A gamer plays on Sony’s Playstation 5 console at his home in Seoul.
Yelim Lee | AFP via Getty Images
The video game giants saw their sales decline in the second quarter as the initial tailwind of the Covid pandemic faded.
In the three months ended June, Microsoft, Sony and Nintendo each posted disappointing results in their respective gaming businesses.
The numbers reflect a broader contraction in consumer spending on video games. Americans spent $12.4 billion on games in the second quarter, according to market research firm NPD, down 13% year-on-year.
Several factors are responsible, not least the easing of pandemic restrictions, with people eschewing home entertainment options in favor of outdoor activities.
Persistent shortages of semiconductor equipment have not helped either.
“Growth of the overall game market has slowed recently as the opportunities for users to get out of the market have increased [the] home as Covid-19 infections have declined in key markets,” Sony chief financial officer Hiroki Totoki said during the company’s earnings call last month.
Sony reported a 2% year-over-year revenue decline at its gaming unit in the June quarter, while operating profit fell nearly 37%. The company also issued a bleak outlook, cutting its full-year earnings forecast by 16%.
The most important reason? People spend less time playing games and more time going out.
Total playtime among PlayStation players fell by 15%, much lower than initially forecast by the company.
‘Covid effect’ disappears
Gaming has been one of the major beneficiaries of the Covid pandemic, with publishers experiencing massive growth as consumers spend more time indoors.
But with consumer spending changing after the lockdown and inflation soaring, the industry is taking a hit.
At Microsoft, total gaming revenue fell 7% year-over-year. Sales of the company’s Xbox consoles fell 11%, while revenue from gaming content and services declined 6%.
The declines were “caused by lower engagement hours and monetization of third-party and first-party content,” said Amy Hood, chief financial officer at Microsoft, during the company’s earnings call last week.
Activision Blizzard, the controversial game publisher being acquired by Microsoft, reported a 70% drop in net profit and a 29% drop in revenue.
The Call of Duty creator blames the slump on weak sales for the latest title in the popular shooter franchise.
Ubisoft, the company behind Assassin’s Creed, posted a 10% drop in net bookings.
Michael Pachter, director of Wedbush Securities, said the disappointing numbers were largely driven by comparisons with “outrageous performance” a year ago. In other words, companies couldn’t match the huge numbers they posted in 2021.
“Everyone saw record numbers during shelter-in-place, with catalog sales of older titles leading the way,” Pachter told CNBC. “That made for an impossible comparison, and the year-over-year declines were well telegraphed and expected.”
Electronic Arts was one of the few companies to defy the contraction in gambling, with a 50% increase in profits and 14% revenue growth.
Console shortage lingers
A major factor hindering performance in the gaming world is the ongoing battle for key console hardware.
Nintendo saw a 15% drop in profits in the April-June period. The company behind the Super Mario franchise blames its poor performance on the global semiconductor shortage, which has prevented it from producing and selling as many Switch consoles as it wanted.
Nintendo sold 3.43 million units of its Switch portable console in the quarter, down 23% year-over-year, while software sales fell 8.6% to 41.4 million units.
Sony sold 2.4 million PlayStation 5 consoles in the quarter, slightly more than the 2.3 million sold in the same period a year ago. The company hopes that a lifting of lockdown measures at its crucial production center in Shanghai and a sales campaign during the holiday season will help reach the goal of shipping 18 million PS5 units by 2022.
“The slow hardware rollout is one of the biggest contributors,” Pachter said. “New hardware buyers tend to buy a lot of software, and PlayStation and Switch sales are limited.”
The remote working trend has also caused delays for new game releases, limiting the pool of games people want to buy. For example, Microsoft has postponed the release of its highly anticipated sci-fi epic Starfield to early 2023, while Ubisoft has postponed the launch of a game based on the Avatar movie franchise.
Will there be more pain?
Rising prices for everything from gas to groceries, and fears of an impending recession could put the sector further into trouble.
The global games and services market is expected to shrink 1.2% year-over-year to $188 billion by 2022, the first annual decline in more than a decade, according to data from Ampere Analysis.
“The tight cost of living puts additional pressure on household budgets,” Piers Harding-Rolls, research director at Ampere, told CNBC.
“The impact will likely be felt on high-ticket items, including console hardware, although limited availability and pent-up demand, especially for the more expensive consoles, will minimize the impact at this point.
Harding-Rolls added, “There could also be some additional pressure on high in-game spend as gamers adjust their discretionary spending.”
Some companies are betting that a push toward subscription products will help counteract the effect of declining game sales.
According to Microsoft, growth in the company’s Xbox Game Pass membership plan helped cushion the blow from weaker demand for consoles and games. While Microsoft did not provide an updated subscriber number for the service, it had a total of more than 25 million subscribers in January.
Sony recently revamped its PS Plus subscription service and hopes this move will help counteract the recent decline in gaming activity. PS Plus subscribers totaled 47.3 million, according to Sony’s quarterly report, slightly less than in the previous quarter.