Image: A worker holds up a guitar as part of the "Rock Band 2"
Paul Sakuma  /  AP file
In this Nov. 19, 2008 file photo, a worker holds up a guitar as part of the "Rock Band 2" game bundle for the PlayStation 3 at Best Buy in Mountain View, Calif. Although the game industry grew 19 percent in 2008, not everyone is sharing in that success.
By Games editor
updated 3/2/2009 8:09:55 AM ET 2009-03-02T13:09:55

Almost a year ago, I wrote a story asking whether the game industry was recession-proof .  And at that point, pretty much everyone I asked was downright bullish.

Chief executives said they were confident in their companies’ ability to weather the storm. Industry analysts repeated their mantra that games had historically held up well during financial downturns. And consumers told me that they’d rather give up going out to dinner than “Gears of War 2.”

How’s everyone feeling now?

The industry is bearing up better than most, that’s for sure. But execs and analysts alike are less buoyant than they were just a year ago. Companies have shut their doors. People have been laid off. And not everyone’s basking in the halo effect of the Nintendo Wii.

First, the good news: Overall revenues in the U.S. game industry topped $21 billion in 2008, up 19 percent from 2007, says the NPD Group. What’s more, year-over-year sales for January were up. That’s quite a feat in this dreary economy.

But even though games are faring better than, say, the auto industry, “that doesn’t mean that there’s not pain, and it certainly doesn’t mean that there’s not winners and losers,” says UBS analyst Ben Schachter.

Nintendo is the big winner
The big winner, by anyone’s measure, is Nintendo, maker of the hugely popular Wii game system. Since its launch in late 2006, the company has sold more than 18 million Wiis — and more than 28 million of its handheld DS systems.

Reggie Fils-Aime, president of Nintendo America, says it’s “pretty clear that Nintendo is growing at a dramatically faster pace than the rest of the industry.”

“If you backed out Nintendo’s growth, the industry would be in a very different place today,” he adds.

Despite the company’s success, Nintendo cut its profit forecast by about 10 percent last month — and its Wii sales forecasts by 1 million. How come?

It’s certainly not a question of consumer demand, says Fils-Aime. He cites currency fluctuations between the Japanese yen, the euro and the American dollar for the trimmed-back forecast. And the whittled Wii projections are simply due to the parent company’s “reflecting conservatism based on overall difficult macroeconomic trends.”

Not all companies thriving
Other companies are certainly feeling the pinch. In February, the once-mighty Midway, makers of the “Mortal Kombat” series, filed for Chapter 11 bankruptcy protection .  Also last month: Square Enix announced plans to acquire Eidos, struggling publishers of the “Tomb Raider” series.

Not even Electronic Arts, makers of the “Madden” franchise, among others, was immune. In January, the company announced disappointing quarterly results as well as plans to slash 10 percent of its workforce.

What’s going on? A couple of things. Game studios spend a lot of money to develop games but don’t see a profit unless those games sell well. Jittery retailers, says Schachter, are opting to stock shelves with big-name games like “Call of Duty: World at War” and “Grand Theft Auto IV,” which are still sure-fire hits. But in such a weak economy, retail outlets are less likely to take a chance on a smaller game that might not take off.  Hence, layoffs and studio closures.

Another issue is that third-party publishers didn’t initially take the Wii seriously — and were slow to react once it became clear that the system was serious business. “When the dominant console is the Wii and you’re not on there, that’s a big, big problem,” he says.

Is Wii the only path to success?
Shane Kim, vice president of Microsoft’s interactive entertainment business, doesn’t agree that the Wii is the only path to success. “They have a hell of a lead in terms of hardware units, but … if the mindset is only going to be on how many hardware units you’ve sold … I think we’re doing the industry a disservice and that’s not what Microsoft’s about.”

( is a joint Microsoft – NBC Universal venture.)

What Microsoft is about, he says, is making the Xbox 360 a platform where third-party game-makers will thrive — a not-so-subtle jab at Nintendo. Kim says that Microsoft has driven as much third-party revenue on the 360 as its other two competitors — Nintendo and Sony — combined.

Nevertheless, Microsoft has slashed jobs in its game division. Last fall, it closed Ensemble Studios, the Dallas-based group that developed the new “Halo Wars” strategy game for the Xbox 360. ACES Studio, the team responsible for the popular and long-running “Flight Simulator” PC series, also got the boot. And 30 percent of game testers lost their jobs in January when Microsoft announced its first-ever major round of layoffs.

'Finite resources'
These cuts, while regrettable, were necessary, Kim says. “In a world where we find finite resources becoming a little more finite, we had to make decisions about (the) best place to utilize those resources.” And one area of heavy investment is Xbox Live.

The online service, which lets owners buy stuff and play games, boasts 17 million members and is one of Microsoft’s competitive advantages. Last year, the company revamped the look and feel of Live, and added the ability to stream movies from Netflix. Over 1 million Xbox Live members activated the “Watch Instantly” feature since its rollout three months ago.

Price is also important to Microsoft’s strategy.  Right before the critical holiday shopping season, Microsoft cut the price of its entry-level Arcade version to $199, which Kim says helped drive strong holiday sales as well as a 33 percent increase in year-over-year sales for January.

Is a price cut in PS3's future?
By contrast, the $399 price tag for Sony’s PlayStation 3 undoubtedly has something to do with its third-place status. And if customers were loath to part with four bills in better times, what about when the economy is circling the drain?

In a note to investors last week, Janco Partners’ Mike Hickey predicted that the company would cut the price of the PS3 by $100 “in April or June at the latest.” But in an e-mailed statement, Sony downplayed the conjecture, saying, “There are no plans for a price reduction on PS3, and anything reported on or discussed otherwise is purely rumor or speculation."

Peter Dille, Sony Computer Entertainment America’s senior vice president of marketing, says the PlayStation 3 offers a better value and return on investment — particularly for families who can’t afford that Disney World trip. The PS3 is a gaming device, but it’s also a Blu-ray player. It’s got free online connectivity and unlike the Xbox 360, a hard drive in every system.

But is the “more-for-your-money” message resonating with anyone beyond hardcore gamers and tech enthusiasts? Dille admits the company needs to “tell that story better."

“We know that price is an issue. It’s the most expensive system out there, so it’s incumbent on us to communicate the value of the system,” he said.

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