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Pachter: Games 'Highly Recession-Resistant' Despite Difficult September Results Ahead
Pachter: Games 'Highly Recession-Resistant' Despite Difficult September Results Ahead Exclusive
October 13, 2008 | By Leigh Alexander

October 13, 2008 | By Leigh Alexander
More: Console/PC, Exclusive

Wedbush Morgan analyst Michael Pachter agrees with the majority of analysts who expect visible year-over-year decline for the games industry in September -- but he stresses the unfavorable comparison is due to comparisons to Halo 3's launch month last year, and not a reduction in demand in an unsettling economy.

While Pachter attributes the current "market meltdown" in part to waning consumer confidence, he believes "video games are likely to weather a recession quite well."

"Notwithstanding this month’s anticipated decline, we believe that the video game software sector remains highly recession-resistant," he says in a recent note sent to investors and Gamasutra.

"Normal" recessions see consumer spending decline by about 5 percent, Pachter explains -- while a recession hasn't yet specifically been documented, the analyst does expect consumer spending to "suffer for the next several months."

Nonetheless, assuming a typical 5 percent decline in consumer spending, Pachter finds fault with the market opinion that consumers will abandon games the way they would other discretionary purchases.

"We think that games fit within a larger category of discretionary spending that encompasses all entertainment and leisure," he says. "In a recession, we think that the number of hours spent by consumers engaging in leisure and entertainment activity is likely to increase, with a shift from higher cost forms of leisure and entertainment to lower cost forms."

"As a category, games are one of the lowest cost forms of entertainment, particularly to those households that have already invested in a home console."

And, says Pachter, the current install base is telling. As the current console generation is relatively new, the analyst notes that the average cost for current console owners falls between $249 and $599. The resulting implication is that "the average household that owns a console is well into middle class socioeconomic status."

"We believe that some portion of console households may be lower income, perhaps 20 percent, but believe that even these households are likely to continue purchasing software, as they most likely contain a self-indulgent, hardcore gamer."

However, while the analyst concludes that hardcore gamers and holiday gift givers are likely to continue game buying largely as normal over Christmas, the lowest-income consumer sector is the most likely to delay game purchases.

"We end up concluding that video games are about as susceptible to a recession as the average of all consumer purchases, so we expect a 'haircut' of 5 percent this holiday," Pachter says.

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Christopher Plummer
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I agree that Video Games are going to still do well during this recession. When I go to other retail areas it is pretty clear that people are not spending money like they used to. When you go to a video game section in Toys R Us, Wal Mart, Target, or a games store the stark comparison between their counters, which usually have at least a couple of customers, and the empty ones around them.

Also, it reminds me of when I was younger. Video games provide great value for their cost. If you are a parent with multiple kids, one console can make the kids really happy at a decent price when compared to what it would cost to get them each something really big. And at $30-$60 a game, there aren't many other alternatives that excite kids to the same level.

Sande Chen
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During the Great Depression, Americans went to the movies in throngs to escape the bleakness of reality... Of course, then, going to the movies was a relatively inexpensive pastime @ 27 cents a ticket.

Trevor Cuthbertson
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"video games are likely to weather a recession quite well."

Trevor Cuthbertson
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Absolutely Right! Remember the last recession we had in the early `90s. It didn't stop anyone from pumping tons of quarters into Street Fighter II, running out to purchase a new SNES just to play Super Mario World, and purchase a Sega Genesis for Sonic and some of the cool Capcom games for the system of the time.

Niles Plante
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Hardcore games may be more expensive comparatively, they still represent value. As consumers spend less, the decline will be the most frivolous of purchases first. Christian is right. Games aren't just for kids. But in most metro areas, a game is still less than a dinner out or cover + Bar tab. Most likely, hardcore gamers will cut from these areas first and start spending more time at home with cable TV, Netflix, and video games. At the worst case, game rentals and 2nd sale will pick up over new game sales.

But that is only one part of the games industry. Free2Play games like Battlefield Heroes and the nexon games will offer a very accessible gameplay experience with microtransactions generating income from all income brackets. I think spending will be down, but not as badly as other forms of entertainment like food service or live events.

Christopher Plummer
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Christian, you are exaggerating. The unemployment rate isn't going to peak in such a short period of time. It may get to 25% but it took 4 years for that to happen during the Great Depression.

Also, the Wii is doing so well because it is aimed at everyone. It isn't tied to a specific demographic.

The question to ask yourself is, what can these current game purchasers do with the money they are saving from not buying a game? I'd say not much.

