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Annual U.S. game retail could hit six-year low in 2012
Annual U.S. game retail could hit six-year low in 2012 Exclusive
May 14, 2012 | By Matt Matthews

May 14, 2012 | By Matt Matthews
More: Console/PC, Business/Marketing, Exclusive, E3

["Should the contraction from 2011 continue at this pace, annual U.S. retail video game revenue in 2012 could fall below the $12.6 billion figure from 2006," says Gamasutra analyst Matt Matthews in his latest Behind the Numbers column.]

It is getting more difficult to have any optimism about the U.S. retail video game market in the near term. Prior to last Thursday, when the NPD Group announced its retail video game sales estimates for April 2012, the analyst consensus had console and handheld software sales down 26%.

Wedbush Securities analyst Michael Pachter had expected software down 19% at U.S. retail, and Michael Olson of Piper Jaffray and Company had foreseen a 25% decline. Doug Creutz of Cowen and Company was more pessimistic than the consensus, with a 27% decline.

According to the NPD Group's retail sales estimates, the actual decline was a shocking 42%. Console and handheld software sales fell from $503 million last April to a mere $292 million for the same period this year.

I can slice the market however you wish console and handheld, high def and standard def, hardware and software but practically everyone took a hit at U.S. game retail.

The only segment that did not suffer was the accessories segment, where the NPD Group records sales of controllers, cases, and points cards. Accessories inched up from $147.8 million last year to $148.6 million this year, a mere 0.5% increase. That's hardly a win in my book.

Before we look separately at the hardware and software segments of the retail market, I want to show just how dire the situation is right now. As the following graph shows, the total amount of revenue generated by the retail video game market in the U.S. is now back below 2007 levels.

Should the contraction from 2011 continue at this pace, annual U.S. retail video game revenue in 2012 could fall below the $12.6 billion figure from 2006, the first full year of Xbox 360 sales and the launch year for the Nintendo Wii and Sony PlayStation 3.

Given how loaded the latter half of the year is, with both software launches and a new console launch, I still consider that event unlikely, but it does give some perspective on where things could go without a turnaround.

Console Blues

The high definition segment of the market had the best hardware news for the month, if I can call it that. According to several analyst comments, it appears that combined sales of Xbox 360 and PlayStation 3 consoles down 18% year-over-year. Microsoft hasn't seen hardware sales that low (on a weekly average basis) since May 2010, nearly two years ago, right before the launch of the current Xbox 360 S model at E3.

You have to go back to July 2011, right before Sony cut the entry-level PS3 price from $300 to $250, to find a month in which PS3 sales were as low as they were in April 2012.

As a result of the weakness in hardware, every major console is down this year compared to last year. The figure below demonstrates this for the Xbox 360, PS3, and Wii.

In the face of the persistent declines, Microsoft has signaled its intentions: a $100 Xbox 360 and Kinect system with a two-year Xbox Live Gold service plan. While this deal is currently restricted to fewer than 20 Microsoft Stores in the U.S., I expect this to be just the test phase, with a formal roll out in other retailers later this year. In a conversation about April sales, Wedbush's Pachter called the $100 deal "Microsoft's price cut" and said he didn't anticipate any other price adjustments for Microsoft's systems until closer to the holiday season.

After a disastrous end to its fiscal year, Sony has restated its intentions to strengthen its video game segment and I don't see any way to make progress in that area without increasing its hardware base and driving demand for software and services. Moreover, Sony has estimated it will increase its hardware sales over last fiscal year, and that certainly will not happen without a price cut or some other dramatic change.

Two months ago, I predicted that Sony would move to cut its price in April and that Microsoft would cut its prices shortly thereafter. Clearly I was wrong, and the new pricing plan by Microsoft is one that I did not expect. However, I still think that Sony needs bold moves to grab as much marketshare as it can, and would prefer it to announce a price cut in June at E3. The ongoing discounts and gift card bundles at retailers suggest a cut from $250 to $200, whenever it happens.

Pachter disagrees, and says that the PS3 will get its price cut by September. Certainly history is on his side, as Sony has announced a price cuts in August 2009 and August 2011. Moreover, Sony has shown immense patience all generation while cutting its hardware prices.

On the issue of pricing, I would note that the average price of the Xbox 360 had been declining from about $300 in January to just below $260 in March. In April, with the introduction of the $450 Kinect Star Wars hardware bundle, the average price jumped up to $325, according to data provided to me by the NPD Group. Based on last month's average price, it seems likely to me that 70,000 to 80,000 units of the Kinect Star Wars bundle were sold during April.

