LOS ANGELES has been having a tough time in recent months. The Californian economy is in crisis, the property market has folded and the all-important convention business has seemed a busted flush. Last week, though, Tinseltown finally hosted a hit show that brought out the stars, and the fans, in force.

The video-games industry has long boasted that it is recession-proof, but in the past two years even E3, the industry’s biggest annual showcase, has been pinched back just like those of its rivals. In its heyday, E3 attracted more than 60,000 people – a figure that has shrunk to about 5,000. In 2007, the number of exhibitors fell from 400 to less than a 10th of that.

This year, though, the empire struck back with an estimated 40,000 people making their way to Los Angeles for a three-day extravaganza that seems to signal a return of confidence to the games market. A constellation of stars was wheeled out to plug new products. The remaining Beatles, Ringo and Paul, were there to launch the latest version of Rock Band, and the celebrity lineup also included Eminem, Jay-Z, Steven Spielberg, Leonardo DiCaprio and Mickey Rourke.

The games industry has certainly suffered along with the rest of the economy. According to Wanda Meloni, analyst at M2 Research, the games industry has dismissed nearly 12% of its workforce since July. And video-game sales are falling – dropping 8.5% in the first quarter of the year, according to market researcher NPD Group, the first contraction since 2002.

Job losses and falling sales don’t tell the whole story, however, said Meloni. Nintendo believes there are now 295m people playing video games in the world and another 150m who could easily be converted. In the US, where video games are a $22 billion (£13.8 billion) industry, 68% of people now use them.

Meloni said the layoffs were the sign of a maturing industry getting to grips with its costs – much of the fall in sales this year could be explained by comparisons with the success of games such as Grand Theft Auto IV, believed to have sold more than 13m copies.

Todd Greenwald, analyst at Signal Hill, said: “The industry is not recession-proof but it is recession-resistant.” He said this year’s E3 had been a “great success” and that the second half of the year would be better as new versions of several popular games go on sale, including Call of Duty: Modern Warfare 2 and a new version of Nintendo’s Wii Sports.

“Paying $50 for a game that gives you 50 hours of entertainment is still a good deal,” he said.

Meloni points out that the industry is still working out how best to fund the development of games, which can cost up to $30m. Cutting jobs was one way of showing shareholders that the companies are serious about cost controls, she said.

And while sales may have slipped, software for new games systems such as Playstation 3 is still in demand. Sony, Playstation’s owner, is projecting a 30% increase in sales this year.

E3 certainly had plenty of new games and devices on show, including several devices influenced by the Wiimote control system, with both Microsoft’s Xbox and Sony’s handheld PSP Go now using the technology.

To really keep growing, though, the companies need to win over more nontraditional gamers and Meloni said that this year’s E3 showed that was changing.

She has been attending the show since 1996 and said that in the early years most of the women there were “scantily clad” and working on the booths. “It’s not like that now,” she said.

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