Power

The game industry comes back down to Earth after its pandemic boom

Game company earnings reports this week show a decline from last year's big profits.

A shelf of Playstation games in a store.

The game industry is slowing down as it struggles to maintain last year's record growth.

Photo: Cyril Marcilhacy/Bloomberg via Getty Images

The video game industry is finally slowing down. After a year of unprecedented and explosive growth due to the COVID-19 pandemic, big game publishers and hardware makers are starting to see profits dip from their 2020 highs and other signs of a return to normalcy.

This week alone, Sony and Nintendo both posted substantial drops in profit compared to this time a year ago, with Sony's operating income down more than 40% and Nintendo's down 17%. Grand Theft Auto maker Take-Two Interactive saw a dip in revenue and said its forecast for the rest of the fiscal year would not match last year's growth, while EA posted a revenue bump but an operating income decline of more than 43% compared to this time a year ago. Ubisoft, which reported earnings last month, saw its sales and bookings this past quarter drop by 14% and 21%, respectively, when compared to a year ago.

All three console makers, including Microsoft in its earnings last month, said they were experiencing declines in sales of third-party games on their platforms. Nintendo in particular has not released a big hit since last year's Animal Crossing: New Horizons, and a number of big game delays and launch fiascos like that of CD Projekt Red's Cyberpunk 2077 have resulted in a notable dearth of hits in the first eight months of the year.

In many cases, game companies are still beating Wall Street estimates, as was the case for both EA and Take-Two and others; the industry is undoubtedly continuing to grow in size. But executives are trying to temper expectations around sustaining the level of growth the industry saw during the pandemic.

"We're gratified to see that as we expected, post-pandemic demand was higher than pre-pandemic demand, and the moderation we expected was not as severe as we expected," Take-Two CEO Strauss Zelnick told GamesIndustry.biz. "As we hopefully get out of this difficult time — it's hard to know given what's going on with the delta variant — it's nice to see the new normal for our business is much stronger than the old normal."

This shift wasn't totally unexpected. Analytics firm Newzoo forecast in May that the game industry would actually contract in 2021 by roughly 1%, only because the growth of last year was not in any way a sustainable, realistic indicator of where the industry was headed in the future.

"It is unique, at least in our history, that we project the declining markets for this year," Tom Wijman, Newzoo's games market lead, told VentureBeat at the time. "While we say the forecast is for the market to decline this year, in the long term, or over more than a few years, there is still very healthy growth for the market. And this year is basically the year where we slightly correct for what was a crazy 2020 for the games market."

At the start of the summer, there wasn't yet a strong indication the game industry had hit that slump. But this week's slate of earnings reports finally brought the game industry back down to Earth. Despite the adjustment, there are still obvious signs that the pandemic forever realigned the industry and pushed it further into the mainstream.

For instance, Sony's game business saw its best first fiscal quarter by revenue in history these past three months. The PlayStation 5 also continues to experience crushing demand, far outpacing supply. As noted by Niko Partners gaming analyst Daniel Ahmad, Sony still cannot make its new console fast enough to keep up with demand, while its version of the hardware with a disc drive is now turning a profit. (The discless PS5 is still sold at a loss.) Sony said it was on track to meet its target of 14.8 million consoles sold by the end of its fiscal year in March 2022.

There are a number of other bright spots for the business. EA has raised its forecasts for the rest of the year on the strength of its services business and the launch of a new game in the Battlefield series this fall. Although its earnings report this week was overshadowed by its ongoing sexual harassment and discrimination crisis, Activision Blizzard experienced an outlying operating income jump of more than 50% this past quarter largely on the strength of its King mobile division. Nintendo is also releasing a new console in October, and Microsoft is gearing up for its biggest first-party software launch in years with the release of Halo Infinite this holiday season.

The game industry may not ever experience the surge in growth and uptick in mainstream popularity that it experienced last year, as everyone began looking for new hobbies and rekindled old ones during the shelter-in-place era of the pandemic. But it's undeniable that a new bar has been set for the industry's financial power and cultural importance. All the industry has to do now is continue releasing new games (and make sure they're polished, not buggy) and keep players coming back.

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