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Growing digital game sales not enough to compensate for weak retail
Growing digital game sales not enough to compensate for weak retail
July 2, 2012 | By Eric Caoili

July 2, 2012 | By Eric Caoili
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Digital game sales are growing in the U.S., but those small gains weren't nearly enough to make up for plummeting software sales at retail during the first three months of the year.

The NPD Group's new "Q1 2012 Games Market Dynamics: U.S." report shows that console and PC game sales across retail, digital, and used/rental revenues reached almost $3.4 billion in the first quarter of the year, compared to more than $3.8 million during the same period in 2011.

Physical game sales make up the bulk of that $500+ million deficit -- some forecast that physical software revenues are performing so poorly this year, they could hit a six-year low in 2012. This category generated $1.4 billion during Q1 2012, down from $2 billion year-over-year.

Sales for digital content (full games, DLC, subscriptions, mobile games, social games) are growing, but not by nearly enough to offset that drop. Digital game revenues grew by 10 percent during the first three months of the year to $1.38 billion.

NPD did not publish sales for the specific digital sales format last year, but it said that combined revenues for used/rental games and digital content reached $1.85 billion in Q1 2011. During the same period this year, those two categories generated $1.9 billion (used/rental sales fell by 5 percent).

This increase in sales for the digital format supports NPD's recent findings that consumers in the U.S. are becoming more receptive to downloading or buying their games online due to lowered barriers of entry.

The firm also published data for three of the biggest European markets -- the UK, France, and Germany -- showing that used/rental sales in those countries came out to $300 million, while digital format sales brought in $959 million in sales during Q1 2012.


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Comments


William Johnson
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I had my theory that digital was just a scapegoat for retail. Looks like this helps confirm it.

We grew up in an age of physical media, and people have a powerful nostalgia for it. It'll probably be the next generation of people (Generation Z?) that really adopt cloud gaming and pure digital distribution over the boxed copy. They'll grow up with Steam, the App Store, Netflix, etc, and so won't hold any sentimental value for physical goods.

So, what I'm trying to say, right now, physical goods matter. Most people still buy their goods from local brick and mortar stores. And there are a lot of factors killing the games industry.

I think the biggest factors are anti-consumer policies. Things like DRM, online passes, DLC pay walls (like all the DLC characters in fighting games), shorter games at higher prices, and other ways publishers try to kill used game sales. By hurting the value reselling games have, what that means is there is less money in the economy, which means people are going to buy less. Publishers constantly try to push consumers around to see just how much they can get away with, and I'm thinking consumers have had enough. So they left the hobby.

You need to treat your customers with respect, and right now, I don't think most major publishers do that.

kevin williams
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Great observation - I go for a scapegoat and a lifeboat (a lifeboat for some of the traditional publishers to try and repeat their tired old tricks in a new format).

The situation I am looking forward too is when the duplication / distribution model goes past the tipping point (not enough support to carry on) - then we find out the reality of what a actual AAA costs and where the rest of the profit has vanished too over the years!

Publishers like the music industry underestimated their customers till its too late.

Patrick Davis
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Anti-consumer policies are definitely a cause. I skipped purchasing 3 games in the last year because of intrusive DRM, and 2 because of cutting content for DLC. It adds up pretty quick when you spread that over the gaming community as a whole.

TC Weidner
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DRM and the like dont help, but lets be real, the world has been in a recession for years now. I dont care what some economic textbook definition is, when people have less household income than previous years, its gonna be discretionary income that gets hit.

William Johnson
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@TC Weidner

That's true, but people do "need" (I use that term loosely) entertainment. I think that's one of the reasons a lot of people thought video games were recession proof, that there use to be a perception of quantity of entertainment hour per dollar with games.

Like movies are now $10 for 2 hours? That's $5 an hour.

Games last gen were $50 for 20 hours. So that's $2.50 an hour.

Games are now $60 for 10 hours. So that's $6 an hour.

I know its some what debatable if games really were on average 20 hours last gen, but I'm going off what I recall my experiences use to be.

Basically, it looks like we're getting less bang for our buck now. And I know there is also a debate about quality vs quantity in here as well. But quality is so subjective it'd be impossible to really measure.

