On the principle — if it has to do with staying at home, it’s booming: Update on the video game industry.

By Adam H. Williams, Senior Associate at E911-LBSLBSglobe.com, for WOLF STREET:

Typically, revenue growth the year before a new console generation arrives is slow. But 2020 is the year of the Pandemic, with people losing their jobs or working from home and in many areas not being able to go to indoor venues and events, video games have exploded. Microsoft and Sony have now announced the details of next-gen consoles, and we are set for a banner year of an all-time sales high, despite the slow-down in the global economy. COVID has created a situation where virtual technologies advanced, international markets were shaken, and gaming just gets bigger and bigger.

Strong Industry Performance

When we looked at gaming in 2019, the US-China Trade War was the big upset, and companies were hedging by moving some production out of China. 2020 was going to be a slow year. And then with the Pandemic, all that went out the window. According to analytics company NDP Group, second-quarter US Video Game sales jumped 30% year-over-year to $11.6 billion, the highest in history:

It was not just software that sold. Startlingly, despite next-gen systems coming out in just a few months, hardware sales across Nintendo Switch, PlayStation 4 and Xbox One exploded by 57% year-over-year to $848 million. And sales of video game accessories – gamepads, headsets, steering wheels, and other peripherals – soared by 50% to $584 million.

Retailers both online and physical, even struggling GameStop [GME], saw a significant surge in business while other forms of entertainment, such as movie ticket sales, collapsed. The used market also remained strong, as did smaller independent games via digital stores.

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Nintendo’s Switch was a big winner and set a new record in August, with sales more than doubling from a year ago, likely driven by Animal Crossing’s success. In terms of peripherals, flight sticks were in hot demand, after the launch of Microsoft Flight Simulator 2020.

The global console games market for the entire year is expected to grow by 41%, from $41 billion in 2019 to about $58 billion in 2020, according to Research and Markets, cited by Yahoo Finance.

Growth in console games has also been driven by an increase of “gamers” worldwide: In 2017, there were an estimated 2.21 billion gamers; in 2021, 2.73 billion people fall under that bracket, with at least 63% of the people in the US being gamers.

9th Generation Console Systems on the Way.

The big news is the announcement of both Sony’s PlayStation 5 and Microsoft’s Xbox Series X, both priced at $499, but both also offering stripped-down digital-only versions. The reception has been positive, though many are skeptical about digital-only. We can expect robust sales into the holiday season of the consoles.

In terms of hardware specs, PS5 and Xbox X are relatively comparable, with PS5 offering a bit higher performance, according to IGN.

In terms of market strategy, PlayStation seems to be winning, with PS4 the dominant 8th generation console. Sony is focusing more on hardware, while Microsoft’s strategy on software ecosystem – with the integration of PC and Xbox platforms with Gamepass – is highlighted by the surprise announcement of Microsoft’s acquisition of Bethesda/ZeniMax for $7.5 billion.

Nintendo’s Switch remains very popular. Both Microsoft and Sony have stated their continued support for 8th generation platforms, and backward compatibility will be a well-received feature.

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Game prices will increase to $70 from the current $60 and potentially higher in international markets. This may create a drag in a tighter market as gamers feel economic pressure. The US market is maturing and quality is a big issue. Many gamers are tired of the incomplete “Game as a Service” model to release an unfinished product – proven by several recent high visibility flops.

China still strong but clouds on the horizon.

Despite heavy restrictions, the China Market has been growing strongly. Still, trouble like the ongoing conflict between Epic Games and Apple around Fortnite (China’s Tencent owns 40% of Epic) and issues similar to those around TikTok have shadowed the market. BGR reports: “The Committee on Foreign Investment in the US (CFIUS) has sent letters to Epic, Riot, and Blizzard, asking them about security protocols involving the personal data of American customers”. This may be a sign that after TikTok, Chinese gaming interests may be the next target (see: Trade War Effect).

Still, the internal Chinese market seems strong. According to a report released at the 2020 China Digital Entertainment Congress in Shanghai, cited by China.org.cn, China’s gaming industry revenues rose 22% year-over-year so far, to 139.5 billion yuan ($20.5 billion). Cloud gaming and esports up were by 79% and 54% respectively, propelled by limited hardware access and cultural phenomenon.

Virtual Reality (VR) starts to come into its own.

That the Pandemic is accelerating VR is interesting. For the industry, training in VR increased, particularly in Telehealth. With Remote Work seemingly becoming the new normal, this area may continue to grow. VTubing (Streaming with a Virtual Avatar) is also becoming popular so VR may be making inroads, particularly amongst Gen Z and Millennials. VR Schools are not yet a thing, but soon may be more common.

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The global market of VR in gaming is expected to reach $11 billion in 2020 and is expected to grow at a compound annual growth rate of about 30% to 2027, according to Market Insights Reports.

Still, VR remains limited, and a break-out hit for VR remains elusive. Valve’s Half-Life: Alyx was well-received, but was handicapped by high equipment costs for those that did not have VR available. Hardware costs remain prohibitive and until costs are driven down, or true next-gen “full-dive VR” (immersive VR) arrives, I suspect VR will grow slowly but steadily absent a larger motivation such as VR schools.

Looking ahead, the 4th quarter is always the biggest for gaming, between the holidays and the winter cold. This year, with continued restrictions and disruption likely, the social aspect of games keeps people busy and connected. But with fears about the recession, will people invest in games and new hardware? Hard to say what’s in store in this environment. But for now, the trend seems clear – on the principle that if it has to do with staying at home, it’s booming – we can expect strong console sales and software throughout the rest of the year at least. By Adam H. Williams, for WOLF STREET.

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