The average price of the PS3 in April dropped again, this time to $262, which I believe should be a record low. Without the addition of the Kinect Star Wars sales, I think that the Xbox 360 and PS3 could nearly have been tied for hardware sales in April.

Handheld Weakness

Handheld software also demonstrated significant weakness during April, both for Nintendo and Sony. Of particular concern is Sony's PlayStation Vita (PSV), whose sales fell below 100,000 units for the month. In terms of units per week, I estimate that PSV hardware sold at approximately half the rate it did in March, probably below 20,000 units per week.

(Specific PSV sales information is not available for April, from Sony, the NPD Group, nor from analysts.)

When examining the PSV launch sales data, I expressed a great deal of skepticism about Sony's handheld. Two months on, I have not changed my mind.

It is my estimation that consumers of all stripes now expect handheld devices to have a great selection of software available at launch. The PSV could have been such a device, with the full PSP software catalog available to consumers, but only half of all full-sized U.S. PSP games are available online and not all of them are compatible with the PSV.

Even if the entire PSP catalog were open to PSV owners, the legacy pricing structure for that software on the PlayStation Store is out of step with the pricing of software in the distribution channels serving iOS and Android devices.

The inexpensive software line that Sony launched specifically to appeal to this cost-conscious segment of the market, PSP minis, is still not completely compatible with the PSV in the U.S. On top of that, the PSV still won't run the PlayStation 1 software available on Sony's PlayStation Store, even though the device is clearly powerful enough to do so.

To make matters worse, new titles designed specifically for the PSV are still trickling into retail and the online store. These titles are priced between $20 and $50, with the majority falling in the $30-$40 range.

Truly, Sony is on the right track, building a truly modern software distribution system with what I hope will be a progressive pricing structure. However, just as quickly as they are moving on their own, the rest of the market is advancing independently and Sony could still be left behind, another casualty of the ongoing disruption fostered by insurgents like Apple and Google.

Personally, I'm still trying to make the case for dropping $250 on the PSV for myself, and I'm hard-pressed to make it for anyone else. Just ask Activision Blizzard what it's doing with its money. The system has been out for three months already, and it has not published a single title for it (though it announced Call of Duty for Vita last year at E3).

I'd like to make a very brief comment about the state of Nintendo's older DS line of hardware. At the end of this week the Nintendo DSi and the Nintendo DSi XL will receive price cuts to $100 and $130, respectively. (Presumably there is practically no further Nintendo DS Lite hardware stocked anywhere.)

This situation reminds me of the spring 2009 price cut that Sony's PlayStation 2 received from $130 to $100. That price cut helped prop up sales for the aging console through one more Christmas season, and 12 months later the system's sales essentially fell off a cliff.

The DS price cuts are the final send-off for the record-setting handheld, and I expect by this time next year its contributions to the market will be minuscule. After Christmas, Nintendo will effectively be a single-handheld system company, putting all of portable software efforts into the Nintendo 3DS.

The figure below shows a brief recap of the growth of the Nintendo DS base in the United States, with some notable milestones along the way.

By the end, I expect that the three Nintendo DS models will account for over 53 million units of hardware in the United States.

Later this week, I want to take a closer look at the software market and then separately the market outside retail. At retail, I will show data that demonstrates that the U.S. is not alone in seeing breathtaking contraction in software sales and that publishers are themselves partly responsible for the contraction. Outside of retail, I think the latest figures from the NPD Group actually carry some hidden bad news: the digital market may be contracting too.

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Zan Toplisek
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Activision Blizzard actually announced at last year's E3 it's developing a Call of Duty title for the Vita...

Kris Graft
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Thanks Zan, you're right. Details are slim, but AB did say that CoD for Vita is coming eventually. We've updated the article.

kevin Koos
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I dont know about a ps3 price cut. I get the idea is to drive game sales but you have to sell around 5 games to just break even on the $50 you gave up. At this stage are you really going to drive that much more in software sales? If someone waited this long for a ps3 and now the $200 price is affordable I don't expect them to buy $300 worth of games anytime soon. Probably buy a ton of used games, at least that is what I would do. I get Sony signaled this with increased console sales, but maybe they are going to release a stripped down console for $199 where they can still make a profit...

Leo Johnson
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I am not surprised at all that sales are down. The gaming industry has completely abandoned the gaming platform that gave them life. People like me (and we number in the millions) who use a PC. I bought a Wii and never use it.
The gaming industry has decided that the money that it cost to program the controls for PC was not worth doing. The best example is Diablo III. They came out and said they did not want to spend the money for making the game simple for PC users. Ok you don't need my money.
You got what you asked for.

