[As part of his monthly analysis of NPD results, Gamasutra analyst Matt Matthews examines how digital models are offsetting Wii declines and the music game implosion.]
Back in late 2009, Wedbush Morgan analyst Michael Pachter made headlines with his observation that persistent year-over-year declines in monthly software sales could be "leading investors to believe that the industry is in a state of secular [long-term] decline". A full 18 months have passed since that time, and those monthly software sales declines outnumber increases by 13 to 5.
In the meantime, much has been made of the industry's attempt to monetize the online space where several casual, social, and free-to-play games have become successful. See, for example, the recent $750 million acquisition of PopCap games by megapublisher Electronic Arts. Simultaneously the market for apps on mobile devices such as phones and tablets has come into its own as a part of the entertainment content market.
What has not become clear is how much these two opposing trends - the decline of the traditional retail market and the rise of the digital goods market - have offset each other. Is the overall video game market growing or contracting? At what rate is it changing?
The NPD Group has tentatively stepped into the breach with its Games Industry: Total Consumer Spend report. While we are not privy to the full report, the NPD Group did release some details publicly, and we have enough information to piece together a slightly more detailed picture of the full market.
Consider the figure below, which breaks out first quarter of all video game industry sales in 2010 and 2011, as estimated by the NPD Group. The figures include retail console software sales, retail handheld software sales, retail PC software sales, and all other forms of content sales. That final category covers several sources: used games, rentals, subscriptions, digital download, social networking, DLC and mobile games.
According to the NPD Group's figures, the total money spent on video game content in the first quarter of 2011 grew to $5.9 billion, a 1.5 percent increase over last year's first quarter result. Given what is known about the size of the retail market, and the fact that it contracted from $2.2 billion in 1Q 2010 to $2.0 billion in 1Q 2011, we can say that all of those other dollars spent on video game content grew from $1.6 billion to $1.9 billion in the same timeframe.
That is, while the traditional retail market lost 10 percent of its value, the rest of the market grew by about 17 percent. It is that 17 percent increase that drove the modest 1.5 percent increase in the total amount spent on video game content.
Unfortunately, that money is not all spent on new games. Since used games are included in that other category, some of the money in that $1.9 billion does not directly benefit video game developers and publishers. We estimate that about 1/5 of the $1.9 billion figure includes money spent on used games, based on what is known about GameStop's used product revenue figures. (Other retailers participate in used video game sales, but we believe that those other used video game programs are a much smaller.)
Regardless, the rate of increase in used game sales at GameStop is slower than the 17 percent for the entire "other" category, and therefore money on subscriptions, digital download, social networking, DLC and mobile games is actually growing much more quickly.
Taken as a whole, we believe that sales of new content - both at retail and outside of retail - are indeed growing. However, it will take regular measurements from the NPD Group's reports to assess just how quickly, and whether the erosion at retail satisfactorily be replaced with other sources of sales. Moreover, it would be helpful to see companies like Sony, Nintendo, Microsoft, Electronic Arts, and Activision express their sense about the reliability of the NPD Group's claims.
Finally, we would like to add that we believe the retail business is doing reasonably well given the slowdown in Wii software sales and the utter collapse of the music game genre. In 2008 the music game segment generated $1.6 billion in revenue at retail as part of the new software segment. That figure dropped to under $900 million in 2009 and below $300 million in 2010.
Now, look at the following figure, which shows the trailing-twelve-month (TTM) total software sales for the handheld and console markets. (For example, the data point above June 2011 represents the sum of all software revenue from July 2010 through June 2011.)
The software segment has lost $2 billion in annual revenue between February 2009, when the TTM total reached $11.1 billion, and today. A majority of that loss could be directly attributed to the loss of revenue from the music game segment alone. For an industry recovering from that kind of burst bubble, the decline in revenues has been relatively gentle, if still uncomfortable.