Three Facts for Perspective

In a moment we'll show how the industry peaked between January and February of this year, but for the moment, let's get some perspective on the industry's slump. Here are three reasons that could have contributed to lower year-on-year sales in May 2009, irrespective of the current economic conditions.

• First, note that May is typically one of the weakest months in the videogame calendar. For example, May was the month with the weakest weekly revenue in both 2006 and 2007. In 2005 and again in 2008, May was the third weakest month, again measured by weekly revenue.

  
  

  Often the nascent summer season is cited as the key reason for the industry's weakness in this particular month. As most students finish a school year and begin summer vacations or jobs, that key consumer demographic will spend less time indoors in front of a television or curled up with a handheld gaming device.

• Second, hardware and software sales were truly extraordinary at the beginning of 2008. Even in a strong economy the industry might have had difficulty keeping pace, much less growing.

  In terms of hardware, Nintendo sold over 3.5 million Wii systems in the first half of 2008 alone. Consider that the PlayStation 2, at the height of its popularity, never broke the 2.5 million system barrier for a comparable period.
  
  The Nintendo DS was no slouch, selling 3.2 million handhelds during the first half of 2008. Moreover, the PlayStation 3 was in the midst of strong sales in the first half of 2008 as it coasted down from its November 2007 price drop and peaked briefly with the launch of Metal Gear Solid 4.
  
  Then look at the software slate that accompanied that growth of the hardware base: Super Smash Bros. Brawl (2.7 million in March 2008), Grand Theft Auto IV (2.9 million in April 2008), and Mario Kart Wii (1.1 million in April 2008). Only Resident Evil 5 has come close to that kind of spectacular launch month in 2009, with just over 1.5 million copies in March.

• Finally, the big-ticket games like Guitar Hero, Rock Band, and Wii Fit may well have run their course for the moment.

  Undoubtedly, expensive games will suffer in a weak economy. But when Nintendo has sold a Wii Fit system for every 3 Wii consoles in the United States and the market is literally awash in plastic guitars, the market is apt to adjust. The drop in revenue just from those music game and Wii Fit bundles is significant enough to explain some of the slowing industry sales.

This isn't to dismiss the economy as a factor in slowing videogame industry revenue. Quite the contrary, the economy may indeed be a key reason that sales are down.

However, it is worth noting that even with the deck stacked against the industry as listed above, industry revenue should still show modest growth by the end of the year.

The Industry Peaked, Briefly

We can measure the health of the videogame industry by looking at a 12-month simple moving average of weekly revenue.

For example, the $415.9 million per week given February 2009 in the figure below is computed by adding up the revenue for March 2008 through February 2009 and then dividing by the number of weeks over which that revenue was accrued.

Viewing the data in this way smooths out seasonal adjustments, since each 12-month period contains exactly one November and December, the months that so strongly skew single-month comparisons.

With one single month exception (September 2008), this simple moving average increased each month for over three years, from $199.3 million per week in February 2006 to $415.9 million per week in February 2009.

At that peak, the industry was at his greatest point in history: a 12-month period during which revenue totalled over $21.6 billion. For comparison, the official total for calendar 2008 was $21.3 billion.

(Our reliable industry revenue data does not extend into 2004, preventing us from following this trend back further.)

Then in March 2009, the rate dropped to $410.3 million per week. It dropped again in April and then again in May, ending at $401.3 million per week.