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Gaming industry to play on despite COVID-19 impact

Although the coronavirus pandemic could complicate release schedules for next-generation video game consoles, analysts think the gaming industry is well-positioned to weather potential long-term impacts.

Many gaming companies, especially those that rely on Chinese manufacturers to produce their products, continue to have supply chain disruptions. These include Nintendo Co. Ltd., which is currently struggling to meet the demand for its Switch consoles, and Facebook Inc., which is facing severe shortages of its Oculus virtual reality headsets.

Microsoft Corp.'s Xbox Series X and Sony Corp.'s PlayStation 5, which are scheduled to launch this holiday season, could suffer repercussions from the outbreak as well, according to Daniel Ahmad, a senior industry analyst at video game research and consulting firm Niko Partners.

"If manufacturers are unable to operate at full capacity before the end of the second quarter of 2020, we could see an impact on next-generation console launches, with either limited supply or delayed releases becoming the likely outcomes," Ahmad said.

Nearly 90% of video game consoles imported into the U.S. in 2019 were manufactured in China, according to research by Niko Partners.

China is "starting a slow return to normal, with factories re-opening and ramping up production," Ahmad said. "However, there is still a notable disruption to the supply chain and both companies will be evaluating how best to meet demand this holiday quarter."

Meanwhile, based on the results of 451 Research's "Voice of the Enterprise: Digital Pulse" flash survey, 27% of enterprises worldwide are experiencing supply chain disruption due to COVID-19. The survey, which was conducted between March 10 and March 19 and represents about 820 completed responses from pre-qualified IT decision-makers, also found that Asia-Pacific is the hardest-hit region with 44% of enterprises being impacted, and that number will grow to 52% of all businesses globally within the next three months.

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However, one company that continues to downplay the impact of the outbreak is Advanced Micro Devices Inc., which is providing chips for both the Xbox Series X and PlayStation 5. During the company's financial analyst day in early March, AMD executive Rick Bergman indicated that both consoles are still on track to launch in the holiday season this year. Although the coronavirus has since expanded into a full-blown epidemic, AMD has not yet updated its stance on the release dates.

Microsoft and Sony have not announced changes in their planned release window for the consoles. Spokespeople for both companies declined to comment when asked by S&P Global Market Intelligence whether they could face potential shortages or delays due to the coronavirus.

Michael Pachter, managing director of equity research at Wedbush Securities, expects the consoles to launch on time. In addition, "early adopters will lap them up, and new games will sell quite well," he said. "The early adopters are typically wealthier and more recession-resistant, and the recession should be over by late summer regardless," he said.

While there are signs the outbreak is negatively affecting manufacturing in the gaming sector, the fact that Microsoft and Sony continue to share details about the new hardware suggests some level of confidence that the consoles are still coming this year, said Neil Barbour, an analyst at Kagan, a research division of S&P Global Market Intelligence.

Barbour did caution that if the console releases were delayed, the companies would have a very hard time getting consumers to buy their devices after discussing the next generation of hardware so extensively. This would likely result in shipments of Xbox One and PlayStation 4 consoles to decline even further than they did in 2019 on a year-over-year basis.

While the absence of new consoles would hurt overall gaming hardware sales this year, the launch of several major gaming titles in the coming months could keep software sales from cratering, Barbour said.

"Publishers still have a wide installed base to sell games to with or without new consoles," he explained. "They may be expecting some lift from early adopters scooping up new platforms, but the majority of their sales will be on the established hardware."

With more consumers staying at home due to the virus, there has been an uptick in game sales, said Darang Candra, director, Southeast Asia at Niko Partners.

"Tencent reported solid growth in its most recent earnings due to increased spending during lockdowns in China," Candra said. "Sales of both PC and console games rose in both Asia and the West, while mobile game downloads reached peak numbers, with Apple's App Store in China experiencing a 62% jump in downloads alone."

Additional insights from The Voice of the Enterprise: Digital Pulse, Coronavirus Flash Survey March 2020:

Coronavirus forces companies to consider permanent policies, culture change

Perceptions of business interruption coverage at odds with reality, survey finds

Assessing COVID-19 impacts on businesses: Changes happening with more on the way