Jeremy Alessi
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How is the NPD tracking digital sales?

Also, even if the statistics are accurate I'd be much more interested in the distribution of that money. For example if it's 20 million instead of 40 million total but it's going into 100 developers pockets instead of Bobby Kotick's.

That signals a healthier economy overall. It might not be the case but it'd be interesting to know.

Jeremy Alessi
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I think there are a number of individual or small developers who've made more at this point. Like has DragonVale grossed over 100 million or what? If not they've got to be close. Not to mention the hundreds that have grossed over a million...

Also, NPD doesn't account for things like AdMob etc...

There's more money in games now than there's ever been, there's just no easy way to measure it anymore, might as well be attempting to calculate the Internet's sales.

In simple terms, the game has changed. Customers aren't paying $60 a title to a select few, instead they're playing for free or cheap and spreading the money around to a multitude of developers from all around the globe. It's a much healthier more diverse eco system.

Marc Schaerer
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The data lack one major factor and thats the shift towards devices outside of NPDs statistics, namely mobiles.

Its surely simple to say it does not offset it if you forget

1. the billions flowing towards Google and Apple AppStores, but if you take them into account one has to start realizing that the reason the data got worse is just that people now finally have an alternative to the 'monopolized' control over the games market, no longer publishers which impacts the sales figures of bad games which in previous days might still have sold but are now just ignored in the favor of another $3 game on your iPad or whatever.

2. the 'success' of the game publishers fuck up steps against the second hand market. You can not sell any pc game anymore as nobody beside you can use it, DLCs on platforms are bound to your hardware / account (consoles, pcs) and so on.
GameStop surely would be the one who could confirm this and a pretty precise number on what was lost on the second hand market due to growing efforts of killing it.

Gone are the day where the customer had any right, at least Steam leaves us with a tad of rights unlike Origin which has an EULA that just shows the same rotten wording their services have had as track for years (shutting down servers cause there was no large enough buzz for the game / on the server anymore and alike)

kevin williams
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I am interested that there is a perception that the sales slump is a little blip that will vanish once the new Gen-8 hardware appears!

The DLC issue is hiding a much bigger issue that the traditional consumer games is holed below the waterline, and it will take a lot more than a new business model to hope to regain the lost ground!

I have to wonder if denial after E3 and the recent studio closures will grow as the reality may be too painful for the conventional media/trade to comprehend?

Tadhg Kelly
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Of course they're not.

They same thing happened in other media too: digital creates the conditions for inevitable large drops in price, and there never have been any guarantees that the substantially increased volume which that brings would cover the previous physical market.

The thing is, however, that much of that slimming occurs in the publishing layer. Great developers will always have a market.

Mike Lopez
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I could not find exact figures for 2011, but according to their 10-K statement Apple had $4.1 Billion in revenue from their iTunes app store in 2010 (all types of content, including apps).

Just apps from Google and Apple accounted for ~$2.2 Billion in 2010 (according to Wikipedia). I am guessing from explosive user growth and spending trends the past 18 months that combined Apple and Google now bring in >$5 Billion on their app stores combined. And games account for a significant portion of that revenue.

How anyone could state that the digital app market (which was not in existence before July, 2008 and is all growth since then) combined with the not-insignificant social game market do not account for the decline in retail games is beyond me.

NPD has long since lost their relevance since they can not forecast digital sales in any reliable and relevant way.

Alex Taube
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I wonder how much influence the free-to-play games have on the numbers. If more and more gamers invest their available time for gaming away from the classical revenue channels, this might add to the "problem". Its quite likely that more gamers will pay less per played hour than before.

Mitchell Fujino
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I would argue in some games, they're spending far far more. (e.g. hundreds of dollars in League of Legends.) But dollars per hour isn't that important a metric, anyways. Skyrim and Diablo didn't crush the industry.

More important, IMO, is that consumers have a set amount of entertainment dollars to spend, and every month there are increasingly more untrackable ways to spend them.

Dollars don't just "disappear" (worldwide recessions aside). If they're not spending it on NPD tracked items, they're spending it on some other entertainment.

