Taxman don't playeth

How tariffs could reshape the US games market

The SuperJoost Playlist is a weekly take on gaming, tech, and entertainment by business professor and author, Joost van Dreunen.

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Judging by the incessant coverage it would seem the recently re-elected US president has already taken office. Much of it has to do with the drastic policy changes announced during the election campaign. A more favorable perspective on digital currencies, for instance, together with the appointment of people like Elon Musk to high-ranking governmental positions have bolstered confidence and contributed to a resurgence in crypto-currency values. A week ago, Bitcoin reached a new price record of $93,490.

Another number that is likely to go up is the cost of video game equipment and hardware. Accounting for $42 billion in consumer spending annually, according to ALDORA Intelligence, the incoming administration has promised to impose tariffs as part of a broader protectionist policy to safeguard and improve the US economy. In strict economic terms, the US economy is fine. But the costs of basic consumer goods have shot up in recent years and overall purchasing power has notably declined. Trump’s plan to protect the US economy from foreign competition and to replace income tax with greater tariff revenue has the potential to exact a heavy toll on the video games industry.

Before taking stock of what this could look like, it is important to note that import taxes imposed during Trump’s first term present a complex legacy.

For one, they did not achieve their stated goal of increasing manufacturing jobs, as these merely stabilized rather than grew, and the costs were largely passed on to US companies and consumers. By increasing the tariffs on washing machines, for example, the Trump administration previously created an estimated 1,800 new jobs and $82 million in annual revenue. But this came at a cost of $1.5 billion to consumers having to pay for higher prices, including a broader ripple effect of the price of dryers going up as well (despite not being subject to tariffs) because dryers and washing machines are commonly purchased together.

It should also be noted, however, that Trump’s previous tariffs did accomplish some strategic objectives. Specifically, it motivated US companies to diversify supply chains away from China, improving supply chain resilience, which was also a major issue at the start of the previous hardware generation for gaming consoles. And, it is also relatively difficult to get rid of such taxes once in place. Despite their economic downsides, the current Biden administration not only maintained but expanded them.

The American two-party government disagrees on many things, but tariffs, evidently, are not one of them. It suggests that when it comes to new import taxes on video game hardware, it is not a question of ‘if’ but ‘how high’.

According to the Consumer Technology Association (CTA), which analyzed the impact on various consumer electronic categories, video game consoles would become 40% more expensive for US consumers. In 2019, over 96 percent of video game consoles imported into the US were manufactured in China. It estimated that, on average, the price of video game consoles would go up by $246. The proposed tariffs would do more harm than good, according to the CTA, and states that “the reputation and credibility of the US in the eyes of the world will deteriorate rapidly.” The games industry has already weathered a massive number of layoffs in recent years, with over 14,200 workers affected in 2024 alone, up from a previous record high of 10,500 in 2023. That leaves little room for additional cost-cutting measures, indicating that the additional expense would likely be passed directly to consumers, similar to what happened with washing machines. (For now, I will focus on gaming consoles and leave out hardware that will be similarly impacted like gaming PC components, virtual reality headsets, and the myriad of accessories like headphones, mechanical keyboards, and furniture for analysis at a later time.)

Making consoles several hundred dollars more expensive will go beyond obviously lower sales. Because the new tariffs can be expected to go into effect in 2025 without much opposition as a result of the Republicans’ sweeping win across all three branches of government, the increase in cost will have a longer-term impact on the video games industry overall. Next year marks the start of a transitional period in console gaming during which the largest manufacturers—Sony, Microsoft, and Nintendo—are expected to announce the next hardware generation. Historically, the economics of the first two years following the introduction of new consoles are particularly precarious, making the industry vulnerable to sweeping changes in its underlying cost structure.

New hardware releases follow a distinct pattern. The first batch of consoles is more costly to produce and distribute compared to units manufactured later in the life cycle. Initial production runs face multiple cost pressures, including the need for expedited shipping to stock thousands of retail locations simultaneously for launch day and the lack of manufacturing efficiency due to unoptimized production processes. As demand patterns become clearer, manufacturers can place larger component orders, securing better bulk pricing and improving margins. A $30 reduction in per-unit cost can significantly impact profitability across millions of units.

Additionally, technological refinements throughout the console's lifecycle enable the development of more cost-effective chipsets, leading to the introduction of smaller, more efficient "slim" models that are cheaper to produce. This manufacturing evolution explains why console profitability typically improves dramatically in the years following launch.

During the most recent hardware release in 2020, the introduction of the PlayStation 5 and Xbox Series X and S managed to break the cyclical pattern of negative margins during the initial few quarters. By embracing digital distribution, both as part of the industry’s overall evolution and the accelerated momentum from the COVID-19 pandemic, console gaming successfully balanced its high upfront cost structure and slower rollout, allowing it to remain competitive with PC and mobile gaming. Announced tariffs now threaten to upset this new equilibrium as manufacturers get close to releasing the next generation of hardware.

Manufacturing change

Taking the US market share (typically 25-30% of global sales), we can project three distinct scenarios for the American console gaming market from 2025 to 2030.

