September 29, 2023

A gamer plays on Sony’s Playstation 5 console at his home in Seoul.

Gelim Lee | AFP via Getty Images

The giants of the video game world saw their sales slip in the second quarter as the initial tailwinds from the Covid pandemic dissipated.

In the three months ending in June, Microsoft, Sony and Nintendo 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 percent year over year.

Several factors are to blame, including the easing of pandemic restrictions, with people eschewing home entertainment options in favor of outdoor activities.

Continued shortages of semiconductor equipment haven’t helped either.

“Growth in the overall gaming market has slowed recently as opportunities for user exits have increased [the] home as Covid-19 infections have subsided in key markets,” Hiroki Totoki, Sony’s chief financial officer, said on the company’s earnings call last month.

Sony reported a 2% year-over-year sales decline at its gaming unit in the June quarter, while operating profit fell nearly 37%. The company also issued a gloomy outlook, cutting its full-year profit forecast by 16%.

The main reason? People spend less time playing games and more time going out.

Total game time among the PlayStation player base fell by 15%, much lower than the company had originally predicted.

The “Covid effect” is disappearing

The Call of Duty-maker blamed the drop on weak sales of the latest title in the popular shooter franchise.

Ubisoft, the company behind Assassin’s Creed, saw a 10% drop in net bookings.

Michael Pachter, managing director of Wedbush Securities, said the disappointing numbers were largely due to comparisons with “outperformers” a year ago. In other words, the companies couldn’t live up to the extremely high numbers they posted in 2021.

“Everybody saw record numbers during the shelter, with back catalog sales leading the way,” Pachter told CNBC. “This created an impossible comparison and the year-over-year declines were well-telegraphed and expected.”

Electronic Arts was one of the rare companies that defied the gaming contraction, posting a 50% increase in profits and a 14% increase in revenue.

The lack of a console remains

A major factor hindering performance in the gaming world is the constant strain on the console’s core hardware.

Nintendo posted a 15% slide in operating profit in the April-June period. The company behind the Super Mario franchise blamed the weak performance on a global shortage of semiconductors, which meant it was unable to produce and sell as many Switch consoles as it wanted.

Nintendo sold 3.43 million units of its portable Switch console in the quarter, down 23% year-on-year, while software sales fell 8.6% to 41.4 million units.

Sony sold 2.4 million PlayStation 5 consoles in the quarter, slightly higher than the 2.3 million units sold in the same period a year ago. The company is hoping that the lifting of lockdown measures in the crucial production hub of Shanghai and sales for the holiday season will help it meet its target of shipping 18 million PS5 units in 2022.

“The slow release of hardware is one of the biggest contributors,” Pachter said. “Buyers of new hardware tend to buy a lot of software, and PlayStation and Switch sales have been limited in supply.”

The telecommuting trend has also caused delays for new game releases, limiting the pool of games people want to buy. Microsoft, for example, delayed the release of its long-awaited sci-fi epic Starfield until early 2023, while Ubisoft pushed back the release of a game based on the Avatar film franchise.

More pain to come?

Spiraling prices for everything from gas to groceries and fears of a looming recession could further trouble the industry.

The global games and services market is forecast 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.

“The squeeze on the cost of living means additional pressure on household budgets,” Piers Harding-Rolls, director of research at Ampere, told CNBC.

“The impact is likely to be felt on high-end ticket items that could include console hardware, although limited availability and limited demand specifically for higher-end consoles means the impact will be minimal for now.

Harding-Rolls added: “There could also be some additional pressure on high spending in the game as players adjust their discretionary spending.”

Some companies are betting that a push toward subscription products will help offset the effects of declining game sales.

According to Microsoft, the growth of the company’s Xbox Game Pass subscription program helped soften the blow of softer demand for consoles and games. Although Microsoft did not provide an updated subscriber count for the service, it had over 25 million total subscribers as of January.

Sony recently revamped its PS Plus subscription service and hopes the move will help combat the recent lack of gaming activity. PS Plus subscribers totaled 47.3 million, according to Sony’s quarterly report, down slightly from the previous quarter.

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