The video game industry has a COVID hangover

The video game industry is suffering from a COVID hangover even a bottle of Pedialyte and a bacon, egg, and cheese can’t fix. After explosive growth throughout the pandemic, game sales are finally plummeting back 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-over-year revenue declines, as soaring inflation takes a toll on the industry. It’s not just hardware and games sales that are taking a hit.

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

The likely reason? People around the world are venturing outside again as pandemic fears subside.

In this picture taken on May 9, 2022, a Sony Playstation 5 video game console is displayed  at the company's headquarters in Tokyo. (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? According to NPD, June U.S. spending across game hardware, content, and accessories collapsed 11% year-over-year to $4.3 billion. Still, that’s far more than pre-pandemic levels, where NPD said June U.S. spending totaled $959 million in 2019.

The game industry certainly isn’t dying. But after such massive growth during the pandemic, it now has to reckon with a return to normalcy that could hurt.

Gamers aren’t buying as many games

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

The company doesn’t break out specific numbers between games and hardware sales, but said its More Personal Computing segment, which includes Xbox-related sales as well as Windows sales and ad revenue, fell 2% year-over-year to $14.4 billion.

Sony, meanwhile, reported a 13% year-over-year drop 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 blamed the slowdown on a decrease in both first-party and third-party game titles. The most popular game in the U.S. during the latest month, according to NPD, was From Software’s “Elden Ring,” which has already been out for five months.

Gamers are also playing less than they were this time last year.

“Total gameplay time for PlayStation users declined 15% year-on-year in Q1,” Sony CFO Hiroki Totoki said when the company released its earnings report. “Gameplay time in the month of June improved 3% compared with May and was down only 10% versus June 2021, but this is a much lower level of engagement than we anticipated in 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-je / AFP) (Photo by JUNG YEON-JE/AFP via Getty Images)

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

Microsoft didn’t provide data on engagement declines, only noting that it impacted Xbox content and services revenue.

Gaming hardware sales are taking a hit

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

Supply chain disruptions and the global chip shortage made getting your hands on a next-generation console largely impossible unless you spent your time glued to Twitter checking for inventory updates at places like Best Buy. Not to brag, but I pulled this off for three different friends.

According to Microsoft, Xbox hardware sales declined 11% year-over-year. Sony, for its part, saw PS5 sales increase 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’s pulling more supply into the holiday season. That said, Sony isn’t changing its projection for 18 million units shipped in 2022.

NPD, meanwhile, said that industry-wide, first-half U.S. hardware sales fell by 8% to $371 million. New console sales in the first half of the year also fell 9% to $2.1 billion.

The holidays will be important for game companies

As with 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 goose overall sales.

And Sony has already said it has a slate of high-powered games ready to drain consumers’ wallets coming, 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 need to wait to see how the rest of the industry fares as companies continue to release their financial results. Nintendo (NTDOY), Take Two (TTWO), EA (EA), and Activision Blizzard (ATVI) report their earnings next week.

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