Pachter: Games 'Highly Recession-Resistant' Despite Difficult September Results Ahead

Ahead of likely poor NPD results for the industry in September, Wedbush Morgan analyst Michael Pachter details in-depth why "video games are likely to weather a recession quite well," with analysis that concludes that the games biz could see at worst a "5
Wedbush Morgan analyst Michael Pachter agrees with the majority of analysts who expect visible year-over-year decline for the games industry in September -- but he stresses the unfavorable comparison is due to comparisons to Halo 3's launch month last year, and not a reduction in demand in an unsettling economy. While Pachter attributes the current "market meltdown" in part to waning consumer confidence, he believes "video games are likely to weather a recession quite well." "Notwithstanding this month’s anticipated decline, we believe that the video game software sector remains highly recession-resistant," he says in a recent note sent to investors and Gamasutra. "Normal" recessions see consumer spending decline by about 5 percent, Pachter explains -- while a recession hasn't yet specifically been documented, the analyst does expect consumer spending to "suffer for the next several months." Nonetheless, assuming a typical 5 percent decline in consumer spending, Pachter finds fault with the market opinion that consumers will abandon games the way they would other discretionary purchases. "We think that games fit within a larger category of discretionary spending that encompasses all entertainment and leisure," he says. "In a recession, we think that the number of hours spent by consumers engaging in leisure and entertainment activity is likely to increase, with a shift from higher cost forms of leisure and entertainment to lower cost forms." "As a category, games are one of the lowest cost forms of entertainment, particularly to those households that have already invested in a home console." And, says Pachter, the current install base is telling. As the current console generation is relatively new, the analyst notes that the average cost for current console owners falls between $249 and $599. The resulting implication is that "the average household that owns a console is well into middle class socioeconomic status." "We believe that some portion of console households may be lower income, perhaps 20 percent, but believe that even these households are likely to continue purchasing software, as they most likely contain a self-indulgent, hardcore gamer." However, while the analyst concludes that hardcore gamers and holiday gift givers are likely to continue game buying largely as normal over Christmas, the lowest-income consumer sector is the most likely to delay game purchases. "We end up concluding that video games are about as susceptible to a recession as the average of all consumer purchases, so we expect a 'haircut' of 5 percent this holiday," Pachter says.

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