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Sugar rush financials don't mean we've dodged the COVID bullet | Opinion

Publishers are reporting record revenues -- but the industry isn't “recession-proof” and there's pain to come down the line

We're neck-deep in earnings season right now, meaning that public companies across every business sector imaginable are currently reporting their results for the second calendar quarter -- the three months from April through June during which the COVID-19 pandemic really started to make its full social and economic impact known.

The results we saw three months ago for the first calendar quarter were little more than a sneak preview of how different businesses were faring under pandemic conditions, since two out of the three months encompassed were pretty much business as usual in every market other than China. This time we're getting a real and unvarnished look at how companies have been impacted, and while there are lots of companies being hit hard by dramatically falling revenues, there are some for whom the pandemic has been a windfall.

For the most part, video game companies are firmly in the latter category. Every one of them that has reported results over the past week or two has shown a huge bump in their gaming revenues. While that's been offset by weakness in other sectors for some firms, by and large the picture of how videogames have fared in the pandemic is rosy.

People bought more games (digitally, at least), paid for more subscriptions and played more mobile titles

Rosy, in fact, may be an understatement. From platform holders like Sony and Nintendo to publishers like Activision Blizzard, EA and Sega, through to mobile gaming firms like Zynga, gaming revenues absolutely soared during the three-month period when much of the world found itself stuck indoors. People bought more games (digitally, at least), paid for more subscriptions and played more mobile titles. This was a rising tide that lifted just about every boat in sight.

This shouldn't come as a surprise, of course. It's natural that consumers would find themselves spending more on games when many of the other avenues for their disposable income -- restaurants, bars, travel, cinemas and so on -- are ruled out, and if you glance over at other industries it's easy to see where some of the revenues that have flowed into the games business have been flowing from. This was always going to be a solid quarter for an industry that provides engrossing, high-value digital entertainment you can buy and access from the comfort of your sofa; a pandemic in which the most consistent advice has been to stay home as much as possible is pretty much a perfect storm for game revenues.

However -- oh, you knew there had to be a "however" coming at some point -- we shouldn't fool ourselves into believing that this means we're back to the Good Old Days of insisting, with some justification, that the games industry is "recession-proof." That was a term bandied around pretty often throughout the 1990s and the early 2000s, as video game market growth powered through economic conditions of all sorts -- including being largely unscathed by the dot.com crash.

This quarter's financial results are a sugar rush; it would be foolish to assume that the crash from this high isn't coming

The fundamental demographic growth of the rapidly diversifying industry in that era being so strong, in combination with the tailwind provided by being a very solid value-for-money offering in terms of entertainment -- and thus appealing to consumers even when money was tight -- ensured that exogenous economic shocks did little or nothing to slow down the annual growth of video game revenues.

Things are not the same this time around. The games business hasn't really been "recession-proof" for quite some time, and COVID-19 is shaping up to create what may be the sharpest economic contraction in history, as well as creating a tough climate for many of the activities upon which the industry relies. This quarter's financial results are certainly sweet, but they're a sugar rush; it would be foolish to assume that the crash from this high isn't coming, or that the booming revenues we saw as the pandemic's effects started to be felt indicate that the games business is going to walk away from this unscathed.

It should go without saying, of course, that this sugar rush of a quarter is setting up some seriously tough comparisons next year -- which is going to make things look pretty negative right at a point when the recently launched next-gen consoles will be hoping for as much positive news and coverage as they can. Even if logically everyone knows that the comparison is being made against a unique quarter that had a one-off revenue bump, the inability of most companies to sustain those higher revenues is going to hurt them in the eyes of analysts and investors.

Animal Crossing is the poster child of the COVID boom, but Nintendo indicated some uncertainty over production going forward

Animal Crossing is the poster child of the COVID boom, but Nintendo indicated some uncertainty over production going forward

That, however, is likely the least of our concerns. More serious is the question of just how badly revenues might drop off from this peak. And that question is very tough to answer given how many question marks remain over the future of this pandemic and its economic fall-out, the potential downside is pretty deep.

The biggest worry, to some extent, is the possibility that for a lot of consumers this quarter's high expenditure on games represented a front-loading behaviour -- effectively "stocking up" on entertainment products, which will shrink revenues in future quarters. This could be the case regardless of how the pandemic proceeds from here; if (fingers crossed) medical advances allow us to return to some kind of normality relatively rapidly, a lot of consumers will likely want to focus on the things they couldn't do during the pandemic -- travel, going out and so on -- which will see video game expenditure take a natural tumble. This would however be the most positive scenario, since it would at least mean that there's hope for consumers' employment and income to return to more solid ground quickly.

A more negative outlook -- and sadly a more likely economic scenario -- is one in which the effects of the pandemic continue for some time in many areas of the economy. Sure, this will result in people continuing to stay home and wishing to be entertained as they do so, but from an income standpoint, this will mean that the second quarter was actually a transition quarter for many consumers.

The great results we're seeing this quarter absolutely do not mean that the industry has dodged the COVID bullet

During this period, a lot of people's disposable income outlets had shrunk dramatically right from the outset -- no going out, no cinema, no restaurant meals, no travel -- but the job losses and income shrinkage that accompanied this change only came into play gradually over the quarter. Lots of people still actually had disposable income to spend, and few places to spend it. Looking to the next quarter and the one after that, and assuming the pandemic continues, we will see job losses and other costs related to the pandemic seriously bite, especially as state support shrinks in many countries.

It's far from the biggest problem created in this scenario -- large-scale evictions are pretty obviously a more pressing social issue, for one -- but from the point of view of the games industry, we could be looking at a very lean back half of the year that will leave this past sugar-rush quarter looking like a dimly remembered dream. Games may be the perfect pandemic entertainment industry, but in a scenario where so many consumers are being forced to severely re-budget, new games and consoles will inevitably be on the chopping block.

Consumers having to reconsider their discretionary spending isn't the only problem that arises from the pandemic. Looking further into the future, Nintendo's situation is something everyone should be looking at carefully -- not the company's financials per se, which are absolutely fantastic, but the accompanying concerns over how slim the company's forward release schedule looks right now. To some extent that's down to a strategy of playing cards close to its chest -- Nintendo is narrowing the gap between announcement and launch on some of its titles in a pretty dramatic way -- but it's also undeniable that the pandemic is having an impact here, with development schedules upended and made vastly more uncertain by the need to shift to teleworking and an inability to predict how the working situation is going to evolve in the coming months.

The reason Nintendo is front and centre in terms of seeing this effect in action is because the company in a charmed position to some degree. It's a market leader that's in the middle of a console cycle, and as such it can afford to be realistic about the impact on its development studios and supply chains in a way that could be PR suicide for either Microsoft or Sony right now. The lack of forward information about major titles reflects to some degree Nintendo's own uncertainty about the conditions under which it'll be operating for the rest of this year, and the possibility of hitting milestones on time as a consequence.

Those factors all add up to show us the potential crash waiting at the end of the sugar rush -- a rough combination of consumers forced to cut back their discretionary expenditure and game companies forced to push back their launch plans for major titles could give us some very, very lean quarters, which will only look worse when they're compared against this week's spectacular numbers. Of course, the pain won't be spread evenly; service games will fare far better than major physical/digital launches, for example, since their players are already invested and they often allow people to be much more granular in their spending decisions. There could also actually be a boom in sales of discounted back catalogue titles that will benefit some companies.

Overall, however, there's a need to be cautious and conservative in planning for the months and years to come, because the great results we're seeing this quarter absolutely do not mean that the industry has dodged the COVID bullet -- those bullets are still in flight, and their impacts are going to be felt in many, many more quarters to come.

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