One way to understand the video game industry’s current crisis is by looking closely at Spider-Man’s spandex.

For decades, companies like Sony and Microsoft have bet that realistic graphics were the key to attracting bigger audiences. By investing in technology, they have elevated flat pixelated worlds into experiences that often feel like stepping into a movie.

Designers of last year’s Marvel’s Spider-Man 2 used the processing power of the PlayStation 5 so Peter Parker’s outfits would be rendered with realistic textures and skyscraper windows could reflect rays of sunlight.

That level of detail did not come cheap.

Insomniac Games, which is owned by Sony, spent about $300 million to develop Spider-Man 2, according to leaked documents, more than triple the budget of the first game in the series, which was released five years earlier. Chasing Hollywood realism requires Hollywood budgets, and even though Spider-Man 2 sold more than 11 million copies, several members of Insomniac lost their jobs when Sony announced 900 layoffs in February.

Cinematic games are getting so expensive and time-consuming to make that the video game industry has started to acknowledge that investing in graphics is providing diminished financial returns.

“It’s very clear that high-fidelity visuals are only moving the needle for a vocal class of gamers in their 40s and 50s,” said Jacob Navok, a former executive at Square Enix who left that studio, known for the Final Fantasy series, in 2016 to start his own media company. “But what does my 7-year-old son play? Minecraft. Roblox. Fortnite.”

Joost van Dreunen, a market analyst and professor at New York University, said it was clear what younger generations value in their video games: “Playing is an excuse for hanging out with other people.”

When millions are happy to play old games with outdated graphics — including Roblox (2006), Minecraft (2009) and Fortnite (2017) — it creates challenges for studios that make blockbuster single-player titles. The industry’s audience has slightly shrunk for the first time in decades. Studios are rapidly closing and sweeping layoffs have affected more than 20,000 employees in the past two years, including more than 2,500 Microsoft workers.

Many video game developers built their careers during an era that glorified graphical fidelity. They marveled at a scene from The Last of Us: Part II in which Ellie, the protagonist, removes a shirt over her head to reveal bruises and scrapes on her back without any technical glitches.

But a few years later, costly graphical upgrades are often barely noticeable.

When the studio Naughty Dog released a remastered version of The Last of Us: Part II this year, light bounced off lakes and puddles with a more realistic shimmer. In a November ad for the PlayStation 5 Pro, an enhanced version of the Sony console that retails for almost $700, the billboards in Spider-Man 2’s Manhattan featured crisper letters.

Optimizing cinematic games for a narrow group of consumers who have spent hundreds of dollars on a console or computer may no longer make financial sense. Studios are increasingly prioritizing games with basic graphics that can be played on the smartphones already in everyone’s pocket.

“They essentially run on toasters,” said Matthew Ball, an entrepreneur and video game analyst, talking about games like Roblox and League of Legends. “The developers aren’t chasing graphics but the social connections that players have built over time.” Going Hollywood

Developers had long taught players to equate realism with excellence, but this new toaster generation of gamers is upsetting industry orthodoxies. The developer behind Animal Well, which received extensive praise this year, said the game’s file size was smaller than many of the screenshots used to promote it.

A company like Nintendo was once the exception that proved the rule, telling its audiences over the past 40 years that graphics were not a priority.

That strategy had shown weaknesses through the 1990s and 2000s, when the Nintendo 64 and GameCube had weaker visuals and sold fewer copies than Sony consoles. But now the tables have turned. Industry figures joke about how a cartoony game like Luigi’s Mansion 3 on the Nintendo Switch considerably outsells gorgeous cinematic narratives on the PlayStation 5 like Final Fantasy VII Rebirth.

There are a number of theories why gamers have turned their backs on realism. One hypothesis is that players got tired of seeing the same artistic style in major releases. Others speculate that cinematic graphics require so much time and money to develop that gameplay suffers, leaving customers with a hollow experience.

Another theory is that major studios have spent recent years reshaping themselves in Hollywood’s image, pursuing crossover deals that have given audiences “The Super Mario Bros. Movie” and “The Last of Us” on HBO. Not only have companies like Ubisoft opened divisions to produce films, but their games include an astonishing amount of scenes where players watch the story unfold.

In 2007, the first Assassin’s Creed provided more than 2.5 hours of footage for a fan edit of the game’s narrative. As the series progressed, so did Ubisoft’s taste for cinema. Like many studios, it increasingly leaned on motion-capture animators who could create scenes using human actors on soundstages. A fan edit of Assassin’s Creed: Valhalla, which was released in 2020, lasted about 23 hours — longer than two seasons of “Game of Thrones.”

Gamers and journalists began talking about how the franchise’s entries had gotten too bloated and expensive. Ubisoft developers advertised last year’s Assassin’s Creed Mirage, which had about five hours of cut scenes, as “more intimate.”

The immersive graphics of virtual reality can also be prohibitive for gamers; the Meta Quest Pro sells for $1,000 and the Apple Vision Pro for $3,500. This year, the chief executive of Ubisoft, Yves Guillemot, told the company’s investors that because the virtual reality version of Assassin’s Creed did not meet sales expectations, the company was not increasing its investment in the technology. ImageA person plays a video game on a tablet. Live service games that are playable on mobile devices, like Genshin Impact, can generate large amounts of revenue. Credit...Ina Fassbender/Agence France-Presse — Getty Images

Many studios have instead turned to the live service model, where graphics are less important than a regular drip of new content that keeps players engaged. Genshin Impact, by the studio Hoyoverse, makes roughly $2 billion every year on mobile platforms alone, according to the data tracker Sensor Tower. Going Broke?

It was clear this year, however, that the live service strategy carries its own risks. Warner Bros. Discovery took a $200 million loss on Suicide Squad: Kill the Justice League, according to Bloomberg. Sony closed the studio behind Concord, its attempt to compete with team-based shooters like Overwatch and Apex Legends, one month after the game released to a minuscule player base.

“We have a market that has been in growth mode for decades,” Ball said. “Now we are in a mature market where instead of making bets on growth, companies need to try and steal shares from each other.”

Some industry professionals believe there is a path for superb-looking games to survive the cost crunch.

“I used to be a high-fidelity guy; I would log into games and if it didn’t look hyperrealistic, then it was not so interesting,” said David Reitman, a managing director at PricewaterhouseCoopers, where he leads the consulting firm’s games division. “There was a race to hyperrealism, and it’s tough to pivot away. You have set expectations.”

Reitman sees a future where most of the heavy costs associated with cutting-edge graphics are handled by artificial intelligence. He said that manufacturers were working on creating A.I. chips for consoles that would facilitate those changes, and that some game studios were already using smart algorithms to improve graphics further than anything previously seen.

He expects that sports games will be the first genre to see considerable improvements because developers have access to hundreds of hours of game footage. “They can take feeds from leagues and transpose them into graphical renderings,” Reitman said, “leveraging language models to generate the incremental movements and facial expressions of players.”

Some independent developers are less convinced. “The idea that there will be content from A.I. before we figure out how it works and where it will source data from is really hard,” said Rami Ismail, a game developer in the Netherlands.

Ismail is worried that major studios are in a tight spot where traditional games have become too expensive but live service games have become too risky. He pointed to recent games that had both jaw-dropping realism — Avatar: Frontiers of Pandora (individual pebbles of gravel cast shadows) and Senua’s Saga: Hellblade II (rays of sunlight flicker through the trees) — and lackluster sales.

He recalled a question that emerged early in the coronavirus pandemic and has become something of an unofficial motto in the video game industry.

“How can we as an industry make sho