Frank Catalano

Frank Catalano: Perhaps the big question about the state’s video game industry isn’t, “is it recession proof,” but rather, “which parts of it might be?”

Speculation, on TechFlash and elsewhere, has asserted that video games are immune to the recession. After all, the reasoning goes, people turn to entertainment during hard times to get their minds off of financial problems. Video games are entertainment. Therefore, video games are recession proof. Game, set, and match.
 
The early returns tend to support this. Market analyst The NPD Group cites record video game hardware, software and accessory sales for 2008, continuing through January ’09. Seattle area game developers seem to have had great holiday seasons. The recession-proof nature of video games is an underlying draw of the Washington Technology Industry Association panel Wednesday on the state’s video game industry, a discussion that I’m moderating.
 
Yet I can’t help feel a bit queasy about all this rampant certainty. Perhaps it’s just my nature, but the closer I get to the promised black ink, the more it breaks up into dots of gray:
 
--Which video game industry -- consoles, mobile or personal computer platforms? The highly touted NPD numbers (using its definition of “video games”) are focused on consoles and dedicated handheld game systems. These stats are impressive, showing a 15 percent increase in U.S. software unit sales in ’08 over ’07. But moving to PCs, a separate NPD report shows a 14 percent decline in 2008 personal computer retail game sales. Even further afield, a third NPD study shows nearly half of all mobile phone users ignore the multimedia features, including games. Hardly a harbinger of good times for all game platforms.
 
-- Which distribution model -- physical retail or online download?  Good retail sell-in numbers in the fourth quarter can look impressive, but retail is also susceptible to that charming sales technique known as “channel stuffing” to help software companies meet quarterly sales quotas. What’s stuffed down may not be regurgitated back until later in Q1. And it’s hard getting solid industry-wide download revenues. So not all reported numbers may hold up later.
 
--Which customer set -- casual game players or hard core gamers? It’s easy to see sub-$10 price points (such as those offered by Amazon.com’s new game store and others) fitting into a casual-gamer-looking-for-entertainment-value recession. At the other extreme, one can make a case that a $50 price tag is not going to pry Gears of Halo 22 from the cold, clutching hands of the hard-core gamer. Are there enough of these customers to keep every game company afloat?
 
Definition deconstruction aside, the biggest unknown is the depth and length of the recession itself. A lot of game hardware, accessories and software were presumably bought together as gifts in December, a month in which a very high proportion of annual sales occur. These customers may not plan to buy games again until the next holiday season or, if they do, they may turn to used games on new sites such as Valu Valu. It is the software blades that make the industry profits, not the loss-leader razor hardware.
 
Recession-weary consumers may also turn to other forms of cheap entertainment that weren’t around during the last deep recession in 1981-82, such as NetFlix , Hulu.com, or even FaceBook and its free apps. In the ’81-’82 recession, “video games” were defined in a single word: Atari. It’s worth recalling that era’s entire video game industry subsequently collapsed in 1983.
 
There’s some indication the local herd is already being culled with Microsoft’s shut down of Aces Studio (of Flight Simulator fame) and THQ closing Sandblast Games. Other negative indicators? Nintendo’s reduced Wii forecast, and cutbacks in advertising spending that could hurt ad-supported games.
 
A lot of unknowns support the contention that games are “recession proof.” The reality may be that only parts of it are. And which parts could be determined in an economic process  reminiscent of a quaintly classic game: musical chairs.
 
Frank Catalano is an author and advisor on marketing and business strategy for technology and education companies. He blogs at Intrinsic Strategy.