As it was mentioned earlier, people are going to cut back on going to the bar, eating out, shopping for clothes, etc... first. They are going to stay at home and have more people over. Hardcore gamers may buy less games but they will unknowingly encourage casual gamers and parents to purchase games over other things. Furthermore, subscriptions may rise for Warcraft and Lord of the Rings Online since they are releasing expansions. Why? because the knock against all of this stuff is that the people playing them are spending too much time in the house and not getting out and being social enough. When people are forced to stay home to save money they will remember how good of a social outlet video games can be.

Patrick Dugan
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I think the web-based stuff and the console download-ables, especially the ones that actually are meaningful to play, are going to win big in coming years.

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Christian, if you are going to be so critical of the article, written by someone who is an expert in his field, then you need to read more carefully. I don't want to assume that it is because you are in Germany and perhaps english is a second language, but there are things you are mixing up.

Pachter is generalizing in saying that perhaps 20% of the market of console owners fall into the lower income category, and generally a lower income family would cut more "leisure" expenses than a middle class family. But a lot of these lower class households may contain a hardcore gamer, so they may still buy a game or two and put more of their leisure money into games.

And in general, hardcore titles will probably still do well. It's the games with less marketing money and less publisher backing which will probably fall by the wayside.

Also casual purchases by family members will see a decline. A dad won't go into a store and say "My son likes games, how many should I get him?" It will be more like "What is the 1 game he wants?"

And anyone who IS a gamer, already knows that comparatively games are one of the best values out there, second only to music. I could go buy Saints Row 2 for my wife and I and get at least 20 hours combined playtime between us. Whereas a trip to the movies is $20 for the two of us, without concessions. And if I played WOW, or any MMO, the 15$ or so a month would be well worth it to sit at home, play a game I like, and get my mind off my dwindling 401k.

Peter Park
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Stop reminding me of how depressing my 401k looks, please. :(

While I hope the economy doesn't drop to where unemployment rate rises to 25%(!!!!), I must say that game market must also see the affect of recession.

I'm saying this only because much of growth of the market today consist of casual game market, which as Anon above mentioned will cut their spending on games, where as hardcore crowd probably won't (or will even increase it).

Hope that time doesn't come and economy regains it's strength and maintain steady growth (no more bubble please).

Dave Endresak
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There was indeed a recession in the early 1990s... and the 1980s were very bad, as well.

In any event, this topic has been covered various times and it has been proven that the modern gaming industry is more resistant to economic downturns than other areas. It isn't immune by any means, of course; it is simply one of the last areas that people would choose to cut if they have to do cutting. They cut movies and other areas prior to gaming because gaming provides better overall cost efficiency/value. People stay at home to do job searching and other things, including leisure, rather than wasting gas (and $$$) going someplace else. This is especially true for modern gaming, and includes the many low cost so-called "casual" games.

I think it's also important to recall that the secondary sales markets and rental markets are much larger than people buying brand new games.

Christopher Plummer
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Yes, but the difference now is that the price of entry is so much less of a factor than it ever was, at least in America. You don't have to buy a new console or new games. There are plenty of used ones that can be bought. Choices aren't limited to the stores that you can walk or drive to. Customers can download PC games, console games, and now even handheld games (PSP). They can even rent them through the mail.

I've always said that HDTVs and broadband connections are the barriers for the PS3s and 360s but that doesn't change the fact that there is still lots of money being made off of the PS2s (the XBOX isn't supported anymore), DSs, PSPs, and Wiis.

Christopher Plummer
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A little bit of a tangent, but I believe that used games are what finally prompted publishers to take the Steam model and digital distribution seriously. And they are hitting it in full force on PCs, 360s, and Ps3s.

- downloadable content is a must have for every game now

- Sony, in particular, are fostering development into AAA $30 downloadable titles to hit a different demographic.

- EA has already started distributing full games online (including consoles) as have most publishers for the PC games.

Austin Ivansmith
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to Christian Keichel,

Everything you wrote about the "lower class", is exactly what anonymous was writing about already.

He isn't saying there are MORE hardcore gamers in lower class households. He is saying, IF there is a hardcore gamer in a lower class household, that household may still purchase games in this "economic downturn."

Pachter is also saying that if a home already owns a console, then another $50-60 for a game isn't a huge expense.

"A lower class household that gets hit by a recession doesn't have any savings to buy things from. A lower class household can't spare a part of it's income to get savings, there are none. In a recession these lower class households you are refering to are in a much more critical situation then the middle class households. In a recession these households aren't able to spend their money on anything else then food, clothing, rent and energycosts. Cultural entertainment in lower class households during a recession is mainly the things you get for free like TV, Browser games, etc."

I grew up in a lower class household in the early 90's. Still got a video game or two at Christmas. I just didn't get every game I wanted whenever I wanted it. A lot of lower class households still have a budget.

Also, where are you getting that the consoles "need" sales? I haven't read that anywhere, that they are dying for sales. I think they are mostly just dying for market dominance. The profits are in the software, not the hardware.