Look out, gamers — big gaming companies like Microsoft, Nintendo and Sony say console prices will skyrocket because of the U.S. trade war with China. And game developers like ZeniMax Media, which owns top developers like Bethesda, Arkane Studios, MachineGames, and Tango Gameworks, say that if fewer Americans buy consoles, developers may hemorrhage jobs and move business overseas.
According to the Consumer Technology Association (CTA), the cost of video game consoles imported from China will increase by 21 percent and cost $56 more on average (96 percent of gaming consoles are made in China). The CTA also says cell phones imported from China will cost $70 more, laptops will cost $120 more and tablets will cost $50 more on average.
But the video game industry has always operated with thin profit margins as game developers invest heavily in research and development to make games compatible with new consoles. And the parts used in consoles like the Nintendo Switch, Playstation and Xbox are imported en masse for a variety of other consumer products, like computers and phones. So it’s unlikely the gaming industry will suffer a more dramatic impact compared to other consumer technology industries.
In addition, the top three console companies — Microsoft, Nintendo and Sony — are in fantastic financial shape according to data from financial health ratings company RapidRatings, which uses companies’ SEC filings and other data to determine their financial health and risk of default.
Observers believe the gaming industry is well prepared to withstand an external shock like tariffs, despite the industry’s filings with the United States Trade Representative claiming the contrary.
Tariffs on video game consoles would “injure consumers, video game developers, retailers and console manufacturers; thousands of high-value, rewarding U.S. jobs at risk; and stifle innovation in our industry and beyond,” according to a June 17 letter addressed to the USTR and signed by Microsoft, Nintendo and Sony (Sony testified against tariffs before the USTR on June 25).
“Accordingly, we respectfully request that the Administration remove HTSUS subheading 9504.50.00, covering video game consoles, from the final list of tariffs, and thus refrain from applying tariffs on these products,” the companies said in the letter. “The U.S. video game industry generated total revenue of $36 billion in 2017 and $43.4 billion in 2018, reflecting over 20 percent in growth. This industry directly and indirectly employs more than 220,000 people. 99.7 percent of video game companies qualify as small businesses and can be found in each of the fifty states; many develop software for video games across the range of platforms, from PCs to mobile, including the video game consoles that we manufacture, and are an integral part of the booming app economy.”
ZeniMax Media, based in Rockville, Maryland, told the USTR that if video game console sales fall because of a price hike due to tariffs, then game developers will suffer.
“A vibrant video game console market is critical to our ability to provide good jobs and continue to grow,” ZeniMax said in its filing. “According to the Entertainment Software Association (ESA), 63 percent of Americans surveyed considered the quality of graphics to be important when deciding whether to purchase a game. Sophisticated, life-like games like ours are made possible by advanced software and can often only be played on the latest consoles. Thus, fewer next-generation consoles in the hands of consumers will lead to a decline in the number of new games consumers purchase. This could cause serious harm to the thousands of game developers and publishers in the United States who depend on console sales to support game sales.”
According to data provided by RapidRatings, Sony is at a low risk of default with a financial health rating of 60 (on a scale of 0-100, with 100 being the best). The actual probability of Sony defaulting is 0.1 percent. Microsoft’s rating is at a solid 84, with Nintendo leading the pack at 88.
“It would be really difficult for Sony or Microsoft or Nintendo to increase the price of their consoles by 25 percent,” RapidRatings CEO James Gellert told InsideSources. “It’s too big a market, it’s price-sensitive, it doesn’t allow for a lot of price change (unless everyone moves together). They’re selling the consoles to get people to play more games and get more consoles into people’s hands. All three are able to handle a short term increase in costs [because of tariffs], and their core health and financial health suggest adaptability.”
The bigger issue, Gellert said, is whether the Big Three have adaptable, flexible supply chains and can change their suppliers if necessary to mitigate the effect of tariffs.
According to RapidRatings’ limited financial data on ZeniMax Media, the game developer holdings company isn’t in great financial shape and might be more vulnerable to the effects of tariffs, but that’s also the norm for the industry and has been for decades.
“There are companies that remain at high risk [of default] for a very long time,” Gellert said. “It depends on cash flow and what their balance sheet looks like, if they have debt that’s being serviced, and what their access to capital is. If they have very little debt but are unprofitable or weak profitability, and have plenty of access to capital, they’re probably fine in the short term.”