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Video games vs. the Recession

posted on December 8th, 2008 by pat
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As an investor, it is prudent to invest in a number of different instruments (stocks, bonds) and markets (the United States, emerging Asia) because the more diversity in a portfolio the more bad news it can withstand before being severely impaired. For examples, stocks do well during good economic times, while the more stable bonds will likely outperform in poor times. Holding both allows you to make money when all is right with the world and preserve much of your money should things start to turn south. However, in times of crisis, correlations go to one. This statement has an obvious truth to it, since, as we just witnessed, almost every market in the world goes down together when things get bad enough; almost nothing (most US government bonds performed well, but that is about it) escapes unscathed. But ‘what does this have to do with video games?’ you may ask.

Many commentators and industry professionals have weighed in on whether video games are recession proof. For starters, asking only if they are recession proof and not depression proof may be a bit of optimism or wishful thinking. More to the point, are we justified in thinking our favorite hobby may continue to grow and prosper despite the economic turmoil currently in the news? Are video games and the companies that make them immune from layoffs and possible deflation?

October was the worst month for global assets most of us alive can remember, and yet the Wii and Xbox 360 both had excellent sales months. Fable 2, Fallout 3, Wii Fit, Mario Kart and LittleBigPlanet all sold very well. And yet video game stocks got crushed along with the rest of the market. So far sales remain strong but stocks have been tumbling (although some companies have recovered somewhat).

There are a few possible reasons for this bifurcation. The first (and the one I would accept wholeheartedly were we not in a time of crisis) is that stock market participants attempt to predict the future and think that even if sales are strong right now, they may not remain that way for the next several months as people lose their jobs, can not get the credit they need to buy PS3’s, or are finally scared into saving a little money.

The second (and one of the reasons that correlations go to one) is that when everything goes this badly, investors are forced to sell anything they can to pay back loans or raise cash. Normally, market participants can raise cash in any number of ways and thus choose to sell their weakest positions, but there are times when they have to sell anything they can (in this example, stock of video games companies) just to put some money in their bank accounts. Stocks are easier to sell than most other instruments so they are going to take a beating in this environment, potentially even beyond what is justified. For this reason, I believe that using falling stock prices to predict gloomy times for the industry in the current market climate misunderstands the severity of our current situation.

Falling stock prices terrify companies, sometimes with good reason. I do not however think that they are a death knell for the industry right now (if stock prices fell during otherwise tranquil times I would be singing a different tune) because markets are currently too chaotic to be predicting anything rationally. This argument is meant to suggest that one potential canary in the coal mine may have died from causes other than slow times for video game sales, but are they actually recession proof?

I find the argument that they offer a lot of entertainment time for their cost compelling (please note I have a strong distaste for the use of this calculus in reviews, but this is about economics, not game quality). It has been said elsewhere, but bears repeating that even at $60 Gears of War 2 offers more hours of entertainment per dollar spent than going to the movies, and the value becomes nearly infinite if games are played mulitplayer over and over rather than just through campaigns. The ability to escape the bad news of the real world for the possibly worse (dragons are going to destroy the whole universe!) but easier to remedy (don’t worry, a band of plucky youngsters will defeat them!) news of a fantasy world is another good reason that certain entertainment industries may fare well during this contraction.

In terms of the holiday season, many consumers have been putting money aside to buy consoles for their children for months are will likely follow through with those plans. In my opinion, video games are likely to withstand a recession, and perform well at least into early next year, but should things get even worse and we fall into a full blown depression the correlation between video game sales and the rest of retail sales may just go to one.

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10 Comments

  1. Tyson said on December 8, 2008:

    I have always been of the mindset that video games were a tad recession proof due to the fact that when people get short on money, games offer a bigger bang for the buck than a say, a trip to Las Vegas. It is interesting though that game company stocks are down. I have a feeling that this is less because of the performance of the company and more because people and mutual funds will buy stock in game companies to fill out their portfolios and what we have seen is profit taking in which game company stocks have been collateral damage.

    I hadn’t thought about it too much until reading this but after a little research, I have found that I have a couple mutual funds in my IRA that have EA shares incorporated into the fund. May have to sell those…

  2. christian said on December 8, 2008:

    People who buy some stocks haven no clue what the company is doing. Game stocks likely fall into this as much as anything. Only some folks will pay attention to whether the projected best seller actually lights up the sales charts.

    This is a great topic that few people are looking at appropriately. I think it is foolish to say games are recession proof when you have EA making layoffs, Microsoft dismantling their internal studios due to the costs involved, and just now hearing Factor 5 just might be broke. Games had razor thin profit margins before the recession, and now it isn’t going to be easier.

