Video games vs. the Recession

As an investor, it is prudent to invest in a number of different instruments (stocks, bonds) and markets (the United States, emerging Asia) because the more diversity in a portfolio the more bad news it can withstand before being severely impaired. For examples, stocks do well during good economic times, while the more stable bonds will likely outperform in poor times. Holding both allows you to make money when all is right with the world and preserve much of your money should things start to turn south. However, in times of crisis, correlations go to one. This statement has an obvious truth to it, since, as we just witnessed, almost every market in the world goes down together when things get bad enough; almost nothing (most US government bonds performed well, but that is about it) escapes unscathed. But ‘what does this have to do with video games?’ you may ask.

Many commentators and industry professionals have weighed in on whether video games are recession proof. For starters, asking only if they are recession proof and not depression proof may be a bit of optimism or wishful thinking. More to the point, are we justified in thinking our favorite hobby may continue to grow and prosper despite the economic turmoil currently in the news? Are video games and the companies that make them immune from layoffs and possible deflation?

October was the worst month for global assets most of us alive can remember, and yet the Wii and Xbox 360 both had excellent sales months. Fable 2, Fallout 3, Wii Fit, Mario Kart and LittleBigPlanet all sold very well. And yet video game stocks got crushed along with the rest of the market. So far sales remain strong but stocks have been tumbling (although some companies have recovered somewhat).

There are a few possible reasons for this bifurcation. The first (and the one I would accept wholeheartedly were we not in a time of crisis) is that stock market participants attempt to predict the future and think that even if sales are strong right now, they may not remain that way for the next several months as people lose their jobs, can not get the credit they need to buy PS3’s, or are finally scared into saving a little money.

The second (and one of the reasons that correlations go to one) is that when everything goes this badly, investors are forced to sell anything they can to pay back loans or raise cash. Normally, market participants can raise cash in any number of ways and thus choose to sell their weakest positions, but there are times when they have to sell anything they can (in this example, stock of video games companies) just to put some money in their bank accounts. Stocks are easier to sell than most other instruments so they are going to take a beating in this environment, potentially even beyond what is justified. For this reason, I believe that using falling stock prices to predict gloomy times for the industry in the current market climate misunderstands the severity of our current situation.

Falling stock prices terrify companies, sometimes with good reason. I do not however think that they are a death knell for the industry right now (if stock prices fell during otherwise tranquil times I would be singing a different tune) because markets are currently too chaotic to be predicting anything rationally. This argument is meant to suggest that one potential canary in the coal mine may have died from causes other than slow times for video game sales, but are they actually recession proof?

I find the argument that they offer a lot of entertainment time for their cost compelling (please note I have a strong distaste for the use of this calculus in reviews, but this is about economics, not game quality). It has been said elsewhere, but bears repeating that even at $60 Gears of War 2 offers more hours of entertainment per dollar spent than going to the movies, and the value becomes nearly infinite if games are played mulitplayer over and over rather than just through campaigns. The ability to escape the bad news of the real world for the possibly worse (dragons are going to destroy the whole universe!) but easier to remedy (don’t worry, a band of plucky youngsters will defeat them!) news of a fantasy world is another good reason that certain entertainment industries may fare well during this contraction.

In terms of the holiday season, many consumers have been putting money aside to buy consoles for their children for months are will likely follow through with those plans. In my opinion, video games are likely to withstand a recession, and perform well at least into early next year, but should things get even worse and we fall into a full blown depression the correlation between video game sales and the rest of retail sales may just go to one.