Videogame industry hits right buttons in troubled economy

Victor Godinez
The Dallas Morning News (MCT)
Lisa Collins, from left, Matt Petri, Phil Lor and Mike Ortega shop at GameStop at Northpark Mall in Dallas, Texas, during their lunch break, November 20, 2008. While most industries are seeing a downturn in sales due to the slow economy, the gaming industry has had an increase in sales. (Jenn Ackerman/Dallas Morning News/MCT)

Bailouts, bankruptcies, liquidations and layoffs have been the business buzzwords over the last few months, but the videogame industry remains stubbornly resistant to the gloom enveloping the rest of the economy.

While game industry executives and analysts aren't ignoring the broader economic trends, all the evidence seems to point to a robust holiday season for game makers and sellers and continued prosperity next year.

Part of the explanation for videogames' continuing popularity, game insiders say, is the "nesting" effect, in which cash-strapped consumers stop going out and look for ways to entertain themselves at home.

"Clearly, interactive entertainment is a great value in a down economy," said Dan DeMatteo, chief executive at Grapevine, Texas-based GameStop Corp., the largest standalone game retailer in the world.

The numbers seem to bear that out.

In October, videogame sales jumped 18 percent, according to market research firm NPD Group.

November has been solid, too, as GameStop said in its quarterly earnings conference call this month that initial signs for the fourth quarter are positive.

There are other signs that games remain as popular and lucrative as ever.

Blizzard Entertainment Inc. said that Wrath of the Lich King, the latest expansion for its popular World of Warcraft online game, sold more than 2.8 million copies in the first 24 hours after it was released on Nov. 13.

Blizzard said the sales avalanche made Lich King the fastest-selling PC game of all time.

Microsoft Corp. has also done blockbuster business in the last few weeks.

The shooting game Gears of War 2 for Microsoft's Xbox 360 console went on sale on Friday, Nov. 7, and sold more than 2 million copies over the weekend.

Generally, any game that sells more than 1 million copies is considered a big success.

And almost anything sold by Nintendo Co. remains a hot commodity, especially the new Wii Fit exercise game for the Wii console, with GameStop and other retailers reporting essentially instant sellouts as copies hit shelves.

That's not to say the game industry is ignoring the trends in other industries.

"We have some concerns about the short term," DeMatteo said, noting that GameStop has frozen hiring at its corporate offices. "We're watching expenses as anybody would prudently do."

Arvind Bhatia, a game industry analyst in Dallas with Sterne Agee, said it's unrealistic to assume that games will be completely unscathed by the broader economy.

"I think we're going to see relative outperformance (compared with the rest of the economy), but I don't think the industry is immune," he said. "To think there will be zero impact is not right, in my opinion."

GameStop did lower slightly its projected earnings for the fourth quarter when it released the third-quarter numbers and said it will open fewer stores next year, after opening more than 600 in 2008.

Electronic Arts Inc., one of the largest game publishers, reported a second-quarter loss of $310 million last month, much worse than the $195 million loss in the same period a year earlier.

Even so, EA did increase its sales to $894 million in the quarter from $640 million.

GameStop's DeMatteo said industry sales are forecast to grow 10 percent to 15 percent next year.

That's a best-case scenario, he conceded.

But if people continue nesting next year, "we could have a best-case scenario," he said.

Some analysts think GameStop is much too conservative in its official outlook.

"The company's total sales growth guidance is pessimistic to the point of being ridiculous," Wedbush Morgan analyst Michael Pachter wrote in a report Nov. 21.

Pachter said he expects holiday software sales to be "robust" and said GameStop probably is equally confident internally.

"We believe that management is intent upon setting expectations that it can easily beat, and expect GameStop to do so."

Regardless of the specific numbers, DeMatteo is clearly bullish on the business.

"I think we're being prudently cautious given the environment we're in," he said. "But strategically, long range, do we believe videogames are a robust, growing industry? Absolutely. How could you come to any different conclusion?"





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