Game over or game on?

As the US video games industry suffers its worst month of sales in six years, Jason Hesse asks whether UK gaming companies are also in trouble.

The US video game industry took a tumble in April, with video game sales plunging by 42 per cent year on year. Retailers sold just $292.1 million in video games in April this year, down from $503.2 million a year earlier, according to market research firm NPD Group. This has also had a knock-on effect on game consoles, which were also down, by 32 per cent, to $189.7 million.

While these statistics are for the US only, what is the implication for UK gaming companies?

Richard Wilson, head of UK gaming industry body TIGA, tells The Kernel that the 42 per cent is just a “headline grabbing statistic”.

“This is by no means the death knell of the video games industry,” he says. “A light release schedule, early Easter holidays and continuing economic troubles are all aspects that will have played their part in the fall in April sales. We also experience seasonal peaks and troughs in the UK; it is inevitable in a consumer-focused industry.”

The crucial story, says Wilson, is that in the same month as retail sales falling, digital game downloads and online game subscriptions contributed a “huge” $370 million in sales. “The transition from physical retail to digital distribution models is a reality and it is happening rapidly. The good news is that UK developers are in a good position to take advantage of this shift as our industry is already switching to digital distribution.”

Kieran O’Neill, chief executive and founder of London-based gaming social network Playfire, largely agrees that weak games sales have been limited to traditional video games.

“I don’t think anyone out there is arguing game sales on iOS devices, for example, is weak,” he says. “For traditional game sales, it’s a combination of disruption from mobile and tablet games and a poor selection of Q2 game releases. The biggest factor for the recent poor results is the latter reason. Very few exciting games have come out; this quarter is a particularly bad vintage. The effects of disruption will be felt strongly, but over a longer period of time that wouldn’t cause such a large drop in one quarter.”

NPD’s Anita Frazier says the decline was due to “notably fewer” new video game releases: “I think it’s as simple as that, because when we see compelling content come into the market, the games are still selling as well as ever. We just saw a lot less of this in April as compared to last year.”

Analysts, too, say that the industry is likely to recover when big-production games, such as Take-Two Interactive Software’s Max Payne 3 and Activision Blizzard’s Diablo III are released later this year. “We expect overall product momentum will improve from the beginning of May,” analyst Colin Sebastian, of Robert W. Baird & Co. wrote in a note to investors.

Luckily, the majority of British gaming companies are already moving away from the traditional retail game space. Seventy-one per cent of new UK studios that started up between 2008 and 2011 are focused exclusively on network gaming. And of the overall market, just a third of UK games companies work exclusively on retail games, according to TIGA.

As for weaker hardware sales, O’Neill adds that two factors are at play: “The first is that all of the major games consoles are in the tail end of the product lifecycle, so most consumers who intend to buy one already have one. Price cuts have expanded the customer base as it always does, but sales will always go down at this stage in the cycle.

“The second is that the value proposition for a stand-alone piece of video game hardware has become much weaker in the last few years due to the increase in quality of web games and the rise of smart phones and tablets. Why buy a dedicated machine for gaming when you get 80 per cent of what you want from a device you already have?”

He makes a good point. The games consoles market can only grow so much before reaching saturation point, which remains until more innovative and appealing consoles are released. It is about hardware makers releasing newer, better, shinier products.

It remains a big industry, however. The UK alone generates £2 billion in global video game sales, according to research by NESTA. Between 2010 and 2014, the market is projected to grow at an annual rate of 10.6 per cent, compared to an average of 6.6 per cent for all media and entertainment markets.

The UK government has taken note of this, and is now throwing its support behind the industry. In his Budget speech last March, George Osborne introduced tax credits for “our brilliant video games and animations industries”, starting from April 2013.

According to TIGA, this tax relief could generate and safeguard over 4,500 direct and indirect jobs; £188 million in investment expenditure by studios; increase the games development sector’s contribution to UK GDP by £283 million; generate £172 million in new and protected tax receipts to HM Treasury, and could cost just £96 million over five years.

“The market is projected to continue to grow,” adds TIGA’s Wilson. “Network gaming grew in 2010 to represent 44 per cent of the global video games software market. The UK remains a strong hub for gaming, with experienced management and development teams. The global games industry, encompassing video games, social and mobile gaming, is stronger than ever before and the future is bright for the UK games industry.”