Counting Rupees: Gaming the economic crisis

Each week Jeff Engel and Geoff Brooks contribute Counting Rupees, a column on the business behind gaming:

The markets have plunged thousands of points, credit is tight, unemployment is skyrocketing, and all you want to think about is what's going on with the gaming industry? Don't worry, I understand. After all, people need something to do when they're not looking for a new job, right? So, with that (depressing thought) in mind, I've decided to speculate a little on how the current economic conditions are going to affect each aspect of the industry, from the publisher to the developer and, of course, the gamer.

Publishers and Developers

If you've been watching the headlines recently you've probably already seen a lot of the fallout from the economic crisis. EA just had to lay off 6% of its workforce. THQ closed 5 studios and also laid off 250 employees. Midway also laid off a "small number" of employees from its Chicago office, shortly after finishing up Mortal Kombat vs. DC Universe and Blitz: The League II, apparently their last hopes in achieving respectable sales for the quarter. Unfortunately, the list of layoffs, closings, and cancellations goes on and on.

The sad part is that even before the current economic crisis hit, some of these companies were having trouble turning a profit. EA reported a huge 84% increase in their revenue for their fourth quarter, but still a $94M loss. Laying off part of their workforce will trim up some of their expenses, but if they're reporting losses despite strong sales of games like Rock Band, Burnout Paradise, and Madden, they're doing something wrong. Given current economic conditions, more losses seem likely.

The implications of all this should be pretty clear. As studios close down and staff is laid off, companies will obviously be unable to produce as many games as they have in the past. The games that still get made will likely do so with reduced staff numbers. The common refrain management typically likes to use is to do "more with less," but as clichéd as this might be in the business world, it's even more improbable in the gaming industry. It's well known that game developers already work insane hours, so it's hard to imagine that there's much more room to increase the productivity of individual employees. As a result, development times will get longer or games will get shorter. To the extent that they're not already doing it, publishers will likely look at their current franchises and try to exploit them maximally rather than attempt to create new ones. At the same time, there will probably be less innovation in the marketplace even among indie titles. Publishers will also continue the current trend of using DLC and special download codes in their attempt to convert potential used game buyers into new game buyers, since used game sales are practically worthless to them. And this leads us to the retailers.

Game retailers

As with publishers, there are already signs of the economic turmoil taking a toll on retailers that sell games. Circuit City, certainly a popular place to buy games even if it doesn't focus exclusively on them, is closing 155 stores and just filed for Chapter 11. Its competitor, Best Buy, is warning that consumer spending is way down.

Gamestop, for its part, reported record earnings in its second quarter, just before the current economic crisis really hit. Will their third quarter earnings, scheduled to be disclosed next week, hold up as well? While consumer spending has likely slowed at Gamestop as well and their stock has taken a huge hit, trading at less than half of where it was just 6 months ago, there probably are some reasons to be optimistic about them.

To start with, people still seem to be buying games and consoles based on the latest October NPD release. The overall industry sales grew 18% over October 2007 despite the economic crisis. Hardware sales remained strong, with the Wii still selling an incredible 803k units, and the 360 and PS3 selling 681M combined. The important part about this is that as more hardware sells, the number of people who now purchase games also increases. This, in addition to strong releases like Fallout 3 and Fable II (in addition to continuing interest in Wii Fit) led to a 35% increase in software sales since last year. It seems that even during an economic downturn, if the games are good they'll find a way into people's homes.

While it may seem counter-intuitive that a luxury like games and consoles would still sell well in a recession, there's actually a common sense reason for this: Gaming is, relatively speaking, a fairly cheap form of entertainment.

Here are some examples of what people are doing to save money now: they're eating out less, they're traveling less, they're drinking less out, and despite a massive crash in the price of gas, they're driving less. What do all of these have in common? They all point to people spending more time at home, and less time entertaining themselves outside of it. So, since people aren't going out as much to entertain themselves, gaming provides an easy and effective way to entertain themselves in the comfort of their own homes. Why spend the average $34.09 to dine out, say, once a week (for a total of $136.36 a month) when you could buy a game for $50-$60 that you can maybe play for an entire month or longer. Or even better, you could buy a used game for an even better deal.

And therein lies Gamestop's best weapon. With NPD sales still healthy that means that Gamestop should have a healthy supply of used games to sell for vastly higher profit margins than new games. And with people still looking to save a buck anywhere they can during tough economic times, used game sales will probably remain relatively strong. My guess is that even if Gamestop's overall revenue is down due to an overall consumer spending drop (which we don't see in the NPD numbers, but is still possible) they still post a healthy profit based on the strength of used game sales. We'll know if I'm right about this soon enough.

You, the Gamer

Do you like the games that you're playing now? Well, if not, then you're probably going to be out of luck for the next couple years. As mentioned, the publishers and developers are in trouble. While the gaming community likes to complain about "sequelitis" and the lack of innovation in new titles, I have a feeling that we could be looking back at this time quite fondly in a few years, as we find ourselves up to our necks in rehashes and sequels. Additionally, just as the movie industry has been doing for years, developers will make edits to achieve lower ESRB ratings so that a game can sell to the widest possible audience (I highly doubt that Mortal Kombat vs. DC Universe will be the only casualty of this).

When money is tight, publishers are going to be very weary of financing expensive new projects. Instead, they'll focus on the franchises that they have already had success selling in the past. Not only do they have better recognition in the market, but they're also typically cheaper to make than a new franchise because the core game design is already done and the game engine is already built. New properties that ARE built in the next two years will probably draw heavily from established games, and will also likely use a pre-existing engine to keep development costs down.

While this may sound sort of bleak for games over the next few years, there's also some good news (or bad news, depending on how you look at it): the next hardware generation will probably be delayed at least a few months, if not a year or so. The reason for this is that people are not going to want to buy an expensive new console and instead will want to get as much bang for their buck as possible with their current systems. Besides, even with Microsoft's latest price drop, the current generation of consoles is still fairly expensive. The Wii, still at its launch price of $250, still flies off shelves with ease, so there's probably not too much reason for Nintendo to want to sell something new just yet. HD penetration is still only 34%, so it would probably make sense for all of the companies to wait just a bit longer before they launch their next systems. In any case, if a console lifetime is roughly 5 years, a new Xbox would be ready in 2010, and a new Wii and Playstation would be ready the year after. If I'm right, the next generation of consoles won't start until at least 2011.

Of course, I suppose if I'm also right about what kinds of games we'll be seeing over the next few years, there may not be so much value in that extra year after all.

As co-editors of A Link To The Future, Geoff and Jeff like to discuss, among many other topics, the business aspects of gaming. Game companies often make decisions that on their face appear baffling, or even infuriating, to many gamers. Yet when you think hard about them from the company's perspective, many other decisions are eminently sensible, or at least appeared to be so based on the conditions at the time those choices were made. Our goal with this column is to start a conversation about just those topics. While neither Geoff nor Jeff are employed in the game industry, they do have professional backgrounds that are relevant to the discussion. More to the point, they don't claim to have all the answers -- but this is a conversation worth having. You can reach them at