Is the video game industry recession-proof?

With strong sales numbers in recent weeks, and a perceived truism that people want inexpensive entertainment in tough times, some think video games could stay strong.

Nintendo is hoping that strong sales of its Wii console are evidence that it, at least, is immune to the economic downturn. Others agree that the video game industry as a whole will suffer less than other technology sectors. GameSpot

It would be tempting for those in the video game business to take some recent news--for instance, that October sales were through the roof, or that the latest World of Warcraft expansion broke the all-time record for single-day PC game sales--as proof that their industry may be immune from the deep despair confronting the global economy.

And indeed, that seems to be exactly what many people in the industry are choosing to believe: that in rough times, people always spend money on entertainment, and that as entertainment goes, video game software and hardware offer much higher value than other options. In other words, the theory goes, the video game industry is recession-proof.

But people holding to that notion may yet want to consider getting their resumes ready or holding off on buying that Porsche, since all optimism aside, the future may not be so bright. It's true that sales may be up in the short term, and look good for the holidays, but Wall Street doesn't appear to be impressed.

Still, many in the industry contacted for this article say they think the sector could in fact turn out to be one of the few winners as general economic conditions get darker and darker.

Activision Blizzard's 'Wrath of the Lich King,' the second expansion to 'World of Warcraft,' set a single-day record for PC game sales. Some see that as evidence that the game industry can withstand the recession. Daniel Terdiman/CNET News

"Nobody's got a crystal ball, but we remain cautiously optimistic" about the future, said David Dennis, Microsoft's corporate Xbox 360 Group PR manager. "All the signs we see point to continued strength for the industry and for the Xbox."

For example, Dennis explained, a recent survey conducted by the National Research Center indicated that 46 percent of consumers expect to purchase a video game system of some kind on Black Friday, the day after Thanksgiving. At the same time, he said that NPD Group, a leading retail analyst firm, reported that video games came in at the bottom of a list of what kinds of products they expect to cut back on in the coming months.

NPD has other data as well showing signs of strength in the business. In its report for October , the firm revealed that for the video game industry as a whole, sales were up 18 percent for the month, to $1.31 billion from $1.12 billion a year earlier. Software was up 35 percent in October, from $514.5 million in 2007 to $696.8 million in 2008, while hardware had a more modest 5 percent rise in the same period, from $470.5 million to $494.8 million.

And on November 13, its first day on the market, Blizzard Entertainment's Wrath of the Lich King , the second expansion to the mega-hit, World of Warcraft, broke the all-time record for one-day sales for a PC game, moving 2.8 million units of the $40 upgrade and surpassing the record of 2.4 million units set in 2007 by The Burning Crusade, the first WoW expansion.

The rationale for projected growth, even in the face of a looming and deep recession, is simple.

"There are a couple of reasons," said Ron Meiners, director of community for the Hollywood Interactive Group. "One is the traditional value of entertainment during tough economic times. Like the great fantastic musicals in the 30s. Movies did great, because they took people's mind off of the troubles they were facing. (And) video games have great value as entertainment. The number of hours of solid entertainment that comes from a video game purchase is much greater than a movie, for example, for very comparable cost."

At the same time, Meiners added, video games today offer consumers a much higher degree of interactivity and engagement.

"They're not just passive," he said. "It's a much more involving activity, which helps make them more valuable."

The industry is also blessed with a steady flow of blockbuster game franchises that seem primed to deliver huge paydays: Fable, Guitar Hero, Rock Band, Grand Theft Auto and many others.

Trouble on Wall Street
But the publishers of those games, and even a leading retailer, have seen their stock prices hammered in recent weeks, beyond even what has happened in the general market crash.

While the Dow's value dropped 28.16 percent from September 2 through November 17, and Nasdaq dropped 36.91 percent in the same time frame, six game industry companies (Electronic Arts, Activision Blizzard, Take Two, THQ, Gamestop and Nintendo) saw their share prices fall an average of 52.53 percent.

And EA, the world's largest publisher of video games, was not on the better-performing side of that group. Its stock fell 60.1 percent, from $48.97 to $19.30 in that time period.

EA did not respond to a request for comment for this story, but in its most recent quarterly earnings release, in which it reported a net loss of $310 million--compared with a net loss of $195 million during the same quarter a year earlier--CEO John Riccitiello did his best to sound optimistic.

"Considering the slowdown at retail we've seen in October, we are cautious in the short term," Riccitiello said. Longer term, we are very bullish on the game sector overall and on EA in particular. The industry is growing double-digits on the strength of three new game consoles and increases in the number of homes with broadband Internet connections."

