A player playing on Sony’s Playstation 5 at his home in Seoul.
Lim Lee | AFP via Getty Images
The video game giants saw their sales plummet in the second quarter, as the initial tailwinds from the Covid pandemic dissipated.
In the three months ending in June, Microsoft, Sony and Nintendo all posted disappointing results in their gaming business.
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-over-year.
Several factors can be blamed, not the least of which is the easing of pandemic restrictions, as people shun home entertainment options in favor of outdoor activities.
The constant shortage of semiconductor equipment has also not helped.
“The growth of the gaming market in general has slowed down recently with more opportunities for users to get out of it [the] Hiroki Totoki, Sony’s chief financial officer, said on the company’s earnings call last month:
Sony reported a 2% year-over-year decline in sales at its gaming console in the June quarter, while operating profit fell nearly 37%. The company also released a bleak outlook, cutting its full-year earnings forecast by 16%.
The main reason? People spend less time playing games and more time going out.
Total playtime among the PlayStation gamer base has decreased by 15%, which is far less than the company initially expected.
The ‘Covid Effect’ disappears
Games have been one of the biggest beneficiaries of the Covid pandemic, with publishers suffering from it Massive growth as consumers spend more time indoors.
But with consumers’ spending habits shifting after the lockdown, and inflation picking up, the industry has taken a hit.
At Microsoft, total gaming revenue is down 7% year over year. The company’s Xbox sales fell 11%, while revenue for game content and services fell 6%.
Microsoft chief financial officer Amy Hood said on the company’s earnings call last week that the declines were “driven by lower engagement hours and the monetization of third-party and first-party content.”
Activision Blizzard, the embattled game publisher acquired by Microsoft, reported a 70% drop in net profit and a 29% drop in revenue.
The Call of Duty maker blamed the stagnation on weak sales of the latest release in the popular shooter franchise.
Ubisoft, the company behind Assassin’s Creed, reported a 10% drop in net bookings.
Michael Butcher, managing director at Wedbush Securities, said the disappointing numbers were largely driven by comparisons to “huge performance” a year ago. In other words, companies couldn’t match the big numbers they published in 2021.
“Everyone watched records while hunkered down in place, with catalog sales of vintage titles ahead,” Butcher told CNBC. “This resulted in an impossible comparison, and the annual declines were well over the top and were predictable.”
Electronic Arts was one of the rare companies to challenge the gaming downturn, posting a 50% rise in profits and 14% revenue growth.
The main factor holding back performance in the gaming world is the constant scramble for flagship consoles.
Nintendo saw a 15% drop in its operating profit in the April-June period. The company behind the Super Mario franchise has blamed the poor performance on a global shortage of semiconductors, which means it’s unable to produce and sell as many Switch consoles as it wants.
Nintendo sold 3.43 million units of its 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, up slightly from the 2.3 million units sold in the same period last year. The company hopes to lift lockdown measures at its important manufacturing hub in Shanghai, and a holiday season sales drive will help it reach its goal of shipping 18 million PS5 units in 2022.
“One of the biggest contributors is the slow rollout of hardware,” Bucher said. New hardware buyers tend to buy a lot of software, and PlayStation and Switch sales were in limited supply. “
The remote working trend has also delayed releases of new games, limiting the range of games people want to buy. Microsoft, for example, has delayed the release of the much-anticipated sci-fi epic Starfield until early 2023, while Ubisoft has delayed the release of a game based on the Avatar movie franchise.
Rising prices for everything from gas to groceries and fears of an impending recession could spell more trouble for the sector.
The global games and services market is expected to shrink 1.2% year-on-year to $188 billion in 2022, the first annual decline in more than a decade, according to data from Ampere Analysis.
“Cost-living pressures mean additional pressure on family budgets,” Piers Harding Rolls, director of research at Ampere, told CNBC.
“The impact will likely be felt on higher-cost items that could include console hardware, although limited availability and pent-up demand especially for high-end consoles means the impact will be minimal at the moment.
Harding Rolls added: “There may also be some additional pressure on higher spending within the game as players adjust their discretionary spending.”
Some companies are betting that the push toward subscription products will help counter the impact of declining game sales.
According to Microsoft, growth in the company’s Xbox Game Pass membership plan has helped mitigate weak demand for consoles and games. While Microsoft did not provide an updated subscriber number for the service, it had more than 25 million subscribers in total as of January.
Sony recently renewed its PS Plus subscription service, and hopes the move will help combat the recent downturn in gaming activity. PS Plus subscribers totaled 47.3 million, according to Sony’s quarterly report, down slightly from the previous quarter.