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U.S. retail software in 2012: What you need to know
U.S. retail software in 2012: What you need to know Exclusive
January 22, 2013 | By Matt Matthews

January 22, 2013 | By Matt Matthews
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    19 comments
More: Console/PC, Business/Marketing, Exclusive



Last week, I covered the latest information available about video game hardware sales in the U.S. retail market. Today, I want to turn to software and highlight some important trends coming out of 2012 and into the first months of 2013.

The Bad News First


Previously, I showed how the software market has contracted in the UK, and unfortunately the U.S. has experienced a similar, but slightly less severe, contraction. Whereas the UK market lost over 26 percent in revenue in 2012 relative to 2011, the U.S. market lost 24 percent during the same period.

That puts the total retail software revenue figure only $200 million ahead of the retail software market in 2006, the year that the Wii and PlayStation 3 launched. