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Is the video game industry recession-proof?

It’s true that video games defied the otherwise discouraging retail sales figures of December 2007. But are video games truly recession-proof?
Image: Video game Halo 3 for sale
Tristan Greenwood, 12, looks at a display showing the box for Microsoft's "Halo 3" at Universal Studios Citywalk in Los Angeles. Game sales hit an all-time high in 2007, and some analysts predict the trend will continue in 2008. Nick Ut / AP file

Whether you think we’re in one or headed for one, chances are you’ve got recession on the brain. So do video game companies, but for different reasons: Many CEOs think the industry can survive an economic downturn without much of a bump.

It’s true that video games defied the otherwise discouraging retail sales figures of December 2007. But are video games truly recession-proof?

Nintendo North America president Reggie Fils-Aime told CNBC last November that he thought the sector — and his company in particular — would weather the coming storm. Historically, he said, video games have done well in tougher economic times.

But what kind of history are we talking about, here? The industryitself is only about 30 years old. The Entertainment Software Association says that video game revenuescontributed about $3.8 billion to the nation’s gross domestic product in 2006. The industry employs about 25,000 people in the U.S. But the trade group wasn’t compiling numbers 17 years ago, when we had the last really nasty recession. So it’s hard to gauge how video games will fare when faced with a serious slowdown.

In this context, video games are often compared to movies — a form of entertainment that traditionally fares pretty well during slow economic times.

“The video games industry — like some other forms of entertainment — has acted as though they are recession-proof in difficult times,” wrote NPD analyst Anita Frazier in an e-mail. “People still want to be entertained and to enjoy a diversion from their everyday concerns.”

During the Great Depression, the down-and-out took to the theaters in droves, willing to spend a quarter per person to forget about their troubles for a few hours.

Frazier cites a study the NPD Group recently conducted regarding consumers’ thoughts about the economy. Of the 2,000 adults polled, more than half said they were least likely to change spending habits on affordable purchases like books, movies, cosmetics or fragrances.

But the average video game retails for somewhere between $50 and $60 — and you need a system to play it on. Compare that to a movie ticket, which is about 10 bucks (without the popcorn and Coke, of course).

But Nariman Behravesh, chief economist at Global Insight, doesn’t buy the one-to-one games-to-movies comparison.

“Are the people who bought an Xbox 360 going to go out and buy more and more and more software to go on this thing? There are limits,” he says. “You might buy five games or 10 games, but you’re not going to buy 100.”

Still, Frazier predicts modest growth in the video game sector in 2008. And Colin Sebastian, an analyst with Lazard Capital Markets, is even more bullish. 

The firm, which makes investment recommendations, put out a research note to its clients last week. In it, Sebastian writes that the video game industry is entering the “largest, most robust cycle in history, and we expect U.S. software sales to exceed $10 billion in 2008.” That’s a 10-to-15 percent bump over 2007, which was the best year on record for video game sales in the U.S.

But does that mean the industry itself is recession-proof? Hardly, says Behravesh, who thinks there are few industries that can make that claim.

“Anyone tied to the government is fairly safe. Health care is another one, especially with an aging population,” he says. “But beyond that, anything that relates to consumer preferences? I think it’s silly to talk about something being recession-proof.”

That said, Behravesh does think the game industry has a good chance of coming through a mild recession pretty well — much as it did back in 2001, the last time we saw an economic dip. In a major recession, though, he foresees the industry “contracting,” along with consumer spending in general.

“I’d say there’s a one in four chance that we go through a major recession and the video game industry gets hit.”

What does this mean to you, the consumer? Some of you are reining in your discretionary spending just a bit. You might put off your video-card upgrade on your PC until things even out, for instance.

But avid gamers, like Kevin Rummings of West Palm Beach, Fla., say that the recession isn’t going to affect their game purchases.

“If I have a job and the extra money to spend, I will,” he wrote in an e-mail. “Games are my only hobby. I don’t play golf or tinker with cars …  games are a great escape for me, always have been.”

How about you? Will you be curtailing your game-buying due to fears about the economy? Or will you keep on spending? and let me know. Selected responses may be published in a subsequent story.