Peak video game? Analyst sees industry slumping in 2019

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THE RISE OF video games has turned Fortnite into a social phenomenon, made esports a rival to the NFL for viewers, and grown button-mashing into a bigger money-maker than Hollywood. Now one veteran analyst is calling for the first industry downturn in a quarter century.

Video game revenue is headed for the first decline since 1995, with sales expected to fall by 1% to $136.5 billion this year, according to Pelham Smithers, owner of an eponymous London-based research firm. He blames China’s stricter approach to game approvals, a shortage of big console hits, and fatigue among players for battle-royale titles like Fortnite.

Mr. Smithers, who began covering the industry in the late 1980s, points to the recent sharp drop in stocks like Tencent Holdings Ltd. and Electronics Arts Inc. as proof that he’s right. He sees the drag lasting until at least 2020.

“The various bits of the jigsaw puzzle just don’t add up, so we’re looking for the market to shrink in 2019,” said Mr. Smithers. “The sell-off in video game stocks is primarily down to a growing realization of the risk that this view is right.”

Mr. Smithers is the first to admit it’s a risky call, with rival analysts at Goldman Sachs Group Inc. to Nomura Holdings Inc. still seeing games as a growth-industry and Morgan Stanley remaining bullish. But he’s been right with similar calls before: He gave Nintendo Co. a ‘sell’ rating a decade ago, a contrarian call at the time that’s proven well founded.

Plus, he’s not alone this time: Research firm Newzoo recently trimmed its 2018 and 2019 revenue outlook by 2% to 3%, citing weakness in mobile games. This week, IDC said China’s games market growth slowed to 5% in 2018, after expanding about 20% a year since 2014.

“There is a lack of fresh, innovative blockbuster titles replacing the current, aging top titles,” Newzoo founder Peter Warman wrote in a blog post in November. “For the longer term, we are now more cautious about the global growth rate of the mobile games market.”

Besides Beijing’s crackdown, investors have been surprised by slower-than-expected sales of Nintendo’s Switch, regulatory scrutiny of game addiction and monetization practices like loot boxes, and uncertainty about the games pipeline at EA and Activision Blizzard Inc. Mr. Smithers predicts more weakness as the market adjusts to the new reality.

It’s not all doom-and-gloom. Mr. Smithers predicts that virtual reality-related revenue will double from $4 billion in 2018 to $8 billion by 2020. He’s turned bullish on Nintendo, which he says will benefit in the long-term from the industry’s shift to cloud gaming. And he’s excited about esports, taking one late-night phone call from a journalist in between watching qualifying matches for this year’s PUBG championship. — Bloomberg