There's still plenty more to be said about this declining market. Let me give a couple of examples of just how bad it has gotten. In 2007, five years ago and the first full calendar year for the Nintendo Wii and Sony PlayStation 3, software sales across the entire U.S. retail market crossed the 50 million unit mark sometime in April.
In each of 2008, 2009, and 2010 the 50 million unit software point was crossed sometime in March. That is, software sold more briskly.
But in 2011, it fell back into early April, indicating a significant slowdown. This year, unit sales just crossed 51 million units at the very end of May. That's edging away from slowdown and closer to collapse.
Year to date, the software unit sales are 30 percent off from the level at the same point in 2011 and over 40 percent down from the peak of the retail market in 2008. The chart below shows the trend in retail software sales through the end of May for each year since 2007.
At least part of this accelerated degradation has to be attributed to the number of active platforms on the market.
Last year at this time, you could make an argument that there were three relevant consoles - Microsoft's Xbox 360, Sony's PlayStation 3, and Nintendo's Wii - but this year the Xbox 360 and PS3 are far and away generating the most software revenue.
In the past 12 months, for every $50 that the Wii generated in software sales, the PS3 generated $66 and the Xbox 360 generated over $100.
For the sake of comparison, had we done the same measure a year ago, we would have said that for every $50 at retail in Wii software, the PS3 was moving less than $45 in software while the Xbox 360 shifted around $65.
With each month that passes, with fewer and fewer releases, the Wii is simply waiting to be replaced by the Wii U later this year.
Likewise, there is a similar situation going on in the handheld market. Last year's PSP software revenues are barely being replaced, and slightly supplemented, by software revenues on the PlayStation Vita. The Nintendo 3DS is slipping into the place formerly occupied by the Nintendo DS, but it still needs a larger base and more core Nintendo titles to truly fill that gap.
What's going on here? The primary challenge facing the traditional video game industry today is that it is losing active consumers faster than it is adding new ones. This is an idea we've heard before, but most recently from Michael Olson and Andrew Connor of Piper Jaffray, who wrote that casual console gamers "are not actively using their consoles anymore and are therefore no longer included in the total addressable market for future console-based video game sales."
Consider the following figure, which shows the number of PlayStation 2, Xbox, and GameCube consoles sold in the U.S. between October 2000 and April 2007, and compares it with the Xbox 360, PlayStation 3, and Wii systems sold in the U.S. between November 2005 and May 2012. These are comparable 79-month periods of time from the beginning of each generation.
This isn't a perfect comparison, since the time periods overlap by about 18 months, but the differential is pretty clear: approximately 30 million more systems have been sold in a comparable period this generation, than last.
Yet, during May 2012, an estimated 5 million units of software were sold for those three platforms. That's far fewer than 10 percent of the base of hardware receiving new software, even if we allow for a generous amount of hardware failure. If only 1 in every 15 of the systems in homes are actually engaged in the video game market, then the audience for brand new $50 and $60 games is far smaller than the actual base size would otherwise suggest.
I've spoken before about how I believed that Wii consumers in the U.S. were active for a short period - maybe six months - after they purchased their consoles, but then went dormant again. So when Wii hardware sales were white hot for a couple of years, the software sales followed at an equally torrid pace.
Software and accessory bundles, like Wii Fit, Wii Play, and Guitar Hero, helped fuel these sales, but eventually consumer demand was sated. If anything, Wii systems appear to have become popular as Netflix clients if not gaming systems, and it will finally crawl across the 40 million system line just as the Wii U launches later this year.
There is no one reason that the Wii market collapsed, but we can see the effects clearly: hardware, software, and even accessory sales have dried up. If my estimates are correct, Wii software sales were the weakest since the system launched in November 2006.
The remaining systems, the Xbox 360 and PlayStation 3, now appear to be on a similar trajectory. Hardware sales are falling, and have been for several months. For example, the Xbox 360 has shown year-over-year declines in hardware sales for nine of the last twelve months. The same is true for the PlayStation 3, although the specific weak months are different.
Except for the Nintendo 3DS and PlayStation Vita, hardware sales are down so far in 2012 for every other platform. The figure below shows that these aren't modest declines, either.
In a similar way, software has been down on the HD platforms in seven of the last 12 months.
To tell it chronologically, each significant source of revenue has collapsed over the past few years. The music games died in 2009, then the PlayStation 2 finally became irrelevant in 2010, and then the Wii and Nintendo DS began final descent in 2011. Now the two HD platforms appear to have peaked, and are beginning to decline as well, and games that are typically big on these platforms like Call of Duty are also beginning to wane. Meanwhile, the Nintendo 3DS and PlayStation Vita haven't begun to substantially replace the consumers and revenue streams that have fled.
To return the industry to growth, it will have to reverse trends that have been in motion for several years. It can try to wring new revenue out of the existing base, or it can entice consumers to buy more systems and then sell them as much software as it can while they're active.
I've been advocating for a while now that Sony and Microsoft drop the entry level price for their consoles, and attract new consumers. Microsoft, in particular, hasn't budged from its $200 baseline system since it announced that price back in September 2008. Sony just reached $250 in August 2011, which means the PS3 has only dropped $50 in 22 months.
Microsoft will clearly win over some new consumers with its $100 console bundled with a two year Xbox Live Gold subscription, due to roll out to GameStop and Best Buy this month. I'll reserve more comment on Microsoft's situation for later this week, when I have a column dedicated to the Xbox 360 and Kinect.
For Sony, the situation is becoming more serious. Despite launching a year after its prime competitor, the system has failed to consistently distinguish itself technologically. Sony-bred games like Uncharted or God of War are top-line exclusive PS3 titles that push the console's complex hardware, but consumers have continued to vote month after month for the Xbox 360.
More alarmingly, Microsoft is achieving this while selling its system at a higher average price. The Xbox 360 has sold for $287 on average so far this year, according to data provided to me by the NPD Group, while the PS3 has sold for about $269 on average. For the PS3 that's almost exactly a $50 drop from where its average stood prior to the August 2011 price cut.
To my mind, there is clearly a market out there for a console more advanced than the Nintendo Wii at a price significantly below $200. Consumers have $200 to spend on technology - sales of iOS and Android tablets tell us this - but clearly consoles are not making their value argument as well as those other devices.
I don't think adding more value - in the form of bundled games or services - is going to make the case at the current price levels. It makes more sense to me, just from the perspective of gaining active users, to get in at a lower price.
The longer Sony and Microsoft wait, the harder it gets to justify the cost for the system. Yes, consumers are dropping $500 and more on Apple's iPads, but these devices are cutting edge. When you tell that same consumer that they can have the very best living room technology from 2005 for $200, it simply doesn't pass muster.
Microsoft may feel it has made its price cut, with the new $100 hardware plus service offering. Will Sony wait until August again to make its next cut? If so, I fully expect the company's PS3 sales to drop to below 100,000 units for the month of July, a level not seen since the summer of 2007.
Later this week, I'll look more closely at the individual titles in the software sales for May 2012 and I'll also dig into what we know about Microsoft and its Kinect business. Stay tuned.