For its part, Nintendo, which saw its stock drop 36.77 percent between September 2 and November 17--almost exactly the same drop as the Nasdaq--also is making the point of putting on a brave face even as the phrase "the worse economic crisis since the Great Depression" becomes a cliche.

"We do believe that the continued popularity of our products, even during these tough economic times," said Denise Kaigler, the vice president of corporate affairs for Nintendo America, "are evidence that consumers are judging us as a good value and a great way to engage in social interaction."

In October, according to NPD, Nintendo sold 803,000 Wiis, up from 617,000 in September and 453,000 in August, and the company has said it plans to increase supply of the console by 50 percent over last year in order to ensure that consumers have an easier time getting a hold of one .

This would suggest, of course, that Nintendo isn't being disingenuous when it says that it has a strong value proposition that is likely to attract consumers this holiday season and perhaps beyond.

Microsoft, too, looks like it has some evidence to back up its reasoning for, as Dennis put it, being "cautiously optimistic."

In October, Microsoft sold 371,000 Xbox 360s, up from 347,000 in September and 195,000 in August.

But these sales numbers all come from before the economic crisis really kicked in. Now, job losses are mounting daily, the stock market is plunging--though it has risen considerably since Friday--and the government is faced with a more difficult job of pulling us back from collapse.

The pricing game
And for those who think that the video game industry can keep up record sales numbers even in the face of such a bleak atmosphere, some have sobering news.

"Video gaming is not immune," said Gartner analyst Van Baker. "It's certainly been robust over the last couple of years, and it's gotten much more popular, and a much broader install base of users, but they're certainly not immune, especially if it's a deep recession."

Baker acknowledged that video game hardware and software is likely to perform better than, say, plasma TVs, but still, he said, in an environment where jobs are scarce and people are losing their homes, "$50 (for a game) is $50."

And while Baker suggested that Nintendo and Microsoft may be able to continue moving the Wii and the Xbox, respectively due to those consoles' low prices ($249 for the Wii and $199 for the lowest-priced Xbox), he said Sony might have a harder time.

"Sony is the one that stands to get hurt the most," Baker said, "because they've got the most expensive" console. The lowest-priced PlayStation 3 costs $399.

The front lines of the video game wars, of course, are at retail, and that is one place to look for clues as to what lies ahead.

According to Colin Sebastian, an analyst with Lazard Capital Markets, leading retailer Gamestop could represent a sign that, indeed, the video game industry can weather the coming economic storm, despite its stock dropping 49.87 percent between September 2 and November 17.

In an alert Sebastian sent out last week by email, he recommended buying Gamestop's stock, citing not only strong October sales, but also sales growth of 20.5 percent during the first two weeks of November compared to last year.

Driving that growth, Sebastian wrote, was quick sales of games like Wrath of the Lich King, Gears of War 2, from Epic Games and the latest edition of Call of Duty, from Activision.

'Gears of War 2', Epic Games' new release, is expected to bolster the Xbox 360 platform, as well as game retailers. Epic Games

But Sebastian's optimism about bellweathers like Gamestop aside, there are those who see deep structural flaws in the mainstream video game industry's business model, flaws that could wreak havoc down the line, even if things stay solid in the short term.

To Corey Bridges, a co-founder of the virtual world platform developer The Multiverse Network, the problems facing the industry have more to do with how its biggest publishers design and distribute their games.

"I do think that the video game industry is going to do reasonably well in this time of recession because video games are a pretty damned efficient use of time," said Bridges. "That said, the...industry has some other problems that it has been ignoring for awhile and that are creeping up on it."

Essentially, Bridges explained, he thinks that the dominance of giant publishers like EA and their general reliance on physical, in-the-box, units, can't hold up. Instead, he said, new tools, ubiquitous broadband and hungry independent developers are going to all combine to eat away at the continued supremacy of the $60 big-name title. And that could spell big trouble for the industry.

Still, he said, that kind of shake-out could take a few more years.

"I think the global macroeconomic climate will adjust itself before the video game industry hits the upcoming chaos," Bridges said.

In the short term, then, there is ample evidence that the video game business may well prove to be stronger than most others. No one is going to do better than companies producing cheap liquor, of course, but in the technology world, it may be tough to identify a sector that could better persevere than video games.

Even Baker, who said it's unlikely the industry will avoid getting hit by the recession, thinks there's room for optimism.

"We'll have to wait and see how consumers respond," Bake said, "but I don't think it's unreasonable to see some growth (though) it's certainly not going to be double-digit."

 

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