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U.S. game retail navigates longest console generation
U.S. game retail navigates longest console generation Exclusive
August 13, 2012 | By Matt Matthews

August 13, 2012 | By Matt Matthews
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    19 comments
More: Console/PC, Business/Marketing, Exclusive



The current console generation started nearly seven years ago -- exactly how has U.S. video game retail been dealing with such an extended cycle? Gamasutra analyst Matt Matthews takes a close look.

In many ways, the decline of video game retail in the U.S. resembles the pause that appears to happen right before a new generation of video games is launched. Not only are overall revenues down according to the latest NPD Group market estimates, but the drivers of revenue -- software and hardware -- are selling at lower volumes despite lower prices.

This last happened in 2005, when Microsoft planned to launch the Xbox 360 in November and the Nintendo Wii and Sony PlayStation 3 were not due for another 15 months. Of course, this year we have the Nintendo Wii U launching by November, and the new systems from Microsoft and Sony are not expected until next year.

It's not as simple as just the launching of a new set of consoles, however. This generation has had a higher peak than the last, relative to its starting point, and it has gone on for a couple of years longer. Along with the higher peak in sales, there has been a corresponding fall.

The figure below shows the last generation's retail revenue growth curve.



It's useful to compare the situation now to that in 2005. Seven years ago July was the second worst month in terms of revenue, at a mere $133 million per week. This year the revenue in July came in around $137 million per week, and it's the third worst in 2012.

Back in 2005 the Game Boy Advance, Nintendo's best-selling handheld at the time, had hardware sales that were down nearly 40 percent from the year prior, despite a price cut from $100 to $80 less than a year earlier. Nintendo's other handheld, the Nintendo DS, was struggling through its first year with sales of fewer than 100,000 units for all of July. Sales of the Nintendo GameCube were even lower.

The situation is not so dire for Nintendo this year, since Wii sales are hitting historical lows right before the launch of a successor. Still, Nintendo sold about 370,000 hardware units across three platforms seven years ago and about 330,000 this July.

The original Xbox was on a terminal trajectory in 2005, but still managed 130,000 units per month on its way out the door. Sales of the PlayStation 2, destined to be the leading console for another year, were basically twice the Xbox figure. At that time, current generation consoles accounted for around 440,000 units and today their modern counterparts totaled around 410,000 in July 2012.

Accelerated contraction

With those kinds of figures being so close to the figures from 2005, it is tempting to say that the industry didn't grow at all in the past seven years -- but of course we know that's not true. Today's video game industry isn't simply a retail market.

Seven years ago, the Xbox Live Arcade service was less than a year old and the Xbox Live Marketplace hadn't yet launched. Valve Software's Steam service was less than two years old. Apple's iOS App Store wouldn't see a release until July 2008.

What I will say is that the traditional video game business model, centered around retail, has been fundamentally altered. Fewer systems are being sold, but at significantly higher prices. Every system on the market today has local storage, multimedia functionality, and the facility to sell products or connect with paid services, in part justifying the higher price of entry. As a result, the economic power of these devices cannot be measured by retail figures alone.

Regrettably, the most public and detailed data we have is about the retail market, so that is where I'll focus today. Later this week I have some more information to share about the digital market, so stay tuned.

Even though the industry is surely experiencing some pressure from a longer than usual generation of consoles, there are still some shorter-term issues that are worth discussing. In particular, we are now over a year into a period of exceptionally poor retail sales.

I know that my columns can come across as at lot of doom, but the problem here isn't just contraction but an acceleration of the contraction.

As I've said many times before, the U.S. retail market for video games began to shrink around March 2009. However, if you look closely at the last 19 months of sales results, in particular the year-over-year (YOY) changes, you'll see an interesting sequence of results. The graph below shows these YOY rates of change.



The last really good month, at least by this measure, was April 2011 when Mortal Kombat (2011) and Portal 2 both launched. And from September through November, the industry's sweet spot, sales were roughly flat ($5.15 billion in 2010 versus $5.12 billion in 2011).

But the accelerated contraction I was talking about is pretty evident: Outside of those three flat months, every other month in the past 13 has had a YOY decline of 20 percent or more. I don't know precisely what, but something changed last summer, and it wasn't just in one segment of the market.

As of July 2011, the Xbox 360 stopped having consistent year-over-year hardware sales increases and the Nintendo DS had its last non-holiday month with sales of 300,000 or more units. Hardware sales for the PS3 also stumbled, but this was mitigated somewhat by the $50 cut to its price in August of last year. Of course, a price cut also means lower revenue.

Software unit sales across all platforms took a dive last summer and have experienced regular downward pressure on average prices. The result: 20-40 percent contraction in 8 of the last 12 months of software sales. Even big months like May 2012, when Max Payne 3 and Diablo III both launched, look terrible in that figure above.

