CHAMPAIGN – Video-game sales have dropped dramatically this year, and Champaign-based Volition Inc. isn't immune to the falloff.
From March through July, industry sales were down every month compared with the same month last year, the Los Angeles Times reported, citing sales data from market research firm The NPD Group. July sales were down 29 percent from a year ago.
The video game business had been called "recession-proof," said Volition President Mike Kulas. But it's probably more accurate to call it "recession-resistant."
Although industry sales are off, there are encouraging signs that long-term interest in video games hasn't waned, he said.
A recent Nielsen Co. study showed people are actually spending more hours playing video games – about 18 hours a week – than they were a year ago, he said. They're buying fewer games, but using existing games longer or renting games.
Now with some signs the nation is coming out of recession, Kulas is pinning hopes on the traditionally big time of year for video games – the Christmas shopping season and January, when people use their gift cards.
"I hope by Christmas, people buy the games they didn't buy over the summer," he said.
Volition, which is owned by Agoura Hills, Calif.-based THQ Inc., designed two games that were issued in the last year: "Saints Row 2," which came out in October 2008, and "Red Faction: Guerrilla," which debuted in June.
"Last October, 'Saints Row 2' did very well. We were very happy with it," Kulas said, adding that reviews were strong and the product had "long legs."
Video game sales tracked well through October and November, but in December the industry started getting nervous, he added.
"'Red Faction: Guerrilla' shipped in June, and it was quite possibly our strongest reviewed game ever on console," Kulas said, adding that it met sales revenue targets.
"Red Faction: Guerrilla" had a Metacritic rating of 85, which Kulas said is very strong. A score of 90 is "very rare," he added. "Saints Row 2" got a Metacritic rating of 82 for the PlayStation 3 version and 81 for the Xbox 360 version.
Despite the industry slump, THQ Inc. enjoyed a strong April-to-June quarter, with the highest net sales and net income for that quarter in history.
Net sales were driven primarily by "UFC (Ultimate Fighting Championship) 2009 Undisputed" and by Volition's "Red Faction: Guerrilla," the company said. As of the end of that quarter, more than 1 million units of "Red Faction: Guerrilla" had been shipped, and the game ranked among the top 10 best-selling titles for June.
THQ said it expects July-to-September net sales to be lower than a year ago, because it has no new titles scheduled for release. It also expects a smaller operating loss for the July-to-September quarter than for the same period last year.
But based on the April-to-June results, THQ now expects to be profitable during this fiscal year, and for net sales to exceed those from last year.
THQ was the No. 3 independent video game publisher in the United States and the United Kingdom in June, the company reported. Only Activision and Electronic Arts were larger.
During the recession, Volition's employment has remained stable, with about 250 working from the studio's headquarters in One Main Plaza in downtown Champaign.
However, Volition's parent company, THQ, made sharp cuts earlier this year, announcing in February it planned to reduce its employee base by 600, or about 24 percent.
Part of those reductions came from the closing of THQ's quality assurance center in Champaign's Church Street Square, a block west of the Volition offices. Eighty-six jobs were eliminated as a result of the closing, with 16 other employees retained by Volition.
Kulas said there have been no employee cuts at Volition, and the company has 11 positions it would like to fill. Among job openings listed at its Web site: senior programmer, senior character artist, designer, audio designer and project manager.
Now that "Red Faction: Guerrilla" has been released, Volition teams are working on "two full projects," neither of which Kulas can discuss publicly. Neither is expected to be released in 2009 or 2010, with 2011 the most likely year for release.
In the meantime, Volition expects to generate revenue from downloadable content that customers can order to enhance the play of "Saints Row 2" and "Red Faction: Guerrilla." The content includes a range of weapons, vehicles and clothing.
"If people like a game, they want to buy more of it," Kulas said.
Also, the Microsoft Windows version of "Red Faction: Guerrilla" is expected to be released in mid-September. The versions for Xbox 360 and PlayStation 3 were released in June.
Developing games takes a lot of time and money. Kulas said top-selling, high-end games often take $25 million to $40 million to develop, and some games in the industry have been rumored to cost as much as $80 million to $100 million.
Volition makes games for the "core gamer" market – one of three general areas to which THQ markets. Its other areas are "online games" and "kids, family and casual games."
Core games, intended to appeal to the avid player, include action, fighting, racing, shooting and strategy games, THQ stated in its quarterly report.
Those games are produced not only by Volition, but also by some of THQ's other studios: Juice Games, Kaos Studios, Rainbow Studios, Relic Entertainment and Vigil Games.
After three decades of video games, Kulas said it appears gamers don't give up the habit as they age. The average age of gamers is the early 30s, he said.
A survey this year by The NPD Group indicated that 63 percent of U.S. consumers played a video game in the last six months, and that the average gamer spends $38 a month on content.
THQ Inc. details risk factors that video game business faces
If you think success in the video game business rests solely with coming up with good games, think again.
In a quarterly report issued July 29, video game company THQ Inc. lists 33 risk factors that could potentially make or break the company.
In some cases, the factors lie beyond the company's control – with retailers, console manufacturers or companies that license brands to THQ.
Some risk factors are obvious: the economy, access to capital, pricing, competition, the seasonal nature of the business.
But others might not be as predictable, among them:
The need for great games, not just good ones. As THQ puts it: "Our business is 'hit'-driven. If we do not deliver 'hit' games, our revenue and profitability can suffer." A relatively small number of hit titles account for a "significant" portion of video game sales, the company said.
The increasing expense of developing games. Part of the reason lies with the platforms the games are played on: Microsoft's Xbox 360, Sony's PlayStation 3 and Nintendo's Wii.
"Because the current-generation console platforms and computers have greater complexity and capabilities than the earlier platforms and computers," it costs more to develop games for them, THQ said.
THQ's dependence on a few big retailers. THQ's five largest customers accounted for 41 percent of gross sales last year. The biggest, Wal-Mart, accounted for more than 13 percent of gross sales the last three fiscal years.
And what happens when big retailers bite the dust? In the past year, THQ had to write off $8.5 million in bad debt when two large customers, Circuit City and Entertainment UK, failed.
Guessing which video game platforms will be popular in the future. "Our business is dependent upon the success and availability" of platforms such as Xbox 360 and PlayStation 3, the company said.
It often takes nine to 24 months to develop a game, so THQ has to decide which games to develop on which platforms – before knowing what the consumer's preference of platforms will be when the game is finished.
Getting platform manufacturers to play along. THQ depends on the platform manufacturers – Microsoft, Nintendo and Sony – and its non-exclusive licenses with them, both for the right to publish titles for those platforms and for the manufacture of THQ's product for the platforms.
Another concern: Since those manufacturers publish games for their own platforms, they might give priority to their own products, rather than THQ's products.
Retailer preferences and practices. "Lack of retailer support for categories in which we publish games could negatively affect the sale of our products," THQ said. The last couple of years, retailers strongly supported games that were music- or peripheral-based, such as "Guitar Hero" and "Rock Band," and THQ did not publish any games in that category.
Consumers turning to used games. "Large retailers have increased their focus on selling used video games, which provides higher margins for retailers than sales of new games," THQ said. Unfortunately for THQ, that reduces the demand for new copies of games.