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Has video game retail become an entirely 'hits driven' industry?
Has video game retail become an entirely 'hits driven' industry? Exclusive
April 19, 2012 | By Matt Matthews

April 19, 2012 | By Matt Matthews
More: Console/PC, Business/Marketing, Exclusive

Is the video game industry, in particular the brick-and-mortar side of the business, becoming more "hit-driven"? That's the claim that Wedbush analyst Michael Pachter made in his most recent note on March's retail sales.

It's a temptingly straightforward thesis, but one that probably deserves some scrutiny. To explain a bit more about Pachter's thesis, he explains the hit-driven business as one in which "gamers [are] willing to pass on an abundance of catalog titles in anticipation of the industry's premier franchises."

That is, while some middle-tier games languish on shelves, gamers are content to play the games they own until a truly big game comes along.

I think there is another aspect to this phenomenon: the increasing concentration of sales of these popular games immediately after launch. Activision Blizzard, in particular, can be seen doing this with the last few years of Call of Duty releases.

So, are sales becoming concentrated among the top-selling games? Are sales getting concentrated around the release of big games? I have only limited data, and it is entirely possible that what I have paints a skewed picture, but let me share it with you. I'll caution you ahead of time: I haven't seen a clear-cut answer just looking at sales figures.

You may recall that the current market contraction began three years ago, with the negative results reported for March 2009. Out of the 36 months since that turning point, only nine have been growth months and the remaining 27 have shown revenue declines.

The full picture, including the growth up to 2009 and the fall afterward can be seen in this table.

Every one of those growth months included the launch of a hit game. September 2009 included Halo 3: ODST and The Beatles: Rock Band. Then God of War III, Pokemon SoulSilver/HeartGold, and Final Fantasy XIII launched in March 2010. Both Red Dead Redemption and Super Mario Galaxy 2 pushed May 2010 into a growth month. Fallout: New Vegas, NBA 2K11, and Medal of Honor topped a list of million sellers in October 2010. The rest of the list is predictably full of titles you've heard of, and likely even played.

So, yes, the growth months have had extraordinary release slates, particularly for games that are part of established franchises that have historically sold well. These games are not only popular, but are often promoted more than untested games, creating a feedback loop that helps propel the big games further.

However, sometimes there are big games released and things go the other way. March's sales are just such an example, I believe. The top 10, as shown in the table below, contains several new releases with licenses that ought to help push the industry higher, not lower: Mass Effect, Resident Evil, SSX, Street Fighter, Tekken, and Mario.

Even with that lineup of games, software sales in March 2012 were down 25% in terms of revenue and 29% in terms of units. Keep in mind that that's comparing to figures for March 2011, which had themselves declined 12% in units and 16% in revenue from March 2010!

So we have a quandary: sometimes big games drive up sales, and sometimes they don't. Moreover, it isn't clear just from top 10 lists (which, regrettably, is most of what is available publicly) how the games below the chart are doing.

To see what's going on beneath the chart, let's take the month at hand and the same month a year ago and see what's going on with the top 10 (our proxy for hits) and the rest of the market (consisting mostly of catalog titles).

According to Michael Olson and Andrew Connor, analysts for Piper Jaffray & Co., the top 10 games in March 2011 contributed 38% of the software revenue for that month and 30% of the software units.

In March 2012, just last month, these figures shifted compared to a year earlier. The top 10 games accounted for just over 39% of the software revenue, a small increase in share. However, the share of units in the top 10 decreased almost two full percentage points, to 28%.

In a nutshell: a lower share of units and a greater share of revenue for the top 10, since last year this time.

That's again, not a perfectly clear picture. Most of the difference can be attributed to the kind of software which was popular a year ago, and that which is popular now. A year ago the top-selling games were Pokemon games which a relatively low average price, while this year the top games were $60 titles for the HD consoles.

I asked the NPD Group if they could shed some light on where the games were going, and one of their analysts, Liam Callahan, offered to comment on new releases and catalog (older) titles. "While the relatively light launch schedule of Q1 2012 would lead one to believe that a decline in new launch sales are the reason for overall software declines, games released in the prior year performed poorly as well," he told me.

The interesting part, however, was this: "Games that launched in Q1 2012 declined 37% in unit sales compared to launches in Q1 2011, while there was a 31% decline in units sales of games launches in 2011 versus Q1 2011 sales of games launching in 2010."

That essentially says that new releases so far in 2012 are down even than the rest of the market (-37% versus -31%), at least in terms of unit sales.

The comparison is, like everything else about this situation, slightly more complex. Callahan told me two months ago that January was a virtually empty of new releases, and from his new comments it's clear that at least part of the problem may be that fewer games have been released so far in 2012.

Finally, there is the elephant in the room: Call of Duty sales. By now we've seen several articles on how Modern Warfare 3 sales are lagging behind comparable period sales by Black Ops. For example, you should check out Gamasutra's latest two pieces on the situation here and here. The latter article provides some extremely important context from Doug Creutz, analyst for Cowen and Company. He notes that while overall Modern Warfare 3 sales are down compared to the previous Call of Duty title, this is primarily due to a decline in sales on the Nintendo Wii, Windows PC, and handheld platforms.