I had thought, prior to the July results, that we would see a turnaround in the market, that somehow U.S. consumers had collectively reset their spending habits on video games to a lower level, and once a full year had elapsed we would see the market stabilize.

Unfortunately, that didn't happen and instead sales were down another 20 percent this July.

As noted in previous months, part of the problem here is systemic: publishers are releasing fewer titles per month this year than they have in previous years. According to the NPD Group's Liam Callahan, there were 39 new releases (SKUs) in July 2011 and only 22 this year, across consoles, portables, and PC.

If the August retail results also show a 20 percent or greater decline, then we will have had three months this year with less than $600 million in sales. That hasn't happened since 2004, eight years ago.

And it isn't just my own pessimism here. Just read what the NPD Group's own analyst, Anita Frazier, had to say: "Based on year to date sales, and taking into account the release slate for the back five months of the year as well as the anticipated launch of the Wii U, annual sales for the new physical channel should come in around $14.5 billion for the year."

That figure, the $14.5 billion for the year, represents a 15 percent year-over-year decline for the retail industry during calendar 2012 and a 5 percent decline over the last five months of the year. Even the NPD Group itself is expecting a tough end to the year after taking into account the software releases that have been announced, like Halo 4 and Call of Duty: Black Ops II, and the launch of a new platform.

Prior to the July results, Michael Pachter of Wedbush Securities was expecting a similar result for software through the end of the year, saying that "the introduction of compelling console software later this year will help to mitigate monthly sales declines, with the result that a modest rebound in sales (to somewhere between down single digits and flat) will likely occur in September through December."

If this year comes in at around $14.5 billion for the total take at retail, then the generational curve -- similar to the one I showed above for the last generation -- will look like the figure below.

August turnaround?

Last generation, the total size of the retail industry grew almost 60 percent from the launch of the PS2 to the launch of the Xbox 360. This generation, if that $14.5 billion holds, then the industry will have grown nearly 40 percent from the launch of the Xbox 360 to the launch of the Wii U. It would be ideal to include all revenues -- retail and digital -- in these curves, but that kind of data simply doesn't exist, not in public and not in reliable form.

Looking ahead, I'm particularly keen to see the August results, which we will have in about a month. The introduction of the Nintendo 3DS XL and the launch of New Super Mario Bros. 2 should bring in some extra revenue, along with Darksiders II and Sleeping Dogs on the HD consoles. Madden NFL 13 won't arrive until 28 August, and therefore will be counted as part of September's results.

We won't know for months whether the retail game industry can really break its streak of 20 percent declines, but if August is indeed a turnaround and the packed release slate helps buoy sales during the last four months of the year, it's at least a sign that consumer do still have some appetite for retail products -- just not outside of the holiday season.

Later this week, I'll have an update on July's software sales chart and some interesting information on digital sales as compared to retail.


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Comments


Maria Jayne
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I don't ever see video game retailers pulling back consistant yearly losses on game sales. I expect any new consoles from now on would primarily focus on digital distribution.

Music stores, Movie stores, Game stores, Book stores wlll all die out. Shelf space in stores that primarily sell other goods will get smaller and smaller, purchasers of those products in turn will become fewer and fewer, until eventually it's just more profitable for those stores to put something else in the space.

I do wonder what would happen if something drastic were to happen in the future though, the thing about physical products is that they were relatively permanent in the world for the indiviual. You'd have to be pretty single minded to wipe out every copy of a book, album or boardgame. When you rely on somebody else, to access your belongings electronicly, what happens to the future media if something happens to that access hub.

Addison Siemko
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A lot of angry people? It is a scary notion, no? But then I think, in such a drastic scenario, my survival would be a more pressing concern.

John Gordon
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There is a significant difference between why book, music, and movie rental stores failed, and why the game industry is currently declining. Amazon, Redbox and iTunes actually offer customers something better than retail. Amazon and Redbox have lower prices, and iTunes does not make customers buy the whole CD. Also Amazon, Redbox and iTunes do this while offering the exact same content as their retail counterparts.

On the other hand a service like Steam is actually worse than its retail counterpart. If a person buys a brand new AAA game on steam it is $60, the same as on a console. But the customer that buys a console copy can actually sell their game back. They get more value from retail. And while games on iPhone and Droid are cheaper, they are not the same content as a console. Also controls on smartphones are inferior.

If customers are leaving consoles, it is not because they have found a better alternative. They are just tired of gaming. Very few customers are not going to leave AAA games to go play on Steam or an iPhone. Instead they are just waiting for good games. The customers will return when (and if) the good games come. The drop in sales is due to fewer games. The industry does not need low quality games to grow. It needs more high quality games.

My fear is that when the new consoles are released even fewer games will come out, and then console gaming will die. And those gamers will not find new platforms. They will simply stop gaming.