Michael Flad
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I wonder how many sales they can't track. Minecraft alone is selling more than 10k copies a day (at 20€, I guess it's $25 then) which sums up to roughly $100 million a year.

Can they track any game on Steam not released by a big publisher - i.e. all the indie games? Right now there's an unusual low number of indie games in the charts but many times half the games in the top 20 on Steam are indie games so I guess that's easily more than $100 million a year (probably much more).

Bob Johnson
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WE have fewer releases now than a few years ago so one would expect retail sales to follow suit.

But at the same time I haven't heard news of any big AAA franchise cancellations.

Much of the decline in sales is probably attributable to much lower shovel ware sales from the Wii side. Then combine that with Nintendo looking forward for the Wii U and having released all their big titles on the Wii already.

As Wii sales dropped so did the new software sales. But I don't think Nintendo is unhappy with the sales of most of their Wii software. I think the sales numbers, when taken over the entire generation, are something to be happy about.

Don't let the latest news cloud the bigger picture.

We might be getting fewer new original AAA titles, but that would be a byproduct of increased budgets and companies not willing to take the risk rather than everyone playing Angry Birds on their phones and iPads.

Last don't forget the effect used games has on the market especially later in the lifecycle when the variety and quantity of used games is at its largest and the used game prices are at their cheapest. So the consumer can choose between a new $60 unproven game or many $10ish proven games that could very well be better.

Realize the used game market has also only become more efficient than last generation. There are more outlets for used games and the process of getting rid of them is easier than ever.

Leonardo Ceballos
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I think one key issue that might also need to be addressed here is the different costs associated with digital sales. Digital games often have much less cost associated with them, so while they may contribute less overall "revenue", that is not the same as profit. For example, a $50 PC game sold on Steam costs less for everyone involved; that is in fact why games are often cheaper on digital services.

I also feel like last year was a heck of a bull year for AAA titles; I can no longer speak for the "average consumer" but I still have such a pile of quality content to go through that I'm hardly picking up anything new these days.

Again, I'm more concerned about costs. I'd like to see the $30 and $40 category open up again. We have the $1 - $8 mobile game, the $10-$15 XBL/PSN game, and then suddenly $60. Only on PC (Steam) do we have any kind of middle ground. Lets hope for the next round the big three console makers open up the system a bit.

Gern Blanston
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I think in this point in time, these numbers don't accurately reflect digital momentum. We're stuck in a unique period of consumer apathy toward consoles due to the failure of the Wii to fulfill its original promise. With all these reports of sales being down year-over-year, the Wii is the only console to have dropped off. And those consumers really never moved over to the HD twins, so they dropped off the map almost entirely.

The rise of digital sales hasn't yet been able to fill the gap left by the Wii. But to say that digital isn't flourishing, and couldn't possibly grow to match retail sales in the near future is naive. If the Wii had somehow held onto its sales (albeit as a hypothetical HD dream console), and digital sales stayed the same as they are today, these reports would be gushing about digital sales helping the market to grow.

William Johnson
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The point isn't that digital isn't growing fast, just that it hasn't grown fast enough to explain why retail is falling even faster. It implies that the market is shrinking.

A lot of people say, "Well, of course retail is failing, everyone is moving to digital distribution." But if that was the case, we'd see even more money flowing in to digital.

A lot of people like to use used game sales to also explain it away. But if that were the case Gamestop would be making fists full of dollars and laughing all the way to the bank. And they're not, they're actually crazy worried because they are in fact retail and they're losing money.

Basically, these are scapegoats to help give a boogyman to explain away why the market is shrinking.

k s
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@Turd Furgeson: I think you're right about the "expanded market" leaving after they lost interest in the Wii and that the market was artificially large during the Wii's best years.

Gern Blanston
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@William Johnson

"...retail is falling even faster... the market is shrinking"

Yes, the market is shrinking due to the former Wii audience no longer playing console games. Virtually every PS3 and X360 player is still playing, but the fall of the Wii (which previously held the market up) is the only reason less people are playing console games.

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@Christian Keichel

Read my quote once more... "...those consumers really NEVER moved over to the HD twins..."

