Analyst: Hardware Sales Will Dictate "Recession-Proof" Industry

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Analysts often speak of the "cocooning effect" in regards to the video game industry and how it handles dips in the economy. The logical explanation is that when more people stay home - when it's too expensive to go out - they still want to be entertained, and home entertainment industries withstand recessions.

Video game stocks may be down, but Wedbush Morgan Securities analyst Michael Pachter maintains that when the October NPD results come in, it will be proof of the aforementioned cocooning effect. According to GameDaily, he says that "hardware sales are a leading indicator of consumer demand," but he does not expect these sales to be slowed by the lackluster economy. Pachter cites Nintendo's aim to increase Wii supply, Sony's big marketing plans for LittleBigPlanet (and we'd assume Resistance 2 is in there, too), and Microsoft's "New Xbox Experience" as examples of the industry's staying power this holiday season. In the end, though, Pachter says that if he's right, investors need to look towards the hardware sales and if they're still good, the "industry is resisting the effects of a recession."

As of now, Pachter says their estimate for the impending October numbers shows an 18% year-over-year increase in hardware sales. And he adds:

"In our view, video games are likely to weather a recession quite well. In a 'normal' recession, consumer spending declines by roughly 5% (from a gross domestic product growth rate of 2 – 3% to a decline of 1 – 2%). The widely expected recession has just begun, with tightening credit markets and low levels of consumer sentiment all but guaranteeing that consumer spending will suffer for the next several months. We are neither qualified nor prepared to forecast the extent or duration of a recession, but it appears to us that the stock market has concluded that the consumer will abandon games along with all other expensive consumer discretionary products; we think that this logic is flawed."

11/10/2008 Ben Dutka

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