John Flush
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@John

I agree with the first paragraph and last paragraph, the middle though I don't agree with.

Steam offers no preorder requirements, guaranteed day of release gaming. Considering retail offers little more than a box with the same content, and typically a key that is non-transferable for the second hand sale retail has actually become a more risky business. Can I activate this game multiple times from multiple PC's? or are they going to lock me into installing it 5 times? and other shady DRM tactics. As such I have abandoned retail.

If a game is something I'm looking forward to I'll pay full price for digital. If not, I can usually wait for it to drop in price faster in Digital than retail. And I don't have to go hunt for it, online or otherwise. Christmas / Summer digital sales give 50-75% savings in a lot of games.

And customers have found a better alternative than consoles. With a gamepad on your PC you can play many of the games the exactly same way you would with a console - and a lot cheaper. The PC actually updates their visuals once in a while too. So people seeing that consoles were going no where started to jump back to the PC.

Also, iPad / Smart phone controls aren't inferior... unless of course you are playing a bad port of a console game. There are plenty of games that are better using touch controls - it is only that the hardcore see those games as inferior and only play horrible ports instead. I don't even play a dedicated handheld anymore because mobile gaming is easier using iOS / Android.

Chris Melby
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@John Gordon

You opinions on STEAM and PC gaming are rather myopic to say the least.

John Gordon
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"And customers have found a better alternative than consoles. With a gamepad on your PC you can play many of the games the exactly same way you would with a console - and a lot cheaper."

Consoles and PCs have coexisted for a long time. The PC has never stopped the console from dominating the game market. And Steam does nothing to change this relationship. If the console market is dying off, it isn't because of anything on the PC. It's because gamers do not find compelling games to play on the console. They aren't leaving for the PC or for smartphones. They are just leaving.

Jimmy Andrews
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You mention diablo 3 not helping retail much -- how much of that is due to a larger percent digital sales, which aren't counted for retail?

Derrick Lim
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The good thing that is coming out of this declining retail sales is that non-serious, generic software stores run by people who don't have a clue as to what they are selling are exiting the market, leaving indie stores that are actually run by people who are passionate about video games. Yes, they're fewer stores around, but the service in these stores are a lot better, and they often stock other geeky collectables and stuff too :)

k s
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The staff at these generic stores really don't know anything at all, I forget what game it was that I was picking up at walmart but their staff member assumed I wanted some golf crap because he's not a fan of guns (which were a part of the game I was getting) and assumed I'd be the same for some reason.

Oh and the staff at EB Games are amazingly ignorant, we have two in my town I go to one most of the time and while their assistant manager is a nice guy he has often given me inaccurate information and their manager hadn't even heard of the Ouya (while their assistant manager had). The kids the employ are even worse (except the girls, who seem uber knowledgeable), half the time they don't know jack outside of CoD or BF, the other half they only know anything about their preferred platform. I met a kid working at block buster once who knew more then the EB staff do.

Sorry if I'm ranting.

Bob Johnson
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What happened is the 360/Kinect and Ps3 joined the end of cycle sales drop off.

The 3DS hasn't replaced DS sales yet. And the Wii continues to slide as fast as it went up.

I don't think this is out of the "normal." The article even mentions 2005 which paints a similar picture for Nintendo just before Nintendo went gangbusters for the next 4-5 years.

So the current scenario is no indication of future failure. IT is only indicating a lull between generations.

The size of the rebound, as always, depends on the appeal of the future generation of gaming platforms.

And we have only seen one of these platforms so far. It is off to a slow start. But again that is no indicator of future success either as its very successful predecessor also had a slow first year.

I think by the time the holiday numbers come in we will know what shape the 3ds is in in the west. Lack of great software will no longer be an excuse. I do recall Nintendo saying Japan was often a leading indicator of what will happen in the west. The 3ds is doing great in Japan.

btw, I did not expect the 360 to continue to go up in sales. It was an aging platforms. It sales number were given a shot in the arm by Kinect and by the new S model. And some price drops. Last holiday it received aggressive promotion which was essentially a limited time price drop. This all indicated momentum was not going to be continued.

Plus Kinect was never the next big thing. It rode the Wii coattails and was always going to run into the same dilemma as motion control games on the Wii. The lag and precision or lack of precision was the same in both systems. And if no 3rd party was going to make great motion control games for the Wii then why would they for the much smaller install base of Kinect many years later? So Kinect was never going to reach the heights of the Wii and was going to fall just as fast as it went up like the Wii. I have noted as much in comments here the past year or two.

Joe Zachery
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Agreed with your look at the Kinect side of the game. Never been any real Kinect software that move software likes it Wii counterpart. To this day I still feel most the new 360 sales are due to people buying a new model. To replace the old model that will soon give out to RROD.

