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Could digital sales also be contracting?
Could digital sales also be contracting? Exclusive
May 18, 2012 | By Matt Matthews

In my last two columns this week, I've detailed some of the specifics behind the declining retail video game market in the United States, focusing on the lagging hardware segment and the collapse in casual gamer engagement on traditional game systems. Now I want to get to the picture for the market outside of retail, specifically the digital content market.

The NPD Group has been refining its methods for capturing data about the sales for video game content being sold outside the new, packaged retail market. For over two years they have been periodically publishing their estimates for this consumer spending, and I believe are now including it in their U.S. Games Market Dynamics report. The next report, about the first calendar quarter of 2012, is due out next month.

In terms of public data, the NPD Group only reports two types of numbers. The first is the total for new, packaged video game content – the physical discs and cartridges and cards on which games are sold. The second type is, quite simply, everything else. That includes “used games, full game and add-on content downloads, social network games, mobile games, rentals and subscriptions.” For the sake of brevity, I'll refer to this second category as ex-retail.

If you read that description of ex-retail carefully, you'll notice that the data includes money spent on non-physical game content and two specific types of physical content, rentals and used game sales. That makes this a little more tricky, since we don't have just the digital part.

Now, let me outline the numbers we have. According to my records, the information released by the NPD Group shows that the ex-retail sales in the first quarter of 2010 were approximately $1.68 billion. In the first quarter of 2011, that figure rose to approximately $1.85 billion, an increase of 10%.

The final figures for the first quarter of this year aren't out yet, but the preliminary estimates that have been released for individual months are $350-$400 million in January and $550-$600 million in February. (For the sake of completeness, the figure for April was about $350 million again.)

The only figure missing is for March, but the data we have already is troubling. According to these figures, total ex-retail spending was $0.9 - $1.0 billion for the first two months of 2012.

Therefore March would have to come in around $850 million to $950 million in order for this segment of the market to remain flat year-over-year. On a weekly spending basis, consumers would have had to increase their spending by over 35% just in the month of March, just to keep 2012 even with 2011.

If the spending rate in February were to continue through March (i.e. if we scale the 4-week total for February up to a 5-week total for March) then under the most generous assumptions ex-retail sales for the first quarter of 2012 would come in around $1.75 billion, a 5% decline from the 2011 figure. I've visualized that possibility below.

That's the best reasonable case, I believe. If sales in March were more like January or April – both of which had averages of about $90 million per week – then the industry could end up with a mere $1.45 billion in ex-retail spending in the first quarter of that year. That's not just a 20% decline from last year, but even comes in below 2010's figure.

Since there are two physical product parts to the ex-retail data, could they be driving the decline? It's possible, but I think it's unlikely.

Rental sales are, I believe, a relatively small part of the ex-retail figures. If someone knows of solid data to the contrary, I'd love to hear it.

As for used game sales, GameStop just reported that used product sales were down only 1% in the February – April period this year compared to the same period last year. I believe GameStop controls 80-90% of the used game market in the U.S., so I don't think that is the source of the apparent decline in ex-retail sales.

Another possibility is that the old figures I have are out of date, and the NPD Group has revised but not restated those results publicly. Even the new retail sales data that the NPD Group reports contains minor revisions from time to time, so it would not surprise me to see revisions in their ex-retail data. And, it is clearly the case that capturing ex-retail consumer spending habits is more difficult.

Regardless, I want to at least raise the possibility that there is some contraction in the digital market. Certainly, we're seeing generally increasing digital revenue in the quarterly reports from the big software publishers, but the trend need not always be up and it certainly won't continue forever.

For example, consider Electronic Arts and Activision Blizzard, the two biggest third-party publishers in the industry. In the first calendar quarter of 2012, Electronic Arts reported non-GAAP digital revenue of $425 million, up 58% from the same period a year earlier.

However, in the first quarter of 2012, Activision Blizzard had non-GAAP digital revenue of only $298 million, down 34% from the first quarter of 2011. I've put these results into a figure below to make the comparison more direct.

One can easily understand why Activision Blizzard is taking in less revenue right now than it was a year ago, because much of that revenue was actually recorded in late 2011 when consumers were buying Call of Duty Elite subscriptions. That is, instead of spending money on map packs in 2012, many consumers opted to pay for Call of Duty Elite subscriptions when they bought the game at the end of 2011.

So that means that the digital revenue at the end of 2011 was higher, right? No. In fact Activision recorded less digital revenue during the quarter in which it launched Call of Duty: Modern Warfare 3 and the Call of Duty Elite service than it did during the quarter a year earlier when it launched Call of Duty: Black Ops.

This isn't to say that digital won't continue to be an area of growth in the coming years; in fact, it surely will be the fastest growing segment of the market. And I have no doubt that Activision Blizzard's digital plans will lead to generally higher digital revenue for the company.

But it would be a mistake to assume that everyone's digital revenue is always going up, and it could very well be that the entire market for all video game content contracted in the first quarter of 2012.

We'll know more in June when the NPD Group reports its official first quarter figures for the full market, and I'll be sure to revisit this issue at that time.

