According to the NPD Group estimates for all of 2010, the retail software market shrank again for the second year in a row. In 2008, consumers spent $11 billion at retail on console and handheld software. The following year that spending fell 10%, to $9.9 billion, and then in 2010 it fell by a further 5%, to $9.4 billion.
There are many possible explanations. According to Wedbush analyst Michael Pachter, the music game genre declined to below $300 million for all of 2010, after reaching approximately $900 million in 2009 and nearly $1.7 billion in 2008.
Wii Fit was also another big-ticket item classified as software during that same period, and its sales have declined and dropped in value as consumers who already own Wii Balance Boards opt to upgrade to the software-only version of Wii Fit Plus.
At the same time, the traditional handheld software market has been under assault from many pressures, including competition from devices like the iPhone and iPod Touch which offer cheap or free games through Apple's App Store.
In each of 2007 and 2008 the Nintendo DS and PSP software market was worth around $2 billion annually. According to Doug Creutz of Cowen and Company, that market's retail value dropped by 10% in 2009, and then dropped another 24% in the past year.
While it is tempting to ascribe much of that decline to the implosion of the PSP market, we still note that the Nintendo DS generated 20% less revenue in 2010 than it did in 2009, even as its installed base increased in size by more than 20%.
Even the decline of the PlayStation 2 has played a part: we estimate that PS2 software revenue dropped by 50% from 2008 to 2010, a loss of about $200-$250 million.
And then there is the ongoing recession in the United States which started in December 2007, according to the National Bureau of Economic Research. It stands to reason that consumers suffering through unemployment or foreclosure are far less likely to spend money on leisure items like video games.
How bad is the current decline? It's enough that the term “persistent secular decline” seems more appropriate each month. (The term was notably used by Wedbush's Pachter to describe investor perception of video game market contraction.)
While analysts have speculated that software could rebound in 2011 (e.g. “low double digit” growth according to Pachter, +3% according to Cowen and Company's Creutz), that growth is still relative to the weak results posted in 2010.
Even at 12% growth, the retail software figure for 2011 would still fall short of the $11 billion mark set in 2008.
Here is the current decline in an easy to visualize form. The first figure shows how total software revenue has changed since 2007.
While the installed base of current generation has expanded from about 20 million consoles and 28 million handhelds at the beginning of 2008 to 75 million consoles and 65 million handhelds at the end of 2010, the total revenue being generated by those platforms has declined by about $1.6 billion.
During that same period, we can look at software unit sales and see a similar decline.
The striking point about this view of software sales is that the volume of software sold at retail has essentially returned to the level seen in 2007 – the first full year that the PS3 and Wii were on sale.
We should note that it isn't that the current generation hardware systems aren't increasing their software sales. In fact, they are, as the figure below shows.
According to Pachter, the current generation consoles – Xbox 360, Wii, and PS3 – collectively increased their software unit sales by nearly 8%. While the Wii did decline (from over 70 million to 65 million units), the growth in the PS3 and Xbox 360 markets more than compensated for that decline. Software revenue also increased on those platforms in 2010, albeit by a much more modest 3%.
Stepping back a bit, this means that growth in the current generation console market has not made up for greater declines elsewhere – in handhelds and the old PS2 market.