Video game giants had a miserable second quarter as the pandemic gaming boom hits a wall

The giants of the video game world saw their sales fall in the second quarter, as the initial tailwinds of the Covid pandemic faded.

In the three months ending in June, Microsoft, Sony and Nintendo posted disappointing results in their respective games businesses.

The numbers reflect a broader contraction in consumer spending on video games. Americans spent $12.4 billion on games in the second quarter, according to market research firm NPD, down 13% from a year earlier.

Several factors are to blame, including the relaxation of pandemic restrictions, with people eschewing home entertainment options in favor of outdoor activities.

The continuing shortage of semiconductor equipment hasn’t helped either.

“Growth in the overall gaming market has slowed recently as opportunities for users to exit [the] at home as Covid-19 infections have declined in key markets,” Hiroki Totoki, Sony’s chief financial officer, said on the company’s earnings call last month.

Sony reported a 2% year-over-year decline in sales for its gaming unit in the June quarter, while operating profit plummeted nearly 37%. The company also issued a gloomy outlook, cutting its full-year earnings forecast by 16%.

The main reason? People spend less time playing games and more time hanging out.

Total play time among the PlayStation player base was reduced by 15%, much less than the company initially anticipated.

Games were one of the big beneficiaries of the Covid pandemic, with publishers seeing huge growth as consumers spent more time indoors.

But with consumer spending habits changing after the lockdown and inflation on the rise, the industry is taking a hit.

At Microsoft, overall gaming revenue fell 7% year over year. Sales of the company’s Xbox consoles declined 11%, while revenue from gaming content and services fell 6%.

The declines were “driven by lower engagement hours and monetization across first-party and third-party content,” Amy Hood, Microsoft’s chief financial officer, said on the company’s earnings call last week.

Activision Blizzard, the beleaguered game publisher that is being acquired by Microsoft, reported a 70% drop in net profit and a 29% drop in revenue.

The creator of Call of Duty blamed weak sales for the latest title in the popular shooting game franchise for the drop.

Ubisoft, the firm behind Assassin’s Creed, posted a 10% decline in net bookings.

Michael Pachter, managing director of Wedbush Securities, said the disappointing numbers were largely due to comparisons with “outsized performance” a year ago. In other words, the companies couldn’t match the wildly high numbers they posted in 2021.

“Everyone saw record numbers during shelter-in-place, with catalog sales of older titles leading the way,” Pachter told CNBC. “That set up an impossible comparison, and the year-over-year declines were well telegraphed and expected.”

Electronic Arts was one of the few companies to defy the gaming contraction, posting a 50% rise in profits and 14% revenue growth.

A major factor hindering performance in the gaming world is the ongoing fight over key console hardware.

Nintendo saw a 15% drop in operating profit in the April-June period. The company behind the Super Mario franchise blamed the weak performance on a global shortage of semiconductors, which meant it couldn’t produce and sell as many Switch consoles as it wanted.

Nintendo sold 3.43 million units of its Switch handheld console in the quarter, down 23% year-over-year, while software sales fell 8.6% to 41.4 million units.

Sony sold 2.4 million PlayStation 5 consoles in the quarter, up slightly from the 2.3 million units sold in the same period a year ago. The company hopes that the lifting of lockdown measures in the crucial Shanghai manufacturing hub and a sales campaign during the Christmas season will help it reach its goal of selling 18 million PS5 units in 2022.

“Slow hardware implementation is one of the biggest contributors,” Pachter said. “New hardware buyers tend to buy a lot of software, and PlayStation and Switch sales have been limited.”

The remote work trend has also led to delays in new game releases, limiting the pool of games people want to buy. Microsoft, for example, delayed the release of its highly anticipated sci-fi epic Starfield to early 2023, while Ubisoft delayed the release of a game based on the Avatar movie franchise.

Spiraling prices for everything from gasoline to groceries and fears of an impending recession could spell more trouble for the sector.

The global games and services market is forecast to contract 1.2% year-on-year to $188 billion in 2022, the first annual drop in more than a decade, according to data from Ampere Analysis.

“The lower cost of living means additional pressure on family budgets,” Piers Harding-Rolls, Ampere’s director of research, told CNBC.

“The impact is likely to be felt on high-priced items that could include console hardware, although limited availability and pent-up demand, especially for high-end consoles, means the impact will be minimal at present.

Harding-Rolls added: “There could also be additional pressure on high spending in the game as players adjust their discretionary spending.”

Some companies are betting that a push toward subscription products will help offset the effect of declining game sales.

According to Microsoft, growth in the company’s Xbox Game Pass membership plan helped cushion the blow of lower demand for consoles and games. While Microsoft did not provide an updated subscriber number for the service, it had more than 25 million total subscribers as of January.

Sony recently renewed its PS Plus subscription service and hopes the move will help combat the recent drop in gaming activity. PS Plus subscribers totaled 47.3 million, according to Sony’s quarterly report, down slightly from the previous quarter.