Jonathan Murphy
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Print disk on location. Over half of all DVD sales are lost, because said store doesn't have it in stock. It's a dysfunctional system that has caused FYE, Borders and soon most retailers to go out of business.

Adapt or die is the only rule of business that matters. Low sales will continue if the industry has the stupidity to continue the $60 price tag.

Wylie Garvin
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When I buy a DVD at retail, part of what I'm buying is that its a factory-stamped disc thats going to last a good long time... far longer than any DVD-R "burner" type discs do. But with a slight price reduction I might be willing to go for that--especially since I like owning physical discs.

For console games, there is the added problem of copy protection (discs use a non-standard format) plus giving thousands of retail outlets the ability to burn "retail" copies of console games sounds to me like a recipe for increasing console piracy rates up to the 90%+ levels often seen on the PC.

Nathan Mates
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Interesting that this comes out the same day as http://www.nytimes.com/2012/08/13/business/media/wondering-how-fa
r-magazines-must-fall.html?ref=todayspaper , which says this: (If link doesn't work, look for The Media Equation / Wondering How Far Magazines Must Fall / By DAVID CARR / Published: August 12, 2012 at the NY Times)

"Last week, the Audit Bureau of Circulations reported that newsstand circulation in the first half of the year was down almost 10 percent. When 10 percent of your retail buyers depart over the course of a year, something fundamental is at work."

Videogame sales are down well more than the 10% that magazines are. It's more than "something fundamental at work" in terms of games.

My theory: consumers have realized that entertainment has gotten a lot cheaper per dollar over the past decade, and price increases get a lot more blowback. People have said "due to ROM costs, SNES titles at $70 adjusted for inflationare well more than current prices." That's nice. But, at the time those SNES titles came out, VHS tapes were $25-75. Now, I see Blurays for $5-10 at Costco, Amazon, etc. Movies have gotten *much* cheaper in the time. Same with streaming music. Netflix gets you tons of discs or streaming for way less than the cable bill of 15-20 years ago. Per dollar, most entertainment's gotten a LOT cheaper. Games are insanely thinking that everything new is worth $60 at retail. Only the multi-million sellers -- Halo*, Call of Duty*, Skyrim, and a few other titles you'll get 50-500 hours of entertainment from -- are worth $60. There's a 'donut hole' of videogame prices -- $60 or nearly zero. A mature industry has products at every price point. Games don't.

The Videogame industry should look at Netflix. A year ago, they tried to unilaterally jack up rates, and tell consumers what they would do. Result: lots of cancelled subscriptions. Lots of blowback online. They really stumbled there, going from a really good company/product to a tarnished one. The game industry is running the same mistake, just a little slower. And the consumers are pushing back the same way.

Keith Thomson
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I disagree with the 60 or near zero comment. Games new have price points anywhere between $30 and $60, depending on the system and the publisher (3ds typically $30-40, Vita $30-40, Wii $40-50, PS3/360 $50-60.) Older games slowly decline and it's not unusual to see games at the $10 through $40 price points that came out 6-12 months ago. It's rare for games to stay above $50 for more than 6 months. Only things like Call of Duty and certain Nintendo franchises can accomplish that.

There's significantly more content at the $5 to $20 range for downloads as well.

Jonathan Murphy
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I agree that the price range is much more generous these days. But a triple A video game at launch for consoles is locked at $60. When a product that doesn't have an expiration date like food loses 50% or more of it's value in a short period of time it's a warning sign the price point isn't working.

Look at the numbers. It's not a theory it's a fact. Downloads will continue to grow until these companies wake up, or more likely go bankrupt.

Wylie Garvin
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So inflation-adjusted SNES titles would cost $70+ in today's dollars, while a current AAA game goes for $60. And its true that manufacturing the physical carts cost a lot more than stamping out a plastic disc does.

On the other hand: Those SNES titles were made with budgets ranging from sub-$100,000 up to maybe $1m, while a AAA game today costs anywhere from $20m to $60m just to develop (with marketing budgets often similarly huge). With budgets as large as they currently are, its possible for a AAA game to sell 2 million copies and still lose money.

Improving hardware, a steadily-growing market and gamers' ever-increasing expectations have allowed budgets and team sizes to inflate to the mammoth proportions they're at now. But now we need to do something never before done by the game industry: we need to scale these budgets back down, and become efficient at making good games. And we need gamers to meet us half-way, and accept innovative games with shorter buzzword-bullet-point lists. There seem to be many gamers who will only shell out $$$ for direct sequels to games they like--and only if those sequels are ever more complicated and feature-laden.

Glenn Sturgeon
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This generation the consoles have longer lifespans, less games and a weak global economy for the past 3 years to build on. That sums most of it up to me.

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