approach games -- and that's not something core gamers will necessarily like.

Spector, for instance, took a fair bit of heat from gamers over his choice to make Epic Mickey, a passion project that reached out to a new audience. Imagine the outcry from some parts of the gaming world if he decides to focus next on, say, the mobile market.

To be clear, Spector hasn't talked about his future plans. He may not have any at this point. (He's declining all interview requests, pointing reporters to Disney's PR team.) And Taylor has his hands full with his less-than-successful-but-not-quite-hopeless Kickstarter efforts, on which he has bet the company.

But both developers, as well as the teams they ran and those impacted by other recent layoffs, could be entering a job market that asks something different of them. Gamers who are longing for the good old days from these teams may find their wishes unfulfilled.

"For talented developers, there won’t be an issue finding what you want to do next," says Williams. "The only thing they may need to do is think differently about how their product is getting commercialized. How can they make their product something that's not just something that people play, but that people will pay to play [consistently]."

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