The U.S. economy is facing numerous setbacks, with inflation rising to a 40-year-high, consumer spending declining and a labor market slowdown. Even the video game industry — often described as “recession-proof” because of consumers’ tendency to turn to games in a downturn — hasn’t been insulated from the general downward shift.
Video game companies underperform in quarterly earnings
Gaming titans Nintendo, Microsoft and Sony all reported declining revenue and missed earnings expectations in the past two weeks. Part of the reason, gaming companies say, is a weakened supply chain, still affected by pandemic-related lockdowns and the challenges of delivering consoles to stores. Another aspect is that much of the world has now reopened and isn’t looking online to forge connections.
“The world is on vacation,” Electronic Arts CEO Andrew Wilson said in an earnings call on Tuesday.
On Monday, video game conglomerate Activision Blizzard reported $1.64 billion net revenue, a $700 million dip in revenue compared to the same time period last year. CEO Bobby Kotick described a “challenging economic environment,” with many companies announcing hiring freezes and layoffs; still, he said, Activision saw a workforce expansion of 25% compared to the previous year.
The company skipped out on an earnings call, citing its pending nearly $69 billion acquisition by Microsoft. It confirmed in a press release that the deal is still slated to close on June 30 next year, if regulators approve.
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While the Call of Duty franchise experienced setbacks, elsewhere in the company, King, Activision’s mobile games unit, was thriving. Speaking to The Washington Post, Wedbush analyst Michael Pachter called it a “good quarter,” pointing out that the company saw mobile growth, especially in King’s in-app purchases. King’s number of players stagnated, dropping to 240 million compared to 255 million for the same period last year.
Other titles with planned updates are on track, the company said, including “Call of Duty: Modern Warfare II,” “World of Warcraft: Wrath of the Lich King” and “Overwatch 2.” The company confirmed that “Diablo IV” is still planned for a 2023 release. Still, days later it was revealed that a World of Warcraft mobile game developed in partnership with the Chinese studio NetEase had been canceled by Blizzard.
“Much of the world is no longer in a lockdown,” said Laine Nooney, assistant professor and historian of video games at New York University. “There’s definitely a sense of global constriction happening right now. It’s pretty apparent the U.S. — which is still nearly half of all global game revenue — is already in a recession. Video games have always been discretionary entertainment. With costs for basic goods like gasoline and food rising, there’s less room in the budget for entertainment.”
There was one bright spot. Electronic Arts reported earnings on Tuesday, sharing that sales were up 22% this year, compared to the same period last year. A large part of that growth was EA’s roster of live service titles such as “Apex Legends.”
“Electronic Arts was wise to stick to its tried-and-true formula of monetizing popular franchises. EA has managed to corner the sports video games market with FIFA, NFL Madden, and its recent addition F1,” said Joost van Dreunen, a lecturer on the business of games at the NYU Stern School of Business. “EA is proving its mastery of monetization with record sales for FIFA Mobile for the quarter, the highest sales for the FIFA franchise, and a 40% increase in daily average players.”
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Supply chain problems with consoles may have impacted how many consumers have the newest Xbox and PlayStation products, and consequently, how many new titles they are purchasing. Across gaming companies, those with live service games (like the constantly updating “Apex Legends” or “Candy Crush Saga”) saw microtransactions bolstering their bottom lines.
Electronic Arts CEO Andrew Wilson admitted that supply chain constraints affected the business but expressed optimism that console units would restock by next year.
“As the supply chain starts to ease, our expectation is that more and more people pick up that next console,” Wilson said, adding that EA would invest in its sports titles to ensure it would have enough content to entertain gamers for the next eight years of the current generation consoles.
Nintendo reported an operating profit of 101.7 billion yen ($764 million), falling short of analyst expectations by about 13.5 billion yen ($101.4 million.) Nintendo Switch sales declined from 4.45 million units in the same period last year to 3.43 million now; software sales also dropped to 41.4 million units compared with 45.3 million last year. The company attributed its console sales woes to supply chain issues and predicted it would catch up with production over the summer. Nintendo still anticipated it would sell a total of 21 million console units in the financial year ending next April.
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Similar to its Japanese competitor, Sony’s game software sales dropped about 25%, selling 47.1 million PlayStation 4 and 5 titles between April and June, compared to selling 63.6 million the year before. When asked about inflation and recession in the Western market on an earnings call translated from Japanese, chief financial officer Hiroki Totoki responded that the main issue was meeting demand for consoles when faced with supply chain issues. He also pointed to how Sony had released fewer large games this financial year, compared to the same period last year.
“There are two big constraints that we are imposed with. One is the parts and components availability. The other one is supply chain,” Totoki said after repeated questions about the PS5′s supply issues. “We want to produce as many units as possible.”
Totoki declined to say if Sony would raise the price of the PlayStation 5. He attributed the drop in game software sales to people having more chances to leave their homes as the rate of covid-19 infections decreases in some key markets. He said the company was still on track to sell a total of 18 million PS5 units in the financial year ending in May 2023. He said that supply was recovering from a lockdown in Shanghai and from scarce semiconductor parts.
Sony completed its acquisition of Bungie and Haven Studios earlier this summer. Totoki cited the earlier-than-expected closing of the Bungie deal, plus a weaker yen, as reasons for cutting its forecast operating profit from 305 billion yen (roughly $2.3 million) to 255 billion yen (roughly $1.9 million).
Microsoft reported a $259 million decline in gaming revenue as well, citing decreased demand for Xbox content and hardware, partially offset by growth in Xbox Game Pass subscriptions.
“Microsoft’s decision to push into subscriptions is proving timely as its newfound revenue stream is offsetting its broader declines across software and hardware sales,” Van Dreunen, the games business lecturer, said. “Subscriptions tend to provide more value to consumers during periods when the economy is proving softer and inflation high. It remains to be seen, however, how Game Pass will stack up as rival Sony ramps up its offering, and a broader array of entertainment services in adjacent categories like video and music compete for wallet share.”