In the past four years, the industry revenue during the first half of the year has been either 34% or 39% of the full year's revenue. If 2009 follows one of those two patterns, what would the total annual revenue be for the year?

• If the revenue from January to June of 2009 turns out to be 34% of the full year revenue, then total revenue in 2009 will be $21.5 billion, a 0.5% increase over 2008. This assumption would require that revenue in the back half of 2009 grow by 9% over the same period of 2008.

  
  

• On the other hand, if 1H09 revenue is 39% of all revenue for 2009, then we can expect and annual total of only $18.8 billion, or a loss of 12%. In this scenario, revenue in the second half of 2009 would drop over 12%, year-on-year.

The final result, which we won't know until mid-January 2010, will probably be somewhere between these two cases. We currently lean toward a value between $20 billion and $21 billion, a modest decline from the record $21.3 billion in 2008.

Even if unit sales of hardware and software pick up, those gains will be undermined by lower software prices and hardware price cuts. That is, stronger hardware and software unit sales in the last half of the year may not actually result in proportionately higher revenues.

Here's U.S. game industry retail revenues since 1997, with the range of possible estimates for the rest of 2009 marked in red:

There are plenty of unknown changes that could impact this significantly. For example, if Nintendo were to cut the Wii's price from $250 to $200, the company would have to sell 25% more hardware just to maintain the same level of revenue. Likewise, Sony would have to sell 33% more PlayStation 3 systems to offset revenue lost in cutting the system's price from $400 to $300.

Softening Software

Compared to June 2008, the software market contracted a cool quarter of a billion dollars in June 2009. Year-to-date software revenue is down over $500 million from the same period last year.

Not only are fewer units of software being sold, but overall software prices have dropped as well. According to figures provided by Michael Pachter, analyst for Wedbush Morgan Securities, the average price of a game sold in the first half of 2008 was nearly $40. In the first six months of 2009, however, the average price has dropped to around $38, a decline of 5%.

At least some of this drop can be attributed to falling sales of more expensive packages like Guitar Hero and Rock Band bundles. Sales of Nintendo's Wii Fit with the included Balance Board, retailing for $90, began weakening in the second quarter and will probably lose its effect on software ASP going forward.

Even though software has been cheaper overall (that is, consumers are buying cheaper software, generally) software unit sales are down over 8 million from the first half of 2008.

The decline in software prices probably spans all platforms, even the Xbox 360 and PlayStation 3 where new software is often priced at $60. Consider the data for per-platform software unit sales over the past 2.5 years shown in the figure below.

As the diagram shows, Wii software sales were flat from the first half of 2008 to the first half of 2009. Even though unit sales were up on the Xbox 360 and PlayStation 3, platforms with more expensive software, the average price of software across the industry dropped. This suggests that consumers were seeking out less expensive software on those platforms, contributing to the overall decline in average software prices.

The data in the figure above also reveals the increasing importance of the current generation of consoles to the software market. Roughly speaking, the three consoles accounted for 50% of all software units sold in the first half of 2008. By our figures, the same three consoles had a 60% share of all software units during the first half of 2009.

Given that software on the Wii, Xbox 360, and PlayStation 3 is priced significantly higher than the software on the other platforms (Nintendo DS and DSi, PlayStation Portable, and PS2), the current generation consoles command an even larger share of all software dollars.

As of the end of June 2009, the Xbox 360 and Nintendo Wii were essentially tied in life-to-date software sales, each in the neighborhood of 132-133 million units. Note that the Xbox 360 has achieved those sales after 44 months on the market, compared to 32 for the Wii. PlayStation 3 software sales currently stand at 54 million units after 32 months on the market.

When the Xbox 360 was at the same point in its lifespan that the PlayStation 3 and Nintendo Wii are now (32 months on sale), American consumers had purchased around 82 million units of software for the system.