    That being said, I don’t think that the actual sales of games will drop. I hate generalities, but assume that two major playing demographics are a) teens, and b) young adult males. This would correspond to the buying demographics of a) parents and b) young adult males. All the cheapskates you see on kotaku or joystiq whining about how a downloadable game is too much or something, is in group a), because they can’t get mom’s wallet. Their buying habits likely won’t change, and they’ll still get games as gifts. Young professionals of various degrees of marital status can do pretty well for themselves when they don’t have to support a family on their salary, and so game purchases aren’t a massive dent in their paycheck.

    In many ways, our hobby is dirt cheap. Where I live, $20 can get you four drinks during peak hours at a bar. A meal under $20 requires a lot of effort. If you compare buying even two games a month next eating out or buying pricier gadgets, it stacks up favorably, making it one of the wiser options if you decide you can keep one avenue of entertainment around.

    Of course, no matter how much sales fluctuate or remain steady, it seems that costs in general and stock shifts are too much. Everybody hold on.

  3. pat said on December 9, 2008:

    im not licensed to give any kind of advice or anything, but i would assume EA (erts) makes up a very small percentage (my guess would be around 1%) of any mutual fund you own in a 401k.

    continuing to use erts as an example, it is 96% owned by mutual funds and other institutions. we can impugn the knowledge these guys have of investing in general and video games in particular, but they are being watched. that high mutual fund ownership is relevant though. erts is (in very small amounts) in the s&p 500 and nasdaq. many mutual funds are designed to replicate these indexes. what this means is that when one of these tracking mutual funds start to go down because banks start losing money people panic and withdraw their money out of fear they will lose more money. since these things have to replicate the index they have to sell their erts alongside their other holdings, and the stock will go down.

    now there are economic problems (lack of credit comes to mind) that may cause some of the weaker players in the industry to get shaken out, but on the whole, we may continue to see strong unit sales for the foreseeable future.

  4. GJ said on December 9, 2008:

    Nice article. Also important to track is the performance of MMOs and companies driven by MMOs. This class of game gives the greatest back for the buck of any video game, so if you’re on a tight gaming budget, it makes sense to keep a subscription than to go out and buy $60 games.

    Do you have any specific data on Blizzard and others? Many MMOs are rolled up into bigger companies (Warhammer is owned by EA, and therefore will not perform well enough to heavily influence the company), and CCP is privately held (I believe). I’m sure Blizzard will do well, as always, but they also have an inordinately large market share.

  5. dreamhunk said on December 9, 2008:

    pc gaming is ression proof and maybe dression proof. the reason is because you can get free games on the pc. You also have mods and games like guildwars.

  6. christian said on December 9, 2008:

    So long as those free games retain their quality, which is a tough claim in the independent circles.

    We are talking about that and not piracy right?

  7. Tyson said on December 10, 2008:

    Maybe dreamhunk can take the money he saves on games and put it toward English lessons. 😛

  8. dreamhunk said on December 10, 2008:

    No I am not talking about pircay. There is pircay on all gaming machines. It’s only micro softs games devs that want pc gaming dead. but it will never die.

    http://www.edge-online.com/news/fallout-3-xbox-360-pirated

    http://www.gamedaily.com/games/gears-of-war-2/xbox-360/game-news/gears-of-war-2-pirated/6940/21592/

    http://ve3d.ign.com/articles/news/39622/Microsoft-Explain-PC-Game-Release-Delays

    for exmaple epic games and gear of wars which sucks in the pc gaming world.Pc gaming has better games because pc gaming is cutiing egde gaming.

    you find free games and cheap game from mods,gametap,indie games, wild tanget, gog.com ebay places like that.

    there are tons of programers that make good games. pc gaming also has alot a genres you just can’t find on consoles.

    http://adrianwerner.wordpress.com/games-of-2009/

  9. dreamhunk said on December 10, 2008:

    Here I’m going to list you should look at and reasons pc gaming will never die
    http://www.youtube.com/watch?v=zHj_vAkPjNQ
    http://www.youtube.com/watch?v=uwXpFv96H_Y

    console games are not as good as pc games here is why
    http://www.youtube.com/watch?v=xY-NSNhgydY
    http://www.youtube.com/watch?v=gyQTCeobZlg
    http://www.youtube.com/watch?v=9TSxXAY4xks

    here is the real truth on micro softs game devs
    http://www.youtube.com/watch?v=oPtKqMmbtNA

  10. Stefan said on December 10, 2008:

    First off, this is a more insightful and mature analysis of why a market does some of the things it does than most I’ve seen this fall. Clearly, more armchair investors should read videolamer.

    Secondly, I think indie-ish PC gaming does do relatively well in economically depressed countries with high numbers of educated programmers. You have lots of programmers with lots of time on their hands…so they’re going to start making toys. It flourished in Russia and former Soviet Satellites during the 90’s (before writing spyware/viruses became the way to make money if you could program and didn’t have a job) and produced things like Tetris (and other types of software, like linux). More than the games being free or piratable, I think it’s the result of startup costs being effectively $0 if you have people with the skills, the time, and home PC’s.

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