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Is Nintendo Really “Reccession Proof”?

On November 19, 2007 in a CNBC article by Andrew Fisher entitled “Nintendo Exec Says Wii is Recession-Proof” Reggie Fils-Aime (Nintendo of America President) was asked about how a recession in the United States would affect Nintendo.  Reggie responded, “Historically when that happens our category tends to do fairly well.”

Thoughts of a recession should strike fear into the heart of any business that relies on people spending their money on unnecessary luxury items.  Recessions tend to bring with them higher unemployment, and drops in consumer spending.  It would stand to reason that someone who just lost their job might just come home and put the Wii up on ebay, instead of buying the latest video game.  Reggie’s bold claim of doing “fairly well” during a period of recession seems to fly in the face of all logic.  But, it is also a statement that is backed up with some historical precedence.

In 1933, during the height of the Great Depression, 25% of the country was unemployed.  During such hard times it would be reasonable to think that one of the first luxuries people would give up would be spending on entertainment.  This turned out to not be the case.  It is estimated that 60-70 million Americans went to the movies every week.  The movie industry was affected by the economic conditions of the Great Depression, but by streamlining their operations and carefully paying attention to their customer’s tastes, the movie industry was able to stay in business (source).  Even in the hardest of economic times people are willing to spend money on entertainment.  And in the middle of the Great Depression the movie industry was able to survive by supplying people a means of escape from the hardships of everyday life.

If the current US economy should slip into a recession can the video game industry count on a similar situation?  The economy today is much more complex and dynamic than the economy of the 1930s.  There are several entertainment mediums in today’s world locked in fierce competition for the consumer’s dollar.

According to recent consumer spending data the video game industry has little to worry about when it comes to outside competition, because they are quickly becoming the dominant form of entertainment in the United States.  NPD data for 2007 reveals that the video game industry in the United States grew 28%, to 18.85 billion dollars in sales.  This eclipses the movie industry, which came in at 9.66 billion dollars in box office sales during 2007 (source).  And projections show the video game industry is set to overtake the music industry in total consumer spending sometime in 2008 (source).

What is even more astounding is that this growth has not just been in the stereotypical young male demographic.  Thanks in part to Nintendo’s Wii console, and DS handheld system gamers now have to compete for controller time with girlfriends, wives, and even grandma and grandpa (source).

It is really not hard to see why this shift in entertainment tastes is occurring.  A typical video game can run anywhere between 20 and 60 dollars.  For a family to go out to a movie the total cost ends up being very similar.  The difference being the entertainment at the movie theater is over in a couple of hours.  A single video game can provide countless hours of entertainment that is spread out over weeks or even months.  Games that offer strong multiplayer support are often enjoyed for years after their initial release.

Recently my wife and I took our 3-year-old daughter to see Alvin and the Chipmunks (Twentieth Century Fox).  The whole experience lasted an hour and a half and cost about 30 dollars.  While our daughter was entertained through most of the movie the same could not be said by my wife and I.  We also bought Cooking Mama (Majesco Entertainment) for the Wii the other day for 30 dollars.  I can not even begin to measure how much more entertainment and fun we have had playing Cooking Mama together verses the sleep inducing entertainment provided by the Chipmunks.  If our budget had been tight Alvin would have sung his songs to three empty seats while we were at home making virtual hamburgers.

So does all this mean if the United States economy moves into a recession we should all run out to our brokers and buy every share of available stock we can in the video game sector?  How would the video game industry as a whole handle a recession?  Well, there are bound to be a few casualties.  Developers who make “shovelware”, Conspiracy Entertainment (of Ninjabread Man fame) I’m looking at you, would find their assets quickly relocated to stronger companies.  You could also expect stock prices in even the strongest of companies to drop.  But for those investors who see downturns in the stock market as buying opportunities the video game industry should be a good port in which to weather the storm.

It is also worth noting that some of the smaller developers who make quality budget titles could see a increase in demand for their software during slow economic times.  At 20 or 30 dollars these budget titles become increasingly attractive when wallets are tight compared to their 50 and 60 dollar counterparts.

As for Nintendo they may very well be recession proof.  Nintendo was founded in 1889 as a manufacturer of playing cards.  Over the years Nintendo has shown a remarkable ability to reinvent their core business and adapt to changing economic environments.  They have survived two world wars, the second of which brought Japan’s entire economy to it’s knees.  Since their initial entrance into video games Nintendo has reestablished the entire industry after the crash in 1983. They have gone from being the industry leader, to last place (in terms of sales), and recently back to number one spot again.  Through all their ups and downs they have always remained profitable thanks to sound business plans and good leadership.  Nintendo has proven itself as a solid long-term investment in any economic environment.  If there is a way to make money Nintendo will find it.  After all if the entire video game industry comes crashing down tomorrow they could always fall back on Love Hotels.

-Justin

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