A gamer plays on a Sony Playstation 5 console at his home in Seoul.
Elim Lee | AFP via Getty Images
Video game giants’ sales plummeted in the second quarter as the first tailwinds of the Covid pandemic subsided.
In the three months to June, Microsoft, Sony and Nintendo posted disappointing results in their games business.
The numbers reflect a broader reduction in consumer spending on video games. Americans spent $12.4 billion on gaming in the second quarter, down 13% from last year, according to research firm NPD.
Several factors are to blame, including the easing of restrictions due to the pandemic, with people shunning home entertainment in favor of outdoor activities.
The constant shortage of semiconductor equipment did not help either.
“Recently, the growth of the gaming market as a whole has slowed down as users have more options to exit the game. [the] at home as Covid-19 infections have declined in key markets,” said Hiroki Totoki, Sony’s chief financial officer, during the company’s earnings call last month.
Sony reported a 2% year-on-year drop in sales for its gaming division in the June quarter, while operating income fell nearly 37%. The company also issued a gloomy outlook, cutting its full-year earnings forecast by 16%.
Main reason? People are spending less time gaming and more time socializing.
Total play time among PlayStation players has dropped by 15%, well below the company’s original forecast.
The ‘Covid effect’ is fading
Games have benefited greatly from the Covid pandemic, with publishers seeing exceptional growth as consumers spend more time indoors.
But with post-lockdown consumer spending habits changing and runaway inflation, the industry is suffering.
At Microsoft, total gaming revenue fell 7% year-on-year. The company’s Xbox console sales fell 11%, while gaming content and services revenue fell 6%.
The decline was “due to fewer interaction hours and monetization of third-party and proprietary content,” Microsoft CFO Amy Hood said during the company’s report last week.
Activision Blizzard, the struggling game publisher acquired by Microsoft, reported a 70 percent drop in net income and a 29 percent drop in revenue.
The creator of Call of Duty blamed the latest installment in the popular shooter franchise for declining sales.
Ubisoft, the company behind Assassin’s Creed, is facing a 10% drop in net bookings.
Michael Pachter, managing director of Wedbush Securities, said the disappointing numbers were mainly due to comparisons with “excessive numbers” a year ago. In other words, the companies were no match for the sky-high numbers they released in 2021.
“Everyone has seen record numbers during lockdown, with older games leading the way in catalog sales,” Pachter told CNBC. “It became an impossible comparison and the year-over-year decline was well telegraphed and expected.”
Electronic Arts was one of the few companies to defy the game cuts, reporting a 50% rise in profits and a 14% rise in revenue.
Console shortage persists
The main factor that reduces performance in the gaming world is the constant race for key console hardware.
Nintendo reported a 15% drop in operating profit between April and June. The company behind the Super Mario franchise blamed the poor performance on a global semiconductor shortage that prevented it from making and selling as many Switch consoles as it wanted.
Nintendo sold 3.43 million units of its Switch handheld console in the quarter, down 23% from last year, while software sales fell 8.6% to 41.4 million units.
Sony sold 2.4 million PlayStation 5 consoles in the quarter, up from the 2.3 million units sold in the same period a year ago. The company is hopeful that lifting lockdown measures at its key manufacturing hub in Shanghai and boosting holiday season sales will help it meet its goal of shipping 18 million PS5 units in 2022.
“One of the main factors is the slow deployment of hardware,” Pachter said. “Buyers of new hardware tend to buy a lot of software, and PlayStation and Switch sales have been limited.”
The remote work trend has also caused delays in new game releases, limiting the number of games people want to buy. Microsoft, for example, has delayed the release of its long-awaited sci-fi epic Starfield until early 2023, and Ubisoft has delayed the launch of a game based on the Avatar movie franchise.
Soaring prices for everything from gas to groceries and fears of a looming recession could lead to further problems in the sector.
According to Ampere Analysis, the global games and services market is expected to contract by 1.2% year on year to $188 billion in 2022, marking the first annual decline in over a decade.
“The cost of living squeeze means additional pressure on household budgets,” Piers Harding-Rolls, Ampere’s director of research, told CNBC.
“The impact is likely to be felt on high-value merchandise, which may include console hardware, although limited availability and pent-up demand, especially for high-end consoles, means the impact will be minimal at this time.
Harding-Rolls added, “There could also be additional spending pressure in the game as players adjust their discretionary spending.”
Some companies are betting that promoting subscription products will help counter the effect of falling game sales.
The growth of the company’s Xbox Game Pass subscription plan helped soften the blow from declining demand for consoles and games, Microsoft said. Although Microsoft did not provide an updated subscription number for the service, it had over 25 million subscribers as of January.
Sony recently updated its PS Plus subscription service and hopes the move will help deal with the recent drop in gaming activity. According to Sony’s quarterly report, PS Plus subscribers stood at 47.3 million, down slightly from the previous quarter.