Will video games surge as recession deepens?

Dave Roberts

The technology industry has taken some big hits in the current economy as consumers and businesses curtail spending. But one segment of the industry sees a silver lining to the downturn: video games.

Game companies in the Seattle area report sales are surging, and they’re aiming to capture business from people who are staying home more and looking for escapist forms of entertainment.

“We really do believe that we are less susceptible to economic woes than, say, big ticket luxury items or a lot of different industries,” said Dave Roberts, CEO of PopCap Games, maker of the popular game series Bejeweled.

Roberts, like others in the game industry, said October was a strong month for his company, despite the nation’s accelerating financial meltdown. Sales of PopCap games through retailers such as Wal-Mart and Target grew 62 percent year over year.

Overall, sales of video games, gaming hardware and accessories were $13.13 billion in the first 10 months of 2008, a 25 percent increase over the same period last year, according to data from the NPD Group market research firm. Anita Frazier, an NPD analyst, estimated last week that the industry will exceed $22 billion in sales for the full year.

The Seattle area has a big stake in the health of the video game industry, due to the presence of Microsoft’s Xbox and Windows gaming groups, and Nintendo of America’s North American headquarters.

The region is also home to an array of companies producing and selling online “casual games” — easy-to-use word, puzzle and adventure games that are distributed online. Big Fish Games, a Seattle-based online game developer and web portal, just had its biggest revenue month ever in October.

The company’s sales jumped 23 percent from September.

“Charlie Chaplin made a small fortune during the Great Depression selling inexpensive escapism entertainment,” said Big Fish CEO Jeremy Lewis. “I believe in many ways Big Fish Games is the modern day equivalent of Chaplin.”

In contrast to the layoffs at many tech companies these days, Big Fish is in full-on hiring mode, with plans to add 60 employees to its current staff of 340 over the next 12 to 15 months.

While the downturn may be pushing more people to seek out games for entertainment, analysts say there are core groups of gamers who will continue to play — and buy — whatever the state of the economy.

A key group of hard-core gamers, young males 18 to 34 years old, is more concerned about getting the latest titles than about the recession, a fact that has kept sales strong, said Michael Pachter, an analyst in Los Angeles at Wedbush Morgan Securities.

“They have no idea that there’s a recession going on, or if they do, they don’t know what it means,” Pachter said. “They aren’t thinking about tomorrow and saving. They’re thinking about today, and ‘Gears of War II’ came out.” However, during the holiday shopping season, many video-game sales come from people buying gifts.

That’s where the industry will start to see effects, Pachter said. Although sales will still exceed those of last year, the year-over-year growth rate may not be as strong during the holiday shopping season as it was earlier in the year.

The industry has long held tight to the notion that video games are resistant to economic turmoil. And so far this year, that has held true for sales of the big consoles — Sony’s PlayStation 3, Microsoft’s Xbox 360 and Nintendo’s Wii.

Still, some in the industry are wondering how games will fare in a long downturn.

“This is going to be the test, this year,” said John Koller, director of hardware marketing for Sony Computer Entertainment America. “It’s going to provide a fascinating answer, I think. Traditionally, the gaming industry has talked about this. We’ll see. We are seeing good numbers.”

Atomic Moguls, a Seattle company that distributes dozens of free sports games through social networks such as Facebook and MySpace, has continued to attract new users.

Between September and mid-November, game downloads increased by 30 percent to 2.5 million due in part to the start of the college and professional football season.

“It is a tribal affiliation that doesn’t go away when times get tough,” said CEO Brenda Spoonemore. She said interactive sports games give fans a way to connect with their teams without “having to shell out a lot for tickets or merchandise.”

While some online game companies generate revenue through individual game sales and subscriptions, many also rely to varying degrees on online advertising to support their business — with ads that appear on their websites and that run in and around the games themselves.

With advertisers reining in their budgets these days, that piece of the business model could prove to be a problem.

“It is naive to think that a broad economic downturn will not have effects on every part of the economy, especially with such a large portion of our industry monetized through advertisements,” said Jessica Tams, a spokeswoman for the Seattle-based Casual Games Association.

PopCap’s Roberts, whose 210-person company generates less than 10 percent of its revenue from advertising, also projects a slowdown in advertising revenue. And he notes that the overall games business could suffer if the economic woes continue.

“We are still seeing good demand for products, and I don’t see anything yet that says the world is going to collapse, but it is my job to make sure we are ready for it if things get worse,” he said.

And as a provider of low-cost entertainment, Roberts said he’s feeling pretty good about where things stand, especially in relation to other industries. “I definitely wouldn’t want to be in the restaurant business for the next couple of quarters,” he said.