There’s a COVID Hangover in the Video Game Industry

The video game industry is suffering from a COVID hangover that even a bottle of Pedialyte and a bacon, egg and cheese can’t cure. After explosive growth during the pandemic, game sales are finally coming back down to earth.

Both Microsoft (msft) and Sony (Sony), two of the world’s leading game companies revealed this week that their gaming divisions saw year-on-year revenue decline, as rising inflation takes a toll on the industry. It’s not just hardware and game sales that are taking a hit.

Gamers are also spending less time playing than last year. Both Microsoft and Sony reported low engagement on their respective online gaming services, Xbox Live and PlayStation Plus.

Possible reasons? People around the world are stepping out again as fears of the pandemic subside.

The Sony Playstation 5 video game console is displayed at the company's Tokyo headquarters in this photo taken on May 9, 2022.  (Photo by Philip Fong/AFP) (Photo by Philip Fong/AFP via Getty Images)

Sony’s PlayStation 5 is still hard to come by. (Photo by Philip Fong/AFP) (Photo by Philip Fong/AFP via Getty Images)

How bad is the drop? NPD. According toIn June, US spending on game hardware, content and accessories fell 11% year-over-year to $4.3 billion. Still, this is far higher than pre-pandemic levels, where the NPD said June US spending Total $959 million in 2019,

The game industry is certainly not dying. But after such a massive development during the pandemic, now it has to be brought back to normalcy which can lead to injury.

Gamers aren’t buying as many games

In their latest quarters, Microsoft and Sony reported declines in game software sales versus 2021. Microsoft said content and services revenue declined 6% year-over-year due to lower engagement and monetization of third-party and first-party titles.

The company doesn’t break down specific numbers between game and hardware sales, but said its greater personal computing segment, which includes Xbox-related sales as well as Windows sales and advertising revenue, up 2% year-over-year. fell to $14.4 billion.

Meanwhile, Sony reported a 13% year-on-year decline in software revenue from 346 billion yen ($2.6 billion) to 302 billion yen ($2.3 billion). Game unit sales fell 26% year-over-year from 63.6 million units to 47.1 million units.

Like Microsoft, Sony attributed the slowdown to a reduction in both first-party and third-party game titles. The most popular game in the US during the latest month, according to NPD, was from Software’s “Elden Ring,” which is already five months out.

Gamers are also playing less this time than last year.

“Total gameplay time for PlayStation users declined 15% year-over-year in Q1,” Sony CFO Hiroki Totoki said when releasing its earnings report. “Gameplay time in the month of June improved by 3% compared to May and was only 10% lower than in June 2021, but this is a much lower level of engagement than our previous forecast.”

Microsoft's Xbox Series X (Black) and Series S (White) gaming consoles are displayed at a flagship store of SK Telecom in Seoul on November 10, 2020.  (Photo by Jung Yeon-jae / AFP) (Photo by Jung Yeon-jae AFP via Getty Images)

Microsoft’s Xbox Series S and Xbox Series X. (Photo by Jung Yeon-jae/AFP) (Photo by Jung Yeon-jae/AFP via Getty Images)

Microsoft did not provide data on the decline in engagement, noting only that it affected Xbox content and services revenue.

Gaming hardware sales are being hit

During the pandemic, game hardware, such as Sony’s PlayStation 5 and Microsoft’s Xbox Series X, has been incredibly hard to come by.

Supply chain disruptions and global chip shortages have made it largely impossible to get your hands on the next generation of consoles unless you spend your time sticking to Twitter for inventory updates at places like Best Buy. Not to brag, but I pulled it off for three different friends.

According to Microsoft, sales of Xbox hardware are down 11% year-over-year. Sony, for its part, saw PS5 sales rise from 179.7 billion yen ($1.3 billion) to 196.1 billion yen ($1.5 billion) year-over-year. The PS5 is still in short supply, though the company says it will be pulling more supplies over the holiday season. That said, Sony isn’t changing its projection for the 18 million units shipped in 2022.

Meanwhile, NPD said industry-wide, first-half US hardware sales fell 8% to $371 million. Sales of new consoles also fell 9% to $2.1 billion in the first half of the year.

Holidays will be important for sports companies

Like most consumer tech companies, video game sales are cyclical. The holiday season is traditionally the industry’s best time of year, with major titles and other product releases designed to drive overall sales.

And Sony has already said that it has a slate of high-powered games ready to deplete consumers’ wallets, including “God of War Ragnarok” and “The Last of Us Part 1.” Microsoft is also working to complete its purchase of Activision Blizzard, which will add “Call of Duty” to its list of first-party titles, further boosting its overall game sales.

For now, we’ll have to wait to see how the rest of the industry fares as companies release their financial results. Nintendo (ntdoy), take two (TTWO), ea (EA), and Activision Blizzard (atv) report their income next week.

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