Economy has game-makers honing strategies

Kristin Kalning Games editor • E-mail

Almost a year ago, I wrote a story asking whether the game industry was recession-proof.  And at that point, pretty much everyone I asked was downright bullish.

Chief executives said they were confident in their companies’ ability to weather the storm. Industry analysts repeated their mantra that games had historically held up well during financial downturns. And consumers told me that they’d rather give up going out to dinner than “Gears of War 2.”

How’s everyone feeling now?

The industry is bearing up better than most, that’s for sure. But execs and analysts alike are less buoyant than they were just a year ago. Companies have shut their doors. People have been laid off. And not everyone’s basking in the halo effect of the Nintendo Wii.

First, the good news: Overall revenues in the U.S. game industry topped $21 billion in 2008, up 19 percent from 2007, says the NPD Group. What’s more, year-over-year sales for January were up. That’s quite a feat in this dreary economy.

But even though games are faring better than, say, the auto industry, “that doesn’t mean that there’s not pain, and it certainly doesn’t mean that there’s not winners and losers,” says UBS analyst Ben Schachter.

Nintendo is the big winner
The big winner, by anyone’s measure, is Nintendo, maker of the hugely popular Wii game system. Since its launch in late 2006, the company has sold more than 18 million Wiis — and more than 28 million of its handheld DS systems.

Reggie Fils-Aime, president of Nintendo America, says it’s “pretty clear that Nintendo is growing at a dramatically faster pace than the rest of the industry.”

“If you backed out Nintendo’s growth, the industry would be in a very different place today,” he adds.

Despite the company’s success, Nintendo cut its profit forecast by about 10 percent last month — and its Wii sales forecasts by 1 million. How come?

It’s certainly not a question of consumer demand, says Fils-Aime. He cites currency fluctuations between the Japanese yen, the euro and the American dollar for the trimmed-back forecast. And the whittled Wii projections are simply due to the parent company’s “reflecting conservatism based on overall difficult macroeconomic trends.”

Not all companies thriving
Other companies are certainly feeling the pinch. In February, the once-mighty Midway, makers of the “Mortal Kombat” series, filed for Chapter 11 bankruptcy protection.  Also last month: Square Enix announced plans to acquire Eidos, struggling publishers of the “Tomb Raider” series.

Not even Electronic Arts, makers of the “Madden” franchise, among others, was immune. In January, the company announced disappointing quarterly results as well as plans to slash 10 percent of its workforce.

What’s going on? A couple of things. Game studios spend a lot of money to develop games but don’t see a profit unless those games sell well. Jittery retailers, says Schachter, are opting to stock shelves with big-name games like “Call of Duty: World at War” and “Grand Theft Auto IV,” which are still sure-fire hits. But in such a weak economy, retail outlets are less likely to take a chance on a smaller game that might not take off.  Hence, layoffs and studio closures.

Another issue is that third-party publishers didn’t initially take the Wii seriously — and were slow to react once it became clear that the system was serious business. “When the dominant console is the Wii and you’re not on there, that’s a big, big problem,” he says.

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