Are Video Game Companies Recession-Proof?

By: Christopher C. Davis

Prior to becoming an attorney, I spent five years employed as a video game programmer at Electronic Arts, publisher of such game franchises as Madden and The Sims. At that time it was an article of faith within the video game industry that video games, much like movies, were relatively immune from broad recessions. To be sure, video game companies have their own cycles with which to contend; each new generation of consoles wrecks havoc with game sales, for example. In theory, during a recession, consumers would use their limited discretionary funds on the relatively inexpensive sources of escapist entertainment available to them. Historically, both movies and video games have tended to do well during recessions, at least in part, for that very reason.

The recent recession has seen commentators declaring the industry both booming and busting. After a disappointing start, 2009 was filled with reports of layoffs and closures within the industry. Conditions were perceived to be changing after the video game industry saw its best month ever in December 2009. Sales this past December, however, dropped 8% from that lofty height and video game stocks have declined on the news. What gives?

Essentially, it is just another year in the life of a game developer. The game industry, again like movies, is fueled by consumers. It is foolish, therefore, to believe that the industry is completely insulated from the broader economy – I imagine that people losing their house are less likely to buy a new Playstation 3. However, as seen in the rapid game-sales cycles within the recent recessionary period, game sales are affected by a lot more than just the broader market.

As noted by video game-focused blog Kotaku, the game industry has seen a lot of closures and layoffs in the past couple of years. This was likely due, at least in part, to developers facing reduced access to credit. Small businesses are more likely to be damaged by a cut or reduction to their line of credit. This is magnified in the video game industry where small studios often have only one or two games in development at any given time and may only publish a video game once every couple of years. Recent sales numbers appear to support this theory, a larger-than-usual percentage of which came from large publishers.

Such bad news can present an opportunity for ambitious entrepreneurs. Budding game developers, like any other new business, need a great business plan focused on keeping their overhead as low as possible. Thanks to the recession, start-ups have access to inexpensive talent, facilities, and hardware – all waiting to be used to realize the next great idea. There is no better time than the present to start making video games, but remember that video games, like every other business, will be shaped by the forces of the economy.

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