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How the financial crisis impacts the game industry

Posted by: Chuck at 9/24/2008 5:26 PM
With current financial crisis is dominating the news I decided to do a little research to see how this crisis impacts the video game industry. I will caveat this article with the fact that I'm not a financial expert and while I did take some financial and accounting classes at one of the better business schools in the country I'm by no means and expert and a lot of what I learned has been forgotten by a combination of adult beverages and violent collisions to the head from playing hockey.

To get a good grasp on how everything went down you should first start with this excellent article at Kiplingers which provides the background of how the situation was created.  The important part starts at point number 10, the freezing of the credit market.  Companies use credit in order to pay for games to get created.  Just look at Midway borrowing a ton of money just to stay afloat and work on games.  Without the ability to borrow money against future earnings many companies are going to be forced to get creative with their finances, look to get bought out, or close up shop.

This impacts indie developers the most as they will not be able to get the funds they need to get their game through the increasingly costly game development process.  Some will be able to make it by financing things on their credit cards but most will find it tough to get the funds they need to get their games to market without assistance from a publisher.

A lack of available cash could also put the kibosh on merger and acquisition activity as a lot of companies will occasionally borrow money to finance the acquisition of another company.  EA built up a large reserve of cash to acquire Take Two but I'm guessing that kind of money would be hard to come by today.

The biggest impact though could be on the consumer side.  While games have been fairly recession proof in the past the cascading effects of upcoming corporate closures and mergers will certainly have an impact on the amount of discretionary income people have to spend on games.  It will be interesting to see when and if this begins impact the monthly NPD numbers.

I don't think this covers everything as there are a lot of different scenarios on how things could go do but I did want to illustrate how the financial crisis could impact the gaming industry in the months to come.  The good news is that the big publishers have plenty of cash on hand to weather the storm but some of the smaller publishers are either going to get bought out or go dark in the coming months.  It's certainly going to be interesting to see how things pan out.  If I've missed something or left something out please leave a comment and we'll update the article accordingly.