If anything epitomizes the hit game today, it has to be Call of Duty. Like Guitar Hero, sales of Call of Duty have gotten more concentrated around its release date, and residual sales in the following months have begun to trail off.

When I asked Michael Pachter about Call of Duty, he told me that he agreed that "Black Ops was the high point for packaged goods" and that he's not sure that there's much that Activision Blizzard can do to change that fact. Surely the Call of Duty Elite service is helping to offset some of the losses at retail, but it isn't clear to me yet whether they're even close to a revenue growth situation yet.

One thing the analysts appear to agree on is that the audience for video games has changed in the past couple of years, and this will necessarily define how sales play out. Piper Jaffray's Olson and Connor have said that they believe that "casual gamers have left the market permanently." Pachter has described the dynamics this way: "casual gamers are likely to shift their playing time from packaged products to mobile and social games, but hard core gamers are far less likely to do so."

This, I think, is the essence of what will define a hit-driven market going forward. The hard core gamers will serve as the backbone for software sales on the HD consoles, while the few casual gamers that can be enticed to pick up a popular title will do so. Middle-tier titles on those platforms will suffer, as a result. The less hard core platforms, like the 3DS and perhaps the Wii U, will have to compete with the channels that the casual audience finds attractive now, like mobile and social gaming, while Nintendo-exclusives (like Mario Kart and Zelda) will continue to post huge sales through long-term, low-level sales.

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Joe Zachery
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"Nintendo-exclusives (like Mario Kart and Zelda) will continue to post huge sales through long-term, low-level sales." Not sure what you mean by low level? Are you talking about their typical below blockbuster launch numbers. Where other games get all their sales in the first month. Nintendo games sell below that average, but continue to move months after. Cause you do realize at least for Mario Kart this generation. It has out sold all the games your calling HD Hit titles.

Still over all it seems that if it's not a Blockbuster FPS title. It has to be a big franchise game sold in the fall to have a chance at huge numbers. Twisted Metal came out early this year, and that game pretty bombed at retails. Then look at the new games from March's NPD. Street FighterX Tekken, and Resident Evil, and Mario Party 9. The are all games from franchises that have sold a couple of million in the US. Yet their starting months average is below 500,000 pieces combined on 2 consoles. So the so called Hardcore gamers are not buying that many hardcore games either.

Jesse Tucker
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I'm pretty sure he means that Nintendo exclusive games tend to gain significantly higher sales because of a much larger tail. Sure, they sell a ton of copies in the first month like any other game, but unlike many games Nintendo games tend to continue to sell well for much longer.

Patrick Haslow
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Answer to the article title:

"Yes, unless the developers are funded through Kickstarter."

Chris Smith
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Kickstarter is not going to save the market from high-profile games.

The whole "wave" of KS is created entirely by games being pitched from industry names, or from teams made of of industry vets. While these are the people that consumers recognize and can expect to produce the products they're asking to fund, there's an iceberg situation here in that these "drivers" are small in number. The real body of games on KS are from true indie developers who will have a hard time being noticed while projects like Banner Saga and Wasteland 2 are such high profiles in a smaller pond.

Mitchell Fujino
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My biggest problem with these charts is the line that says "Retail only; excludes PC".

We're talking about a time where Minecraft PC has made over 80 million dollars, Indie Bundles make over a million a shot, League of Legends makes enough money to just give away 5 million, and Steam is powering along strong as ever.
With the exclusion of PC and non-retail, any conclusion drawn about the state of the industry using these numbers seems inherently flawed.

Frank Cifaldi
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This article is specifically about the retail market, and doesn't claim to be about the entire video game industry. None of the products you mentioned are sold at retail.

Vince Taroc
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I commented on the last article about Call of Duty, but I think it's decline in sales has a lot to do with word of mouth from the actual Call of Duty fans. There's a lot of problems with Modern Warfare 3 with the compensation lag. A lot of players of the game just couldn't handle being at a disadvantage anymore and put it down to play something else.

Daniel Martinez
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Word of mouth is still the biggest influential factor for yours truly; followed by reviews, and finally marketing in that order. Sales figures are totally meaningless. Sometimes I even avoid purchasing games that have too many people playing them like the COD/MW series just to go against the grain in spite of the hype. I mean if everyone jumped off a bridge...

Gil Jaysmith
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If that's the case then you're just depriving yourself of potential fun for no reason. Perhaps you'd enjoy them. Also, your analogy makes no sense. Games are fun, not forms of suicide.

Kevin Fisk
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@ Gil,

You could also say you're depriving yourself of potential fun by just buying the hits and not seeing what else is out there. I think that's what Daniel was getting at.

