The video game giants had a miserable second quarter as the pandemic gaming boom hits a wall

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

Yelim Lee | AFP via Getty Images

The giants of the video game world saw their sales plummet in the second quarter, as the initial tailwinds of the Covid pandemic faded.

In the three months to June, Microsoft, Sony and Nintendo each 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% year-over-year.

Several factors are to blame, including the easing of pandemic restrictions, with people shunning 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 have increased for users to exit [the] at home as Covid-19 infections have declined in key markets,” Sony chief financial officer Hiroki Totoki said during the company’s earnings call last month.

Sony reported a 2% drop in year-over-year sales for its games unit in the June quarter, while operating profits fell nearly 37%. The company also issued a bleak outlook, slashing its full-year profit forecast by 16%.

The main reason? People are spending less time playing games and more time hanging out.

Total playtime among the PlayStation player base fell by 15%, well below the company’s original forecast.

The “Covid effect” disappears

Gaming has been a big beneficiary of the Covid pandemic, with publishers seeing exceptional growth as consumers spend more time indoors.

But with changing post-lockdown consumer spending habits and rampant inflation, the industry is taking a hit.

At Microsoft, overall gaming revenue fell 7% year over year. Sales of the company’s Xbox consoles fell 11%, while revenue from gaming content and services fell 6%.

The declines were “due to lower engagement hours and monetization of third-party and first-party content,” Microsoft chief financial officer Amy Hood said during the company’s earnings call last week.

Activision Blizzard, the struggling game publisher being acquired by Microsoft, reported a 70% drop in net profit and a 29% drop in revenue.

The Call of Duty maker blamed the decline on weak sales of the popular shooter franchise’s latest title.

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 “outsized performance” a year ago. In other words, companies couldn’t match the sky-high numbers they posted in 2021.

“Everyone saw record numbers during shelter-in-place, with catalog sales of older titles leading the way,” Pachter told CNBC. “It set an impossible comparison, and the year-over-year declines were well telegraphed and expected.”

Electronic Arts was one of the few companies to defy the gaming contraction, posting a 50% rise in profits and 14% revenue growth.

The shortage of consoles persists

A major factor hampering performance in the gaming world is the continuous rush for key console hardware.

Nintendo posted a 15% decline in operating profit in the April-June period. The company behind the Super Mario franchise blamed the poor performance on global semiconductor shortages, which prevented it from producing and selling as many Switch consoles as it wanted.

Nintendo sold 3.43 million units of its Switch handheld 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 more than the 2.3 million units sold in the same period a year ago. The company hopes a lifting of lockdown measures in the crucial Shanghai manufacturing hub and a holiday season sales drive will help it reach its goal of shipping 18 million PS5 units in 2022.

“Slow hardware deployment is a major contributor,” Pachter said. “New hardware buyers tend to buy a lot of software, and PlayStation and Switch sales have been limited.”

The remote work trend has also caused delays in new game releases, limiting the number of games people want to buy. Microsoft, for example, delayed the release of its highly anticipated sci-fi epic Starfield until early 2023, while Ubisoft pushed back the launch of a game based on the Avatar movie franchise.

More pain to come?

Soaring prices for everything from gas to groceries and fears of a looming recession could lead to further problems for the sector.

The global games and services market is expected to contract 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.

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

“The impact will likely be felt on high-priced items which could include console hardware, although limited availability and pent-up demand, particularly for high-end consoles, means the impact will be minimal to the current time.

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

Some companies are betting that a push towards subscription products will help counter the effect of falling game sales.

According to Microsoft, the growth of the company’s Xbox Game Pass subscription plan has helped to cushion the blow of weaker demand for consoles and games. Although Microsoft did not give an updated subscriber number for the service, it had more than 25 million total subscribers as of January.

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

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