In the bull case, without any additional import taxes, the US market would continue its historical growth trajectory. Based on previous generational transitions, we expect US annual sales to peak at approximately 17.5 million units in 2026, driven by the simultaneous strong performance of new hardware from all three manufacturers. This projection is supported by historical data showing each successful generation establishing new peaks—the PS4 generation reached 13.7 million units in its peak year, while the PS5/Series X era achieved 18.2 million units during the COVID-influenced 2021 peak.

The base case, incorporating a 20% tariff, suggests a significant but not catastrophic market contraction. US sales would likely peak at 14.6 million units in 2026, representing a 20% reduction from the bull case but still maintaining volumes above previous generational peaks. This scenario assumes manufacturers absorb some impact and consumers adjust purchasing patterns but maintain platform engagement. Historical data from price increases in previous generations suggests the PlayStation ecosystem shows the most resilience to price changes, while Xbox and Nintendo platforms typically demonstrate higher price sensitivity.

The bear case, with the full 60% tariffs, presents a dramatic restructuring of the US console market. Peak sales would reach only 7.8 million units in 2026, effectively returning the market to early 2000s volumes. This scenario reflects not just reduced sales but potential structural changes to the industry. For comparison, this would place the US market below 2003's volume of 9.2 million units, despite two decades of market expansion and a substantially larger gaming population.

By 2030, these scenarios diverge significantly. The bull case maintains healthy US volumes of 15 million units annually, supported by digital services and broader demographic reach. The mid-case, which is currently the most likely outcome in my opinion, settles at 12 million units, while the bear case drops to 6 million units, suggesting a fundamental shift in how Americans consume video games. The data indicate that tariffs would not just affect sales volumes but could permanently alter the console industry's role in US gaming culture.

Outlook

The high-octane news coverage and imminent chaos that we can expect from the next administration obscures its impact on existing industries and consumer markets. But we can draft a few scenarios of what’s to come.

In the short term, I anticipate a blowout holiday season. As soon as consumers do the math and figure out that they may be paying a lot more once the new administration takes office, they’re likely to buy console and gaming equipment now. Buying a current generation device that will mostly be able to provide a satisfying experience playing existing and soon-to-be-released titles, like Grand Theft Auto VI, will be a more affordable alternative than spending an additional 40 percent on a new console with a more limited inventory of titles. Suddenly, the $700 PlayStation 5 Pro that had everyone up in arms a few weeks ago won’t seem so unreasonable anymore.

As we get closer to the release of the next console generation, I also expect Microsoft, Sony, and Nintendo to come together and make another plea for exemption. In 2019, they issued a joint statement, warning that a 25% tariff at the time would cost US consumers $840 million annually while disrupting complex supply chains and threatening innovation in an industry where 99.7% of companies are small businesses. At the time, import taxes on consoles were exempted but who knows what next year will look like.

In the long term, the proposed increase in consumer costs will catalyze the current push into new distribution channels and monetization strategies. By potentially raising console prices, Trump’s trade policies create immediate pressure to find hardware-independent delivery methods. Just as the 1983 crash and 2008 recession catalyzed new distribution models, these tariffs could fast-track the industry's shift toward cloud gaming, streaming services, and transmedia distribution, marking a classic transition from content innovation to distribution innovation in the pendulum cycle.

Microsoft is a likely beneficiary because it will be able to leverage its network of data centers and the investment it has made in top-tier content over the past years. Because cloud gaming and streaming play do not involve selling hardware components to consumers, this route will be more financially sound than relying too heavily on selling consoles. The tech giant also acquired a massive slate of priced IP in recent years, allowing it to make content available through different channels—either premium sales or as part of its Game Pass offering—using various price points. Similar to video streaming services like Netflix and Disney+ which have managed to grow their audience base with the introduction of cheap subscriptions that feature ads, I expect Microsoft to follow suit. It had already laid out plans to generate $1.4 billion in ad revenue by 2030, based on documents leaked during the legal case from regulators around the acquisition of Activision Blizzard King, and we can expect a tariff increase to make this a more urgent priority for Microsoft.

I’d expect its rival, Sony, to develop accessories that extend the life cycle of its current install base at a lower price point. The PlayStation Portal, for instance, proved surprisingly popular. Even including the higher tariffs, it would remain a reasonable substitute compared to upgrading to the next version of the PlayStation. Moreover, Sony’s gaming division is in the process of reorganization to focus efforts on acquiring and building intellectual property that it plans to distribute throughout its own ecosystem and on PC. A recent change in management suggests the firm will be pushing more collaborations, like the recently released LEGO Horizon Adventures, and transmedia initiatives. Sony is also in talks to acquire Kadokawa, a well-known Japanese media firm known for, among other things, Elden Ring. A year and a half ago, I wrote about how Sony becoming a media empire would offset the looming cost increase on its existing hardware business.

Finally, the proposed tariffs impact more than just consoles and gaming equipment. Board games—a category that has been growing in recent years and which offers a welcome alternative to screen-based entertainment—and toys are also largely manufactured outside the US. Mostly these are industries that rely on economies of scale, long development cycles, and slim margins. Drastic changes to their economics would be felt immediately.

That makes the incoming administration already the least fun in history.