Saturday, June 9, 2012

What’s Ailing The Video Game Industry?

Things aren't rosy for those hoping to make big bucks in video games.

Five years ago, the idea of a 29 percent year-over-year decline would have sent shock waves throughout the industry. But when NPD reported that shortfall a few weeks ago, publishers, gamers and investors shrugged briefly, then promptly forgot about it.

But the problem isn't going away. Sales of traditional video games are clearly suffering. Game studios are closing left and right. Even game makers who used to print money are backpedaling. Monthly sales numbers at brick and mortar retailers have declined steadily for the past seven months, and while apologists argue that digital distribution is making up that gap, the numbers don't back that up.

The NPD Group recently issued updated sales numbers for the first fiscal quarter of the year, folding in digital sales, used game sales and rentals. That raised the number from $1.5 billion to $3.4 billion — which sounds like a nice jump, until you realize that in the first quarter of 2011, that number was $5.9 billion.

Investors in the industry's publishers aren't happy. BMO Capital Markets' Edward Williams says shareholders believe the industry "is in a secular decline." That might be a bit dire, but things truly aren't good.

So what's wrong? And is there a turnaround in sight?

Many point to the fact that we're experiencing an unprecedented gap between new console generations. With the current console cycle in its seventh year (the Xbox 360 was released back in 2005), which is considerably longer than what previous consoles have faced, consumer fatigue has set in. Gamers are simply growing a little bored with their devices.

While the industry tends to focus on software sales, the hardware numbers of late have been dreadful. Despite routinely outselling its rivals, the Xbox 360 has seen its sales fall year-over-year for 10 of the past 12 months. PS3 sales are down nine months in the past year. And the Wii… oh, the poor Wii. Since January 2009, it has only recorded year-over-year gains eight times. That's 34 months -- nearly 3 years -- of declines.

Some hold out hope that Nintendo's Wii U, due out later this year, will turn things around dramatically. But while the system could give a small boost to sales numbers, most analysts predict the real turn of the tide will come following the launch of the next Xbox and Playstation. Few expect the Wii U to perform anywhere near as well as the Wii (and considering how well the Wii has sold over its lifetime, that's not exactly a shocker).

Then there are the problems with games. New intellectual properties rarely launch at the end of a console's life cycle. Publishers, instead, roll those out when new consoles hit the market, since buyers are more open to them at that point. That has led to the bout of sequel-itis the industry is currently mired in.

And while it's always nice to play a new installment in a beloved series, players are getting a little tired of the same old franchises.

In addition, publishers have severely cut back the number of titles they're releasing in the past few years. Major triple-A releases are still coming out, but the mid-tier titles that used to be released regularly (to moderate sales) have dried up.

"We believe there are few new intellectual properties to reinvigorate interest in the games sector," says Wedbush Securities analyst Michael Pachter. "Consumers have been offered a never-ending series of sequels, and have been offered fewer choices each year for the last several years, with the result being waning interest in new software purchases and an unprecedented three years of software sales declines."

"The poster children for limiting consumer choice are Activision, Electronic Arts and THQ, with each company offering 50 percent as many titles as they offered several years ago, with only one new intellectual property launched among the three companies over the last year," he says.

There's some good news on the horizon, though. This holiday season is packed with potential hits, which could at least stanch the bleeding -- and the expected release of games like Grand Theft Auto V, Bioshock Infinite, Dead Space 3 and Crysis 3 early next year could return the industry to positive territory, at least temporarily.

"We continue to believe most of the months for the balance of this year could be down double digits," says Arvind Bhatia, of Sterne Agee. "That said, declines in Nov/Dec may be less severe. … [and the first quarter of] calendar year 2013 has the potential to see year over year growth."

And while some investors might view the numbers as imminent signs of a second industry implosion (the first coming in the heyday of arcade games and Atari), industry observers say they don't think that's happening. Instead, they say, it could be an evolution of gaming into the next stage of interactive entertainment.

"It is unlikely that gamers are abandoning their passion in favor of other forms of entertainment, and inconceivable that if packaged goods sales have declined, people formerly playing games are now doing something unrelated," says Pachter.

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