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If you buy a device ad you don't use it, why nor sell the device to someone who will?

k s
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I personally hate playing with keyboard and mouse (though keyboard alone is fine for turn based games) and so I design all my games to work with the gamepad and not the mouse and keyboard. That really is my single biggest issue with PC as a gaming platform.

John Flush
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@A W - maybe he doesn't like supporting second hand sales?

As for Leo, I don't agree that abandoning the PC is the problem. Abandoning the customer is the problem.

RPG's aren't RPG's anymore, everything is an action game.

Single player games aren't single player games anymore, you have to tack on multiplayer. Don't forget you also need to tack on achievements or trophies reminding people that play single player they are doing it wrong and will never complete it 100%

You have DLC that 'extends' the game - some consumers see it for what it really is though, double dipping for the story/experience that should have been delivered in the first place.

Add in the fact the consoles are old. The experiences are the same-old same-old (one of the reasons I think JRPG's are dying, they all feel the same with the same character types). There is nothing to get people talking technology wise... of course people are moving on.

Doom and Gloom though? probably not, most people are still going to play their 3 or 4 games a year and ignore the rest. Maybe instead of appealing to everyone you should appeal to the people that play more than the mainstream games?

Ahmad Daniels
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When I look back at the top selling games of that year they were like mostly Wii games and GTA. I'm sure that the Wii kind of settling and not doing anything else to really get the new found gamers excited plays a big role in this.

Bob Johnson
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IT has been all downhill for awhile now. End of cycle.

On the handheld front going forward probably will be a smaller business. 3ds is doing really well in Japan by all accounts, but not so great in Europe and only ok in the US. Vita having a tough time even in Japan without software. No longer has the Monster Hunter exclusive either.

remains to be seen if Japan is a leading indicator or not as to the handheld's chances here in the US. It has been a leading indicator in the past. Meaning eventually the success or slowdown shows up first in Japan then in US/Europe.

Still I do wonder one thing. Nintendo generally is regarded as making quality games. They generally are regarded as having a stranglehold on the kid's market. Kids though are generally ...I don't think they see the quality as much as adults. And so if parents see a kids is just as occupied with a $1 games as a Mario Kart 7 then...what happens?

But I do think quality has a staying power in any market even if it isn't sometimes riding the trends of the day.

Wii U should give boost to year's hardware numbers if only because there are enough early adopters who will line up to purchase it during xmas season.

Bob Johnson
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I also think that we are at crossroads as far as consoles go. But not because those gamers are going to play games on iOS instead.It is because of costs.

A box to deliver 10x the power of the 360 is going to cost $$$$. That means fewer customers. At least the rate or purchases will be slower.

The budgets of games that take full advantage of that power are going to cost a lot more $$$$$. That means fewer games that are going to take that risk and higher price points. That also translates into fewer customers.

Yes there can be digitally downloaded smaller games. But when your phone or tablet or cheap laptop already has the power to play those games then why buy a $400+ console to play the 1 or 2 AAA games that you might want to play? That purchase proposition is going to be tougher next gen.

On top of it, 10x the graphics of the 360 might not look 10x as good because we are getting into good enough territory where the images are already pushing photo-realistic. It doesn't help that we know it will take a good year to get a good game on the next 360 or PS3.

That's why a company like Nintendo is attempting to give customers a new way to play with their Wii U lcd screened controller. Is is enough? Not sure. But they have to do something to set themselves apart and to avoid some of the obstacles above. They need to set their gaming experience apart from not just other consoles but from these tablets, phones and everyday laptops etc.

So even cheaper games with lesser graphics will be unique on the system.

Travis Flynn
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There are too many issues conflated in an article like this. They tend to conflate declining overall sales across the market with declining health of the market. Additionally, they also tend to focus on retail as if that's the barometer for health, without recognizing that gaming is shifting to digital distribution quite rapidly. Third, consoles have become much more diversified, offering non-game services directly to the TV which many people use their consoles for.

It's really no surprise that the market is contracting from what it was in 2008. The problem though, is that overall market size isn't a good indication of the health of the market. A better indication would be total profits year over year, rather than just net revenue.

Companies can cut releases (And they have) and end up making more money than in the previous year. While overall sales will be down, even for a single company level, not having the dev cost of 4 or 5 games, and instead focusing it on 2 or 3 can be a significant boon.

Ironically, perhaps, this neglect opens up the possibility for things like crowdfunding for niche titles, which has seen explosive growth this year.

Add to that the fact that we're in the longest console cycle ever, it's no surprise that console sales have dropped off, and it's doubtful that a price cut will save them because a large number of people who wanted the product have already purchased them. Remember, consoles aren't apple products, it's not like they're getting yearly revisions to inflate hardware sales. Perhaps that's an option the big 3 should consider?

