Videogame Makers Can't Dodge Recession

By YUKARI IWATANI KANE The tentacles of the recession have reached into the videogame industry, a business that was long considered downturn-resistant. As recently as six months ago, the videogame industry was racking up strong growth even as other businesses reported sharp declines in sales and profits. U.S. videogame sales jumped 10% in January as consumers snapped up $60 to $70 games, which can bring dozens of hours of at-home family entertainment. But last month, videogame sales plunged by a record 29% year over year, according to market-research firm NPD Group. Meanwhile, sales of consoles such as Microsoft Corp.'s Xbox 360 and Nintendo Co.'s Wii plummeted 38%. The steep drops came on top of a gradual sales decline that began in March. View Full Image Associated Press Last month, videogame sales fell 29% from a year earlier, according to NPD. Sales of consoles sank 38%. The turnabout is rippling out to companies such as online retailer Amazon.com Inc. Last week, Amazon blamed weak quarterly results from its media business on a decline in videogame sales. "You're seeing an industry slowdown in games and consoles," said Amazon finance chief Tom Szkutak in a conference call. The reversal of fortune is likely to show up further in coming weeks. When Nintendo reports earnings Thursday, some analysts expect to see weaker revenue on a decline in Wii sales and slower-than-expected software sales. Videogame retailer GameStop Corp., which reports earnings next month, is also projected to post less-robust results. Game publishers Electronic Arts Inc. and Activision Blizzard Inc. are expected to post lackluster results when they report in early August, though EA has the advantage of a stronger roster of new games like "Tiger Woods PGA Tour 10." "Initial orders for our products are tending to be lower," said Strauss Zelnick, chairman of Take-Two Interactive Software Inc., best known for its "Grand Theft Auto" action-game series. "It's not just us, but the industry as a whole." The New York company cut its annual earnings forecast earlier this month, in part because it postponed the launch of its BioShock 2 shooter game. While the videogame industry had hopes of posting double-digit revenue growth this year, analysts now predict flat to 5% growth from $11 billion in 2008. Jesse Divnich, an analyst for Carlsbad, Calif., research firm Electronic Entertainment Design and Research, said he will "be happy if the industry grows." The weakness stems from more consumers sitting on the sidelines and tightening their purse strings, especially as they wait for Nintendo, Microsoft and Sony Corp., the maker of the PlayStation 3, to cut the prices of their consoles. Many console and PC game sales are also being cannibalized by digitally downloaded games and alternative entertainment sources like Apple Inc.'s iPhone, which offers thousands of games that can cost only 99 cents or even nothing at all. The videogame industry also faces tough comparisons to last year's second quarter, which was particularly strong given the release of blockbuster games like Take-Two's "Grand Theft Auto IV" and Nintendo's "Wii Fit" and "Mario Kart Wii." But the recession has clearly exacerbated the falloff. "It's highlighting the weak months because if people don't really have a reason to go out to the store, they're not," said John Taylor, a financial analyst for Arcadia Investment Corp. in Portland, Ore., alluding to the industry's tendency to see the biggest sales during the year-end holiday season. Many videogame executives say they remain positive about the industry, pointing to coming releases of big titles. Nintendo is launching "Wii Sports Resort," a collection of resort sports games, this week. Meanwhile, MTV Games is releasing its "The Beatles: Rockband" music game in September and Activision will start selling shooter game "Call of Duty: Modern Warfare 2" in November. View Full Image Associated Press Paul McCartney appeared at the unveiling of 'The Beatles: Rockband' Xbox game June 1 in Los Angeles. Analysts expect Sony to cut the price on its PS3 by about $100 this year, leading to price cuts by Microsoft on some of its Xbox 360 models. The PS3 starts at about $400, compared with the equivalent Xbox 360, which costs about $300. Though Nintendo has said it won't cut prices on its $250 Wii this year, it is expected to do so indirectly by bundling games with the console. Representatives for Sony and Nintendo say there are no plans for a price cut at this time. Microsoft declined comment. But Tony Bartel, GameStop's merchandising and marketing chief, said the company has factored in "a price cut in at least one of the platforms" and is "anticipating a very strong third and fourth quarter." Still, videogame makers and retailers are likely to run into choosier consumers like Vaughn Forman. Mr. Forman, a 24-year-old gamer in Delray Beach, Fla., owns the latest consoles from Microsoft, Nintendo and Sony but said he is buying fewer games because he is still looking for work after graduating from college. While he wants to buy "The Beatles: Rockband" game, which will go for $250 with accessories, he said he "can't afford to buy it until I get a job." Evan Wilson, an analyst with Pacific Crest, said many people are continuing to play games they already own, particularly since many of the games can now be refreshed with updates and new features online. "Games provide so much value that you don't necessarily need to buy other stuff," he said. Write to Yukari Iwatani Kane at yukari.iwatani@wsj.com