Video game revenue is headed for the first decline since 1995, with sales expected to fall by 1 percent 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.

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 Smithers. “The sell-off in video game stocks is primarily down to a growing realization of the risk that this view is right.”

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 percent to 3 percent, citing weakness in mobile games. This week, IDC said China’s games market growth slowed to 5 percent in 2018, after expanding about 20 percent 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.”

Here’s a look at the key arguments from Smithers:

Mobile games revenue (49 percent of industry total) will fall as China, the world’s biggest smartphone market, sees a 10 percent contraction due to Beijing’s tighter grip on game approvals, he said. The U.S. and Japan mobile markets are also plateauing and won’t make-up the difference, he predicted. Consoles (19 percent) will struggle to follow-up a record year in 2018, which saw the release of multiple blockbusters including Red Dead Redemption 2, God of War, Spider-Man and Super Smash Bros. Ultimate, he said. The aging of PlayStation 4 and Xbox One consoles will also be a drag on growth. “If the PlayStation 5 comes at the end of 2020, that’s great for 2021 but bad for 2020.” PCs gaming (25 percent) will slump as players lose interest in last-man-standing titles like Fortnite and PlayerUnknown’s Battlegrounds (PUBG), which today have fewer users than a year ago, he said. The format has been popular since 2017.

The bearish call comes as investors ask whether last year’s sell-off in game stocks is a temporary setback in a multi-year bull run or an ominous warning sign for the industry. After ballooning to almost $1 trillion in total market valuation a year ago, the 30 largest publicly-traded game publishers including Tencent have collectively since lost $247 billion, according to data compiled by Bloomberg.

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. Smithers predicts more weakness as the market adjusts to the new reality.

“I’m not sure if there’s been enough of a reset in some of the really expensive stocks,” he said. “EA still looks expensive. Capcom still looks expensive.”

It’s not all doom-and-gloom. 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.

“I’ve got the esports bug,” he said. “There’s just nothing like it. And that’s coming from someone covering the industry for three decades.” DM