(It is my understanding that the non-GAAP digital revenues reported by the publishers are the actual money they take in during that period for those goods and services. The publishers also report GAAP revenue, which takes into account revenue deferral over periods of time during which the company assumes that the consumer is realizing the value of the product sold. So, for example, a DLC pack sold to a consumer could take in $15 at the time of sale but the company may defer some of that revenue and realize it over a longer period, say 3-6 months after purchase. The non-GAAP revenues are therefore the data most comparable to what I believe the NPD Group is measuring.)

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Phil Nolan
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I assume streaming games fit in the "new, packaged video game content" category? I think every new game I bought in the last year was streaming.

Joe McGinn
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More importantly, core free-to-play - League of Legends, World of Tanks, TF 2 et al. It seems to be the fastest-growing digital sales sector. Without estimates of their revenue, any discussion of the scope of the retail marketing is meaningless.

Michael Rooney
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I'm curious what access NPD has to the primary digital retail channels. I know they have access to many retail channels, but the most popular digital distributors don't really have a relation to retail (Valve, Sony, and Microsoft).

For me, the majority of my game purchases over the last 2 years have been off of Steam, and it has affected my purchases of physical goods as well as goods on other digital platforms. Knowing Valve tends to not release their Steam sales numbers, it feels like there is a much larger margin for error in their reports on those sales.

"During 2011 [Steam] grew to offer over 1,800 games to over 40 million accounts. Year-over-year unit sales increased by more than 100% for the seventh straight year." Numbers not to be ignored when considering "contraction" of anything. Especially when it could be the cause of the contraction everywhere else.

Tom Baird
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But the digital marketplace for a console isn't the only (or even primary) way of getting console games.

While it's only one example:

Super Meat Boy released on Later on Steam than Xbox, and still it's Steam sales doubled it's Xbox sales. Console platforms are definitely larger, but that doesn't mean their Digital components are (not all Xbox owners purchase XBLA titles, and not all Xboxes are still seeing regular purchases/use).

Jakub Janovsky
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2Christian Keichel: 40+Million is number of active Steam accounts (Acitve Steam account = at least 1 game and being active in past 30 days).

Michael Rooney
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@Christian: The rest of the article has some pretty significant stats also.

"during the 2011 Holiday Sale Steam's simultaneous user number eclipsed the 5 million player mark."

From Valve's website (35 million active users):
"Steam is our direct pipeline to customers. It began as a little sleeper project—a handy tool to update Counter-Strike—and morphed pretty quickly into the world's largest online gaming platform. Steam guarantees instant access to more than 1,800 game titles and connects its 35 million active users to each other—and to us. Through Steam, fans can easily buy, play, share, modify, and build communities around Valve products as well as titles from other independent game studios. Steam is available in 237 countries and 21 different languages."

@"Super Meat Boy released on Later on Steam than Xbox, and still it's Steam sales doubled it's Xbox sales. Console platforms are definitely larger, but that doesn't mean their Digital components are (not all Xbox owners purchase XBLA titles, and not all Xboxes are still seeing regular purchases/use)."

That's even a bigger reason I'd question NPD reports for digital sales. Steam is a huge platform, and if it's sales aren't being included then the report is going to be pretty skewed toward retraction (my original point).

We also should start including mobile game downloads. They are part of the same market handheld games are after all, and their part of the market is exploding.

Michael Rooney
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@Christian: My original comment was just stating that I had no idea what access NPD had to those channels. For example, NPD had no access to Walmart's sales data until last year.

I'm sure NPD is estimating Steam sales, but Valve hasn't released many numbers for them to establish good estimates off of. As of last year, Steam has seen 100% yoy growth for 7 years. It's a huge piece of the market to just be guessing at; there is probably a huge margin for error that the retail estimations don't have.

Nooh Ha
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"I'm curious what access NPD has to the primary digital retail channels."

As far as I understand it, they dont have access to this data. I believe that their market size info for ex-retail is purely based on surveys. i.e. asking several thousand gamers, "how much did you spend on PC downloads in the last month". Using this methodology you would then combine it with "total gamers in the US" figures to extrapolate total market size.

As market sizing methodologies go, it is arguably the most flawed and prone to inconsistencies. Put simply there are so many points of potential of weakness (e.g. respondents understanding the questions incorrectly, having inaccurate recollection of their personal spending etc.) that all get magnified with the extrapolation process.

Peter Matiss
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Based on IDG's data, the video game rental market is mostly a North American phenomenon. So much so, IDG does not report video game rentals for Europe, whereas it is estimated to be a $380 Million business in the US. According to my European contacts, the European rental market is limited to Blockbuster.

It might be worth taking a look at US vs. Europe to size the impact of Rental on your analysis. My hunch is that we are not getting a complete picture from 3rd party data reports.

Give me a shout if you have interest in discussing the topic further.

Kel Skye
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I'd be more inclined to support Blizzard through digital sales if they didn't region price Australia. Same goes for a lot of games on Steam - that they are priced higher digitally than they are in stores is a reason to avoid both until the game inevitably goes into the bargain bin.

k s
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That isn't cool, they should just account for the exchange rate and no more. I used to love blizzard but over the years since SC I I've lost a lot of respect for them.

wes bogdan
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I couldn't imagine renting game because eithei i : demo it/trial,wait for $29-under bargin bin to set in or buy it right when it releases . I couldn't imagine going to blockbuster to rent something with free demo's avaible online at psn or xbl heck even 3ds has some.