I effectively said that former Wii players just stopped playing. I never said they all moved on to the HD consoles. The PS3 and X360 have been on the market so long that consumer apathy may be catching up with them. Here is a link that works:
http://www.vgchartz.com/article/250231/2012-year-on-year-sales-an
d-market-share-update-to-june-23th/

HD console sales are slightly down, and that's most likely due to the fact they've been on the market for 6-7 years already. And certainly the mobile/social gaming sectors have pulled a few people away from home console gaming.

But to reiterate, the main reason digital sales haven't been able to balance the low retail sales is due to the Wii's unmatched drop in sales over the past 2 years. If the Wii had been designed as a more powerful, HD-capable machine, the market would have grown by now in my opinion.

William Johnson
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@Turd Furgeson

The PS3 and XB360 haven't exactly hit market saturation. So I honestly don't think you can really just chock it up to their longer shelf life. And it also doesn't help explain the drastic drop in game sales. If there are so many PS3 and XB360's on the market, and that's the reason new hardware isn't selling, then why isn't new software selling?

Gern Blanston
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@William Johnson

Contributing factors of low software revenue:
-declining economy, the general public having less money to spend
-more popular and cheaper Indie games
-steep drop-off of Wii sales
-significant periods of low sales in handheld market (namely 3DS)

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@Christian Keichel

If disagree on the Wii HD theory. If they'd simply made the console slightly more powerful and 720p capable, they wouldn't have had to price the system at more than $299. That's still a very attractive deal, especially considering the extreme enthusiasm for motion-based gaming at the time. Sales would no doubt have started out as well, but they also would've continued on to this day with higher 3rd party support, and a more diverse and full game library.

As well, this generation has sold far more than the last. If you remember, the Gamecube and Xbox combined didn't even come close to reaching either of the current HD consoles' sales. And within the same time period the Wii is fairly close to where the PS2 was. The difference between last-gen and current-gen is significant. I estimate total console sales from last gen at nearly 200 million. Sales of current gen consoles are beyond that already. And by the end of these current consoles' lifecycles, they will have outsold the older systems altogether by tens of millions, or maybe a surprising number more (depending on the atypical lifespans of PS3 and X360).

Matt Ployhar
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Let's see.. there are 3 major channels.

1) Retail. (R.I.P)
2) Digital.
3) F2P.

Retail global is a fraction - rounding error - of what it used to be. I'll use PC Games for example. In CY 2011... there were about ~15m units PC sold at US Retail. (Per NPD) Maybe 30m units PC total at Retail sold globally. Sounds dismal right? Especially when you consider that Digital (Steam) alone is sitting at ~40+ m unique users. If we put the attach rate at 2 games per user.. that alone would be 80 m units global. However; Steam is NOT 3/4 of the Digital market. They might be at best ~50%. On the PC there's: BattleNet, Origins, Impulse, GOG, etc.. a host of smaller guys up to & including G4WLive. (Some day.. even the Torrents might become more legit.. as more F2P Games get moved across their networks) Then... we have F2P.. dwarfing both of those 2 aforementioned. LoL - what... ~30m users? World of Tanks? 20+m? There's a TON of F2P games now ... and even more so when you look at all the SKU's globablly. The F2P story gets even crazier when you include all the SNS games (e.g. Farmville), & Casual Games that are big in other Geo's (e.g. Maple Story, Runescape)

So yeah.. times are a changing.

Retail is pretty much at least 95% Console Games. After all.. the Retailers have a dependency on those 'Secondary' sales. (They can sell that Game actually more than once even... and do). So... yeah... things are likely going to get really ugly for Console Games Sales at the Brick/Mortars over the next ~5-7 years. Especially as the volume & bandwidths increase for Broadband Users globablly.

This will have a huge impact on NPD tracking, GFK Chart Track, & VGChartz - at least in the short term. If luck shines on them... maybe Steam or EA or Blizz or Zynga will open up their books a little more to them. Until then... things are going to get real interesting.

Joe Wreschnig
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This is the first year I've spent a significant amount on games I'm pretty sure can't be tracked, by directly buying from / donating to from the creators (via Kickstarter, PayPal or Amazon merchant accounts, and similar things).

I'd like to think this is a trend that's part of the "decline", but that's probably just wishful thinking.


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