Analyze This: Is The Video Game Industry Recession-Proof?
April 9, 2008 Page 3 of 4
Jesse Divnich, The simExchange
Education, energy, milk, Mario and health care -- what doesn't belong here? I don't believe any leisurely business can be considered "recession proof." But [if] one could mask itself as being recession proof, the video game industry [could] be one.
During these times, consumers decrease what they allocate to entertainment activities. That does not mean they completely cut out such a budget; they simply scale back.
Movies, music, theme parks, vacations and restaurants are some of the activities consumers will likely scale back on, before they cut out their video game budget, especially in the core video game sector. (Note that the "core video game market" is not the same as the "hardcore" video game market.)
Of course, there are going to be those who do scale back on their video game budget. Fortunately, those that do either contribute their entire entertainment budget to video games or contribute the least amount. Those two groups likely represent maybe 20% of the market; the other 80% will not [scale back].
We can assume which sectors within the gaming industry will likely be affected. For the extreme hardcore gamers, they will likely cut out spending on games that they never had strong interests in. On the other extreme, the ultra-casual gamer will likely cut out video game spending altogether.
Since demand for the Wii far exceeds supply, [sales] could drop by 10% in the next few months, and it would not make a dent in Nintendo's revenue stream. We don't know how strong Wii demand is -- we just know it's more than what they can supply.
The DS is a different situation, as it is the cheapest among all the video game hardware. Although I suspect that a recession would decrease demand for the DS, the extent of which it does will likely not be noticeable.
For 2008, the video game industry will still see growth. As more consumers purchase next-generation systems, the average price per game sold will increase. Factoring in the strong 2008 release schedule, we will likely see a double-digit percent increase for software sales. For hardware sales, we are looking at a possible flat 2008, given that we expect next-generation hardware price drops in the coming months -- before June.
To sum it up, consumers are likely to cut out other expenditures in their budget before cutting what they allocate to video games. Of course, the video game industry will not be immune to an economic recession, but because of its explosive growth, the effects of a recession will likely go unseen. A recession to the video game industry is equivalent to hurling rocks at an oncoming train.
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