This Is Not 1984

Remember the "Video killed the Radio Star" song? Well, video – as in the MTV video brand – also killed the computer game industry back in 1984 that was previously riding high with success following success.

But today is not 1984. In addition to the sudden rise in music video popularity, market leader of the time Atari shot itself in the foot by only selling seven million Pac-man cartridges instead of the projected 20 million. This was quickly followed by only selling one million of their horrible ET game, when they thought they would sell 25 million. Rumor is that there are millions of ET Atari 2600 cartridges buried in a New Mexico landfill. The fall of Atari led to the markdown of all computer games, which were then considered to be nothing but a passing fad, and hastened the entire industry's decline.

The seeming crash of 2002 however does not have a smoking gun cause. Nobody is even sure if there was a crash at all, or if things are going to get better. Certainly at the mall this holiday season, any mall, there was a brisk business at the computer game store. I could barely get in and out of most of the stores I visited, and people were buying a lot more than just Grand Theft Auto: Vice City.

But the numbers vex us. The GiNDex, a measure of publicly traded companies in the computer game industry that we use to determine the health of the industry, is low. In fact, it has never been lower since the September 11th attacks. Formerly high-riding companies are down lower than Internet startups. Interplay is trading at six cents a share. 3DO is at two dollars. Industry Giant Infogrames is at one dollar and 85 cents a share. Midway put out a profit warning in December.

So what is going on? The market was flying at the beginning of 2002. At E3 the talk was again how the computer game industry was challenging movies for dominance in the entertainment field and also about all the new technology they were packing into PCs and game consoles. The GiNDex broke performance records week after week over the summer, then would slack off a bit and rocket skyward again.

So, to quote the movie series that is the Star Wars for the current generation, The Lord of the Rings trilogy, "How did it come to this?"

To answer this question I called around to chat with people in the industry I've met over the past six years with GiN. I talked with retailers, developers, publishers and even public relations folks. Each seemed to hold a small piece of the puzzle, but nobody was keyed into the big picture. So I am going to try and put it all together. I admit my theory is a bit optimistic, but I just can't discount the sheer volume of foot traffic I saw throughout the holiday season.

Here is what I think happened, and what will happen in the coming months. First, in the U.S., the economy is terrible. Our president may be distracting the nation somewhat by fighting a phantom war on terror, but he wasn't able to disguise the fact that the economic climate is more akin now to the 1930s than the booming 1990s. If you don't believe me, try selling some advertising or rounding up some investment capital. You would be better off catching fireflies in the artic. So anyway, people went out holiday shopping with less money to spend. That quickly began to drive the general economy into a more of a tailspin.

But what people did not realize is that the games industry is isolated, at least somewhat, from the rest of the market. Even after the September 11th attacks, the industry did not experience the same dips that the rest of the technology sector did. But retailers were not taking any chances. They ordered fewer games for their shelves, in the same way that Sears ordered fewer dining room tables. They did not want to be stuck with inventory they could not sell in a seemingly sluggish economy.

This began the ripple effect. Publishers were now looking at numbers that showed that fewer games were being ordered, and also seeing data about the slow economy in general. So they put out "profitability" warnings on the theory that their stock would not drop so much when they reported their lower December income if people were warned about it first. Normally these warnings are a good strategy, make a company look honest and insolate it somewhat from bad news. But in this case, the slew of warnings issued in December, just when the holiday season was getting into full swing, really only fueled the fire.

The ripple got bigger.

Investors were looking forward to the isolated gains of the game industry, having fled to it over the summer from the more volatile tech market, which led to the game industry's summer surge. But they expected too much, and they certainly did not expect an army of profitability warnings. Now they converted their game company stocks to liquid assets or bonds, or something they thought would be a safe port to ride out the storm. In other words, they sold their stock. When lots of people sell their stock, the value of that stock drops based on simple supply and demand rules. Certain factors can change that, but generally, large selling activity lowers value.

To some extent, the dropping stock prices confirmed to retailers that short ordering was the right thing to do, despite the number of people in their stores.

Some companies made individual mistakes as well, like backing sequel titles that seemed rushed or did not have as large a following as estimated. So in isolated, but enough to be noticeable, cases companies were not even selling through their limited orders.

The good news is that this situation, if I have analyzed it correctly, will fix itself.

So here is my prediction for the near future. When the December sales numbers are released, people will see that the industry did experience growth this year, perhaps not on par with the 20 percent gains of the year before, but gains nonetheless, perhaps in the 10 to 15 percent range. Retailers will begin filling their inventories again, and the stocks will slowly begin to rise. Basically this entire process will begin to work in reverse, although probably more slowly than the rapid December crash. By March, things will look pretty good again, at least in our isolated corner of the overall world market.

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