The video game marketplace has been resilient in the face of worldwide economic hardship largely due to its primary demographic: young adults. Young adults have few liabilities, such as a house and children, and a large discretionary budget. Unfortunately video games are not completely immune to the effects of global equity and debt market fluctuations.
The Dad & Mom Effect
This is probably the most obvious of the economic effects on gamers, affecting mostly young gamers and adults living in the basement of the parents. In tough times parents are giving their offspring less money to spend, or buying them fewer games (if any) because they have less money themselves to spend on what are called, "discretionary items;" anything other than food, water, shelter, clothing, and debt. Dad is not able to shell out $50 for a new game when his 401(k) - an employee-sponsored retirement account that invests in the equity (stocks) and debt (bonds) markets - has dropped 38% this year alone. Many firms are also cutting wages of their employees, such as recently happened at Goldman Sachs and Morgan Stanley.
Fewer Games
Despite being less affected than many other markets, game makers are going to have to cut costs as credit, venture capital, and sales shrink. This means fewer employees and a focus on producing profitable titles. The effects of cutbacks today will for the next several years affect games you have never and will never hear of as they are scrapped at conception. Games take years to develop, and cutting back on development today will affect product releases several years down the road. A poor economy will not stop the release of Starcraft II or Killzone 2, but there is going to be less money budgeted to inventing original titles like Spore and Bioshock.
Further, the cost to develop a new title and risk of funding innovative content is higher than pumping out sequels to popular franchises like Final Fantasy and Grand Theft Auto. Established franchises are likely to break-even at worst and turn in a steady, predictable profit based on prior sales. In good times you are likely to see seven Star Wars titles for every Supreme Commander that is released. In tough times you might get two Star Wars titles and a movie tie-in, and God help you if one of those titles is Yoda Stories.
One of two things may also happen: Smaller studios and independent developers may get squeezed and bought up by larger firms such as EA. Given the lack of available credit, however, firms getting bought out might be the lucky ones, as smaller firms struggle to make ends meet. Then again, as larger firms layoff employees and cut costs, those employees may start smaller studios of their own to create the kinds of games they have always wanted, rather than those mandated by The Man. It is too early to tell which way things might go at this point, but it could be either or a combination of both.
Take the Ghostbusters game, for example, that was dumped by Vivendi before being acquired by Atari (now a subsidiary of Infogrames). Or Midway (Mortal Kombat), which announced plans to lay off 25% of its workforce recently. Look also at Warner Brothers, who bought more stock in Eidos just a few weeks ago. Electronic Arts (NASDAQ: ERTS) stock has been absolutely hammered this year and, whether you love them or hate them, it is a bad sign for the video game marketplace for EA to be getting pummeled.
More Expensive Titles and Hardware?
So far this has not been a major issue, and what is otherwise a worldwide financial crisis has benefited video gamers at the register, at least in the short term. Fuel price increases, which raise shipping costs and therefore the cost of everything to just about everyone, have largely subsided (for the time being). Electronic retailers are slashing prices to get every dime from consumers in the hopes that they can outlast competitors. Circuit City in particular is grasping at straws in the midst of bankruptcy to capture holiday shoppers, which in turn reduces prices at competitors both online (Newegg, Amazon) and off (Best Buy). Circuit City stock was delisted from the NYSE (New York Stock Exchange) in November and now trades OTC (over the counter) for less than 20 cents. As a result, prices of games and hardware are likely to remain in the same range they have for the past several years, though it might be wise to avoid giving Circuit City gift cards anytime soon, and to make any gaming purchases you are planning before year-end.
Web Gaming Communities
It is no secret that several Gamespot employees have been laid off recently due to restructuring at CBS Interactive (condolences to user Donkeljohn among others). This is a difficult environment for any business, and firms reliant on advertising dollars - such as Gamespot.com and its parent firms - are having a particularly tough time. The result is fewer people sitting on the other side of your monitor when you log into Gamespot and similar sites; and rest assured many other sites are being affected. Potential problems include prolonged site downtime, outstanding issues going unresolved for longer periods, less content such as Game Guides and game portals (example), and unforeseeable items. This is not to say that there are or will be issues, as gaming sites retain their critical employees such as programmers and content developers, but that these are possible consequences of reduced staff levels and budgets going forward stemming from a difficult economic environment.*
Reduced Service and Support
As unemployment rises and employers cut costs, support and service centers are going to be understaffed, have reduced hours, and return policies are going to be curtailed, as both Wal-Mart and Target did during the last bear market in the first half of the decade. The result would be reduced service quality for gamers across the board; whether it is trying to return Hello Kitty Island Adventure without a receipt or connecting to a server that seems to be perpetually down in your favorite MMORPG, service and support is a popular expense to cut because it is very expensive.
The Government Puts Its Hand in Your Pocket
New York State Governor David Paterson wants to tax "digitally delivered entertainment services", which is government code for taxing added game content. Expect more creative Government tax solutions to revenue shortfalls that have resulted from resident companies that have gone out of business, moved overseas, or consolidated.
-Disclosure-
*This is a good place to mention that the opinions and speculation of and by Bozanimal are his own and not those of Gamespot.com or its affiliates.
Bozanimal is a business professional of seven years, and holds Series 7 and 63 licenses. However, this article is not investment advice. He is not an economist and is not responsible for investment decisions made on the basis of this article. For investment advice please contact a qualified financial planner such as a CFP, and for tax advice a qualified tax professional such as a CPA.
Several links within this article lead to external sites. Neither user Bozanimal nor host Gamespot.com or affiliates are responsible for the content of those sites, particularly Kotaku, because those guys are, like, crazy and stuff.
More disclosure should probably go here but Bozanimal cannot think of any at this time.