Recessions Good For Movies and Video Games? Think Again

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May 13, 2009

With the recession now playing the back nine, and after watching Activision-Blizzard (ATVI) turn in an incredible quarter, and after seeing The Walt Disney Co. (DIS) post some disappointing numbers, I think I’ve heard about all I can take from the “the recession is helping movie and video game revenue” crowd.

I don’t mind their perseverance or conviction; I admire it actually. I’m simply bugged by those proponents waving some hand-selected numbers out to serve as verification of the truth. If a strapped consumer truly is steering towards low-end entertainment and away from expensive venues, then the majority of the data will support the argument. Frankly, it doesn’t. Hear me out.

Yes, Activision-Blizzard earned $189 million in Q1 versus only $43 million from Q1 a year ago. That’s impressive.

Proof that video games are prodded when things are monetarily tight? Keep reading.

A similar story can be told for movie-goers. Though $8.00 a pop is a ridiculous ticket price, it’s cheaper than a $50 dinner or an $800 weekend getaway. And, that’s the explanation given for this year’s (to date) box office success. So far this year, movie revenues are ahead of last year’s total by 17%, once again ‘fueled by the recession’.

So far the numbers all support the theory, no? Unfortunately, that’s where most investors would stop getting facts and just smugly dive into their favorite stock pick.

Fortunately, I have the rest of the story.

If a recession is good for video game sales, what happened to Electronic Arts Inc. (ERTS) last quarter? Their Q1 operating loss widened from $37 million to $62 million on the heels of a 24% dip in revenue. EA makes video games too, and clearly the recession isn’t a boon for them.

The reason Activision did so well…. the company also launched the latest edition of the Guitar Hero series in Q4, which could have spilled over into Q1. The company also offers the subscription-based online game World of Warcraft, which has a cult-like following…. of paying customers. It would be hard to screw that franchise up, other than by just not selling it.

If a recession is good for movie revenue, what happened to Disney? Disney studios’ Q1 income came in at a a paltry $13 million…. a joke compared to the $377 million raked in during Q1 of last year. Looks like the recession isn’t good for all the studios…. just some.

[Side note: Disney's theme parks? The ones that cost $69 to get into? Between the two, attendance during Q1 was basically flat. I guess the consumer has a little more discretionary cash than he acts like he does.]

It’s at this point most investors would rightfully argue that Disney’s movie line-up in early 2008 was far netter than 2009’s. And, those same investors would argue EA Games didn’t have the advantage of working with Guitar Hero and World of Warcraft. I don’t disagree at all, which is the whole point…… low-end entertainment’s success has nothing to do the recession - it’s just that some companies are delivering what the public wants.

My apologies for getting a little harsh, but I feel strongly about the lesson. I shudder when investors make errant assumptions, and I get downright terrified when the assumptions actually lead to a profit - it gives investors an unhealthy degree of confidence.

To anyone who has made the assumption described above, I submit to you that you should ask a few basic questions before buying into the buzz:

Do video game sales specifically improve in a recession, or do they just grow all the time in any environment?
Do box-office takes actually improve in a recession, or do they just grow all the time in any environment?

If you want to argue that the industries are recession-proof or recession resistant, that’s fine. That’s an important distinction to make though….the difference between “recession-resistant” and “thriving because of a recession”. If you believe the latter, you may want to get out of these stocks at the first sign of a recovery, which would be a mistake if the former is actually the case.

By the way, to answer the two questions above, video game sales have gone up every year since 2000, which includes the 2000/2002 recession as well as the 2008 recession. They also went up every non-recession year, so it would be dangerous to link a cause and effect.

Box office takes since 1990 (19 complete years) have gone up every year except 1991, 2005, and 2008. Of those three, only one (2008) is linked to a recession. So again, it would be difficult to assign a cause-and-effect relationship now.