From 2005 to 2008, the U.S. retail videogame industry has seen annual revenue grow. During that period the market for consoles and handhelds doubled in size from $10.5 billion to $21.4 billion, and memories of the modest contractions of 2003 and 2004 have faded.

With the announcement of final U.S. figures for 2009, the NPD Group reported that retail videogame sales for the year were down 7.9% from 2008 to $19.66 billion. That a decline was all but inevitable was clear even before the beginning of the fourth quarter – the only question was how far down the total market would fall.

The events of 2009 will provide much fertile discussion in the coming years, but for now we should make a first read of the figures we have.

For example, one of the big platform holders, Sony, lost $1.3 billion of revenue in the American retail videogame market during the year, despite increased software and hardware sales for its flagship PlayStation 3. We'll attempt to say where the money went, and what to expect for Sony's fortunes in 2010.

Before we're done we'll also look at software unit sales for the final quarter of the year, and reveal an important shift in lifetime software sales for the three big consoles.

Industry At A Glance

When compared with 2008, only four months in 2009 showed year-over-year growth: January, February, September, and December. Even in December, which showed a nearly 4% increase in revenue from the previous year, not every segment saw growth.

Whereas hardware and accessories both saw revenue increases, the biggest single segment of the industry – software – saw its monthly revenues decline by over $190 million. According to Doug Creutz of Cowen & Co., within the larger software category both console and handheld software lost revenue, $173 million and $19 million, respectively.

Given the very strong hardware market in December 2009, it is not difficult to understand the bounce in the accessories segment. While the Nintendo Wii was selling a record 3.8 million systems in a single month, “7 of the top 10 accessories items in December were for the Wii”, according to Anita Frazier, analyst for the NPD Group.

While hardware still ended the year down – losing over 8% from its high point in 2008 – the accessory market was essentially flat, down less than 1%.

With software revenue contracting in 9 out of 12 months during 2009, it ended down nearly 10% for the year.

Analysts like Michael Pachter of Wedbush Securities point to a very strong slate of software releases in the first quarter of 2010, and suggest that we should see a turnaround in software revenue.

Pachter notes that January may well be another down month, but that fortunes should reverse in February and March. We share this optimism, but are also concerned that consumers may have concentrated their video game purchases during holidays and that could well affect revenues through the end of the first quarter.