Join our community of smart investors

Gaming: not so recession proof

Recent quarterly results from the US show that gamers have pulled back spending since the pandemic
August 26, 2022
  • Ampere Analysis downgrades its 2022 forecasts
  • Nvidia sees big drop-off in gaming revenues

Demand for gaming hardware and software has fallen back from its pandemic peak as economic conditions tighten across the world. Microsoft (US:MSFT), Nvidia (US:NVDA), Activision Blizzard (US:ATVI) and Nintendo (JP: 7974) have all seen revenue from their gaming divisions drop in the second quarter of this year.

Previously, there was a belief in the industry that gaming companies would be recession resistant because users could get hundreds of hours of entertainment from single purchases. But there are those who are circumspect. “It is difficult to know what the net impact of a recession will be, maybe people will go out less and game more, but also they might make less in-game purchases if budgets are squeezed,” said Piers Harding-Rolls, research director at Ampere Analysis.

 

Powering down

US consumers have spent less of their time gaming in 2022. The proportion of US gamers aged between 16 and 64 who play games at least once a week dropped by 5.6 percentage points in the second quarter of 2022 compared with Q4 2021, to 64.6 per cent, according to Ampere Analysis. This lack of enthusiasm can be seen in the big US companies’ quarterly earnings.

In Microsoft’s Q2 update, gaming revenue was down 7 per cent on a year-on-year basis. This was driven by a decline in demand for both Xbox content and hardware. Xbox content and services sales fell by 6 per cent and hardware sales dropped 11 per cent. Meanwhile Activision Blizzard saw net revenue plunge by 30 per cent year on year. Its recent Call of Duty game underperformed, and gamers have been more reluctant to spend on in-game purchases.

Nvidia is a huge player in gaming hardware, with 75 per cent of the global graphics processing unit market. In Q2, year-on-year gaming revenue fell by a third while quarter-on-quarter revenue was down 44 per cent. Gaming has dragged down group revenue and second-quarter sales came in at $6.7bn (£5.66bn), 17 per cent below its original forecast.

Some of the sector’s year-on-year numbers were expected, given the tough pandemic comparators. As economies open up, it’s natural to spend less time playing video games at home. However, the quarter-on-quarter numbers suggested the tightening economic conditions are having an effect. Nvidia said its results reflected “a reduction in channel partner sales likely due to macroeconomic headwinds”. Nvidia’s gaming GPUs are also used for cryptocurrency mining which has also seen a fall in demand, but management is “unable to accurately quantify the extent”.

One of Nvidia’s channel partners is Nintendo. Interestingly, though, the Japan-headquartered business has blamed supply issues rather than weakening demand for its results. Again, hardware sales were hit most badly, down 22 per cent, compared with an 8.6 per cent drop in software. The blame was placed on “supply shortages in semiconductors and other components among other factors”.

Nintendo has made no changes to its original financial forecasts for the fiscal year published in May. The company admits this is under the assumption that it is able “to manufacture the products in accordance with our sales plan”. Unlike Nvidia, Nintendo seems confident that demand for its hardware will continue to outstrip supply in the near term.

 

Casual gamers decrease spending

Separating the impact of a natural pandemic drop-off from the growing cost of living crisis is difficult. Lots of people took up gaming during lockdowns, but this means there are more casual gamers that are likely to leave the market or reduce in-game spending as budgets are squeezed. “This is the issue you see with Netflix; massive market penetration also means that there are more fringe users,” explained Harding-Rolls.  

In-game spending buying items in a game, such as weapons and clothing – which enables companies to monetise games constantly rather than just at the point of purchase. It is a fairly new economic model for the gaming industry. This is the first time it will have faced a recession and Activision’s recent results suggest it might not be that robust. Revenue from online channels – which includes downloadable content, microtransactions and subscriptions – fell by 27 per cent to $1.45bn.

This decrease in spending by fringe users, coupled with the delay of big games scheduled for Q4 and tightening Chinese regulation, is the reason why Ampere is now expecting the global games content market to shrink by 1.7 per cent in 2022. This is a downgrade from the 1.2 per cent contraction it forecast at the beginning of the year.

Despite recent issues, the industry is confident this is more of a post-pandemic correction than a long-term decline. Ampere has forecast 3.6 per cent growth in the games content market in 2023. Microsoft chuef executive Satya Nadella said that since it partnered with Epic Games and made Fortnite free to stream with Xbox Cloud Gaming, “over 4mn people have streamed the game-to-date, including over 1mn who were new to our ecosystem”.

Nvidia GeForce GPU sales are up 70 per cent on pre-pandemic levels and peak concurrent users are also up 70 per cent. "It's very clear the fundamentals of gaming are strong and this medium is doing really well," CEO Jensen Huang said. 

Government-mandated lockdowns were a golden opportunity for the gaming world. The 2022 correction shows the flipside of that coin, but industry confidence remains high.