The market is extremely health, and it is just weird to see all this doom and gloom.

k s
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You make a really good point about profit versus revenue.

Michael Rooney
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@"Add to that the fact that we're in the longest console cycle ever, it's no surprise that console sales have dropped off, and it's doubtful that a price cut will save them because a large number of people who wanted the product have already purchased them. Remember, consoles aren't apple products, it's not like they're getting yearly revisions to inflate hardware sales. Perhaps that's an option the big 3 should consider?"

I think this is an oft overlooked point. Maybe not overlooked, but definitely not shown with the gravity it deserves.

The fact of the matter is the consoles have all sold really well. This is the most successful generation we've had, and each console is selling well rather than the typical single success, 1 break even, and one failure.

Sales by generation in millions (source wikipedia):
145.99 (N64/PS1/Dreamcast)
201.14 (PS2/Xbox/Gamecube)
226.95 (Wii/PS3/360)

Imo it comes down to dated hardware raising questions of whether or not a current gen console is worth it at any price for a lot of consumers.

It's also misrepresented in that it doesn't count the market growing with phones and tablets being a viable market for games now. It's no surprise to me that handhelds are dropping off.

Michael Rooney
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If you want it grouped that way then the current generation still results in more consoles sold, and the standard deviation of the last generation is even larger, making this generation more generally successful.

Honestly, you mustn't have been paying attention if you think nobody is making money this generation. Microsoft has been in the green for a while in their gaming division with the exception of this last quarter. Last year they posted a $1 billion profit in their gaming division. Xbox was up 25% in Q2 despite being down 21% in Q3 (25% of Q2 > 100% of Q3).

Sony is harder to track because the same division that handles PS3 handles their TVs, and Sony's TVs have been doing terribly. They did sell more in their Q3 (Sony and Microsoft have staggered quarters. Sony's Q3=Microsofts Q2) than they did in the previous year.

Really it's not nearly as bad as it's made out to be.

I think a lot of people are blowing this out of proportion. Nintendo is finally falling in sales which was inevitable, and handhelds are taking a huge hit from cell phones; these were both inevitable. The console and PC are both doing really well for a spring that's essentially had 1 big title in Mass Effect 3 compared to last year when we had Dragon Age 2, Crysis 2, Portal 2, Little Big Planet 2, Killzone 3, and Dead Space 2 in the same time period.

Michael Rooney
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@"No, last year their profit was $32 million
sion_S ees_132_B

From your own article, "During the full fiscal year, the company took in a profit of $1.32 billion, up from $618 million in 2010. The division also saw an overall revenue increase, again reflecting higher Xbox 360 platform revenue."

SEC filings from Q4 2011:

That looks a lot like $1.32 billion to me.

Bob Johnson
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The other disturbing thing about the console space is new generations in the past brought new IP.

I wonder if this generation has the least new IP ever? I get that feeling, but haven't seen any hard data.

Next generation should even be worse because of the size of the budgets needed to make a new AAA game.

Thus more sequels. NOt automatically a bad thing, but bad if that's the only thing or the vast majority of things.

Also here's another phenomena working against next-gen consoles. The time it takes to make games these days and then polish them up and refine them.

I think we get to a point where, for example, an old yet very refined online shooter is preferable to the sequel even though the sequel has better graphics because the old shooter has just had so much work put into it that it would take the new shooter years before it gets to that point of refinement.

You can look at something like WoW and see how tough it is for a new MMO to come along. WoW has been refined so much over the years that anything coming out now either has to very different or a next-gen leap in order to stick. I mean who wants to start over and experience the same growing pains for something that at its core isn't much different than WoW?

Although on the console side the big thing going for it in terms of online shooters is they can shut down the old servers and "force" players to upgrade to the latest hardware.

Johnathon Swift
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What, you mean the consoles that have reached market saturation aren't selling well anymore? I mean, it was bound to happen, it had to, that's part of why we even have console cycles!

And yeah, of course the year to year sales of software have contracted. There's very few games that are being released, and those that are, well they're all of the same genre. More shooters!

Jonathan Murphy
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Bad economy, high game prices, mass lay offs, high budgets, next gen consoles around the corner. This recipe was obvious. But that's for retail. Other areas such as digital, indie have seen growth.

thay thay
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Console prices are too high. Kinect is keeping the price of 360 high. The arcade should be $150 by now. Sony may not be able to afford to drop PS3 price.

Leon T
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These results are not surprising. The industry is only supporting about half of all the consoles out there with the Wii support all but gone. Then the handhelds are going through a transistion which usually means lower harware/software sales. Also this is pretty much the end of this cycle so unless some market growing breakthrough comes out it is all down hill until new hardware launches and gets some steam going.