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Can the Videogame Industry Bounce Back From Its Recent Lows?

·5 min read

The dream run for the videogame industry seems to have come to a sudden halt. After a solid 2020 and 2021, when sales hit record highs, videogame makers have struggled to hold on to the momentum in the second quarter as well as the first half of this year.

While soaring commodity prices have made people cut down on consumer discretionary spending, the videogame market, which was thriving until some time back, is facing several other challenges. According to market research firm NPD, videogame sales slumped both in the first half and second quarter, as gamers have drastically cut down on buying both consoles and gaming accessories. Moreover, not too many big games have been launched in recent times, waning the interest of gamers.

Videogame Sales Decline in Q2

According to the latest report from NPD, videogame sales fell by $1.78 billion in the second quarter of 2022, with overall spending on videogames in the United States totaling only $12.35 billion. This reflects a 13% year-over-year decline.

This comes as both Microsoft Corporation MSFT and Sony Corporation SONY reported revenue declines in gaming in their recent quarterly results. Almost all big videogame manufacturers are shying away from launching new consoles or releasing new games and reported a sharp decline in revenues in the second quarter.

SONY reported a year-over-year decline of 2% in its gaming revenues in the April-June quarter. Sony Corporation’s operating profit declined 37%, with the company now painting a gloomy picture. Sony also cut its profit forecast by 16% for the full year.

The story at Microsoft isn’t any different. MSFT said that its revenues at its gaming unit declined 7% year over year in the second quarter. Microsoft also reported a 6% decline in its content and services revenues, while Xbox console revenues declined 11% year over year in the second quarter. Microsoft has a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Activision Blizzard ATVI, which is being acquired by Microsoft, came up with even worse numbers. ATVI reported a 70% decline in its net profit, while its revenues plummeted 29%. While Activision Blizzard blamed the massive decline on poor sales of its latest title of the popular franchise Call of Duty, there are several other factors that have been posing as major challenges for all game makers.

Nintendo NTDOY, one of the top performers during the peak of the pandemic, saw a 15% decline in operating profit in the second quarter. NTDOY managed to sell only 3.43 million units of its portable Switch console, declining 23% year over year. Also, Nintendo’s software sales declined 8.6% year over year to 41.4 million in the April-June period.

Electronic Arts EA was the only company that reported profits. EA reported a 50% jump in its profits, while its revenues climbed 14% year over year in the second quarter.

Challenges Aplenty

The gaming industry is dealing with a number of challenges. One of the reasons behind this slump in revenues is undoubtedly inflation, which has led to individuals spending less on luxuries as a result of their cautious spending. After a solid 2020 and 2021, videogame sales fell precipitously in the first half.

As most individuals spent their time indoors due to the COVID-19 pandemic, the gaming industry witnessed growth. As a result, the videogame industry grew 26% between 2019 and 2021, hitting  record-high revenues of $191 billion. Sales were already increasing from 2015, and the pandemic gave a further lift.

However, since the beginning of this year, things have changed. Experts had predicted that video game sales would decline once the economy reopened as people would have the option of outdoor entertainment. That didn't happen because sales in 2021 soared even higher when popular games and consoles were released, but that has come to a halt.

Since there haven't been any significant launches in a while, gamers' interest is waning and the dry spell will last for some time. In April, May and June, the most popular games were mainly classics. This is one reason why companies like Nintendo, Microsoft and Sony saw a decline in their revenues in the second quarter.

Moreover, the ongoing competition for important console hardware is a significant issue that is impeding performance in the gaming industry.

Nintendo’s portable Switch console sales declined 23% year over year in the second quarter. Sony PlayStation 5 console sales came in at 2.4 million in the April-June period, marginally higher than the 2.3 million sold last year during the same period.

Moreover, gamers have also been struggling to find new consoles in physical stores and online due to logistic issues, a lack of gaming components, and a shortage of semiconductors.

The conflict between Russia and Ukraine is also having a significant impact on the gaming industry. Following the invasion of Ukraine, a number of significant hardware and videogame developers, including Microsoft and Sony, have ceased business in Russia.

The industry is being hampered by the fact that Russia was formerly the 10th largest gaming market in the world, according to research firm Ampere Analysis. However, sales have now been substantially reduced.

According to a separate report from Ampere Analysis, the global gaming market is projected to contract 1.2% year over year to $188 billion in 2022. This will be the first annual decline for the gaming industry in more than a decade.

However, the industry still has enormous potential. Sales are probably going to increase as more games and platforms are slated for release in the second part of the year. After two years of strong growth, the gaming sector is reportedly paying back some of its profits this year, according to Ampere Analysis. Although a decline is predicted, the year should end at levels greater than those prior to the pandemic, and strong growth should resume in 2023.

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