Daniel Martinez
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Thanks for clarifying, Kevin, lol. Sorry I didn't clarify, Gil; I've played COD, I don't understand the hype, but to each his/her own, y'know? In another example, I played Castlevania: Lords of Shadow over God of War. Whether that was a dumb idea or not, is debateable. All my peers whom have played God of War say it's a great game but a bit of a cakewalk and not as challenging as Lords of Shadow. In that example: if I had to pick which product to invest my money in, I'd choose the one that will challenge me more, even if it isn't a "blockbuster hit." To me, LoS was very much worth the money and pretty damned difficult.

Kofi Jamal Simmons
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In some ways, some games are treated as desposable media like music and movies. Things like season/online passes (which can be useless if the publisher shuts down the online service...), limited prints, used games sales (the only way you can get some games that are 2-3 years old), games are often judged based on the immediate sales and hype. I would like to see more platformers, but that doesn't sell as much.

Dave Hagewood
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Publishers are directly responsible for this problem and ironically are the ones most affected by it. By keeping retail game prices high and the length and production value of those games high, a single AAA game has become a serious investment in time and money. Of course only the hits are going to make money... who can afford to get everything? So they spend even more on production and marketing, risking millions of dollars to get those coveted top 10 spots each quarter all the while exacerbating the problem. When it doesn't pay off it crashes hard and they are quick to pass the blame to the developers who get put out of business left and right. Every dollar exiting retail is going straight to mobile and steam and there is good reason.

Nat Loh
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are you suggesting it's the publisher's fault for not reducing the retail game prices? They've been at $60 since 2005, before the chart in the article shows its big dip which unironically corresponds to when our economy went to the toilet. And even if the publishers reduced their wholesale prices, the retailers will gladly charge $60 and take the extra profits. I don't think these charts represent profit and production, but the amount of money consumers are spending month to month at retails. The industry as a whole keeps growing and growing so while the industry's profits distribution is getting more top heavy and you put the onus on publishers, it is also the direction that is leading them to great profits. And let us not forget, the consumers are choosing to spend their money on these bigger titles. Perhaps it's the perception of better value or just good reviews or word of mouth, until the economy fully recovers, it will stay like this.

I think the real trend (and by trend I mean over the last several years) is kids who have time/$ to play 12 games a year are dividing up their spending between retail/console and mobile/apps. The console big hits are seen as "safe" investments. The ones with multiplayer are insured to have strong communities. Meanwhile, they are able to make many smaller investments on the mobile front for reasonable entertainment returns. Older gamers with more $ but less time are being more selective about their games for different reasons but with the same results. They'll only have so much time to enjoy the games they buy so they're more likely to scrutinize their purchase; which is where the whole word of mouth issue plays a big role.

Evan Combs
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Well the biggest reason in all of this is the market, but if you look past that the biggest reason the middle tier has fallen out is price. People just aren't going to pay $60 for a game of lesser quality. Personally I believe there are even bigger problems that deal more with business types who run these companies who don't really understand games or customers, they only look at metrics to make decisions. This leads to poor game design, improper budgets, and the wrong price point.

But not all of the blame should be on them, there are also developers who want their game to be a AAA title, but can't get the proper budget for it. So instead of limiting the scope of their game to create a better game, they try to do everything without the right budget which ends up being a poorer quality game. Not every game can be a AAA title, and instead of doing what AAA titles do just not as well, developers need to learn to concentrate their games down to what it will take to make a good game with their budget.

Tadhg Kelly
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Becoming? They have been for years.

Tiago Costa
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Beat me to it... I think that in the middle of the PS2 life (perhaps even before), game developing costs became so big that the ecosystem can ony sustain the hit big games.

Matt Johnston
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A bigger deal would be some clarity on whether this is "first purchase" or includes "pre-owned" sales.

If first purchase only (which I suspect), it would tell me that more people wait for the game to re-appear on the pre-owned shelves. Other than that, there's not enough data here to say anything about the industry.

Is it hits driven? Obviously.

How many of the games in that list are not sequels?

Jonathan Murphy
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Entertainment is not work, it is not a large commitment of money and time. When it falls into this definition a vast amount of people lose interest, have other priorities. It's the reason cable TV is dying. If given the choice between a set schedule of TV shows and Netflix. Most will chose Netflix. Lower the prices or die out. The consumers are making it clear. The big companies multiplied this problem with day one DLC and yearly sequels.

Nicole Byrnes
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I think that the big name games will always make more money and people do hold out for those games because they know what they are going to get. If you like a game and there is a sequal to the game coming out of course you are going to want to play it and see what it is about. When a movie you love is making a sequel you go and watch it even though it is never better than the original, but people get suckered in and always go watch it and the same thing happens with video games. The industry is really just making sequels of every game and not really coming out with anything new so people reall only have that choice of falling into the "hit" trap because there is nothing else out there. There are old games of course but after a while those get boring, how many times could you possibly beat a game before you need a new challange? It also could be peers. Everyone is playing the new game and you're still playing your old one? Of course you're going to go out and buy the new game to keep up with everyone else and not feel left out of all the hype and talk.