The Video Game Industry: An $18 Billion Entertainment Juggernaut

by: Investment U

The one-day record holder for a movie premiere is Spiderman 3, which brought in $59 million in ticket sales on its opening day.

Spring's opening blockbuster brought in $500 million in sales. It was the biggest entertainment opening ever. But it wasn't a movie…

Grand Theft Auto IV, a video game, recorded sales of $310 million… on its first day.

It's not the first time video games have made a one-day killing like that. Game sales have outpaced movies for some time now. For the first time last year, the video game industry surpassed the movie industry in gross sales.

Last year's game industry grew to $18.8 billion. That's a 40% increase from the prior year. Software sales represented $9.5 billion of that figure, and it's not hard to see why.

The video game industry of today looks nothing like it did 10 years ago. Gone are low-tech games and disconnected users. Today's video game players are all ages, demographic and geographic backgrounds. And there's a lot of money at stake…

Sixty-eight percent of households in the United States play computer or video games. Game software sales were $2.6 billion in 1996, and by 2006 they had reached $7.4 billion.

In 2007, the industry sold 267.8 million games. That's 540 games sold every minute.

Profiting from the video game industry isn't as simple as investing in the company making a blockbuster game. You also have to know about the machines these games are played on…

The Video Game Industry Profits from Multiple Platforms

The video game industry is broken down into games and consoles. Games can come in many different formats. Most are console games, meaning they only play on a specific company's game system - called a console, while the PC versions can play on any computer.

PC games represent only a small sales segment in the game market, but they have an incredible reach with users. Last year, 40% of all U.S. residents two years of age or older played an online game.

The console market is concentrated among a few game systems like Nintendo's (OTCPK:NTDOY) Wii and DS, Sony's (NYSE:SNE) Playstation 3 and Microsoft's (NASDAQ:MSFT) X-Box 360. Consoles represent $9.35 billion in sales for the industry.

Aside from the tremendous time that goes into the coding and construction, labor is the largest cost in producing a game. Programmers can make $90k annually, or more. With the ability to locate offices in economical locations, and the ability to sublet work wherever it's cost efficient, the game industry can produce games for less.

The cost to make an average game can run from $10 to $50 million. When you compare that to the average 2007 movie cost of $106 million, you can see why the profit margins are so attractive.

Diverse platforms have given rise to a multitude of games as companies have rushed to meet the demands of numerous demographic segments.

New Players Have Opened up Huge New Markets

The stereotypes of video games being the domain of teenage boys, as well as being ultra-violent, are changing. Gamers are more likely to be older, young professionals who can afford to purchase games and consoles. The average gamer has been playing for roughly 12 years.

And men aren't the only ones playing these days…

Forty percent of all game players are women, and there are more women playing games (30% of all gamers) than there are boys under 17 years old (23%). Women represent a larger and larger population of game players every year.

Companies are tailoring their games to this growing audience, making games less violent and more family friendly. While the news likes to report that video games are getting more violent every year, the small number of violent-rated games is proof that the industry gets more bad press than it deserves.

Only 15.5% of last year's games were rated "M" for mature. The majority of games - 56.5% - were rated "E" for "Everyone 10+." The fastest growing segment in the games industry is the family segment that grew 110% from 9.1% to 17.6%.

As younger generations grow and have children of their own, more parents are playing video games than ever before - 36% of parents play video games. "Families that play together stay together" can now mean playing video games.

Eighty percent of gamer parents play video games with their kids.

Forty-seven percent of video game players are between the ages of 18 and 49. The fastest growing demographic is the 50-plus crowd. This doesn't mean that kids aren't playing video games anymore; far from it… they still represent 28% of all gamers out there.

More and more older Americans are playing video games than ever before. Video games are perfect activities for seniors by providing activity without physical stress. They offer health benefits with coordination, balance and endurance. 24% of Americans over age 50 played video games last year, and that number should only increase.

The average game buyer is 38 years old, five years older than the average player. This gap in age represents the scores of parents buying games for their children, and the tremendous influence parents have on sales.

Regardless of age brackets, entertainment traditionally declines during economic downturns and recessions. But the video game industry has defied conventional wisdom.

Why the Video Game Industry Does Better During Recessions

Economists haven't called our current downturn a recession yet, but there's no shortage of bad economic news to help support that argument.

The last recession the United States had was after Sept. 11, when technology demand crashed. Despite that, sales of video games during that period increased 43%. 2002 became a record year in video games, posting $7 billion in sales.

And it's happening again…

Video Game Industry - Top 8 Video Game Producers

Retail sales in February fell by 0.06, but video games and equipment increased sales 34% over January to $1.33 billion. But this sales boom hasn't stopped.

Game sales hit $1.7 billion in March 2008. That's a 57% increase from the same time last year.

In the same way people 'cocoon' themselves during winter storms, consumers stay home more when the economy is down.

It may sound counterintuitive, but the increasing costs for entertainment have encouraged people to spend less, and as a result they are purchasing games that cost much more than the average movie ticket.

Time is the reason gamers are willing to spend the money for these products. While an average movie may run two to three hours, a new game may take an expert player 100 hours to finish.

A $50 to $60 cost for that game starts to look very reasonable. Especially when you consider the time spent playing these games means less time for spending money on more expensive entertainment options.

Even when hard times end, the game industry will continue to profit. Today's gamer is a devoted player logging an average of 7.5 hours a week playing games.

That's a dedicated player who will continue to buy and play games for years to come.