Lately, analysts have loved the video game industry, making claims that it may be recession-proof, but there are still questions that linger. With the market shedding jobs at a remarkable rate, analysts are looking for any signs of optimism, and the video game industry has continued to prosper.
There isn’t universal agreement among analysts about the ability of the video game industry to make it through a recession without a significant dip, but analysts remain hopeful:
Frazier predicts modest growth in the video game sector in 2008. And Colin Sebastian, an analyst with Lazard Capital Markets, is even more bullish.
The firm, which makes investment recommendations, put out a research note to its clients last week. In it, Sebastian writes that the video game industry is entering the “largest, most robust cycle in history, and we expect U.S. software sales to exceed $10 billion in 2008.? That’s a 10-to-15 percent bump over 2007, which was the best year on record for video game sales in the U.S.
The MSNBC article notes that the price point of video games is significantly higher than that of other entertainment media such as movies and books, and built into the $50-60 price point is an expectation of prior investment in hardware. While the entertainment value, if one measures it in hours, of video games generally exceeds the typical 2-hour movie, there is still a disincentive to paying a higher price tag in this market.
If a major recession were to hit, the repercussions could be felt throughout all forms of entertainment:
Behravesh does think the game industry has a good chance of coming through a mild recession pretty well — much as it did back in 2001, the last time we saw an economic dip. In a major recession, though, he foresees the industry “contracting,? along with consumer spending in general.
“I’d say there’s a one in four chance that we go through a major recession and the video game industry gets hit.?
The elephant in the room in any discussion of video game sales in a recession is the used video game market. Developers and publishers hate the used video game market because it directly affects their bottom line, but GameStop is thriving. The profit margin on used games is huge, and the lower cost of the games directly appeals to consumers confronting the market downturn. At Forbes, they are particularly bullish about the opportunities of GameStop:
Yet no rival can touch GME’s used-game business. Indeed, Electronics Boutique represented the only real threat in this area. Furthermore, GME’s Edge program promotes customer loyalty by awarding bonuses for trade-ins and purchases. In addition, pressure on new game sales arising from deteriorating consumer spending trends should be offset by used-game sales as shoppers seek to save money. This bodes particularly well for GME, since profit margins on used game sales are more than double those of new titles.
As an educated game purchaser, I realize that creators do not see any return from their games when consumers buy used games, but I have some fond memories of going to Funcoland with my mother. She was reluctant to spend a bundle of money on new titles, but my sister and I would come out of there with a handful of games that would entertain us for weeks or months.
If the recession begins to affect the video game industry, GameStop will still rack in the cash because most consumers care more about the size of their own wallets rather than the compensation seen by the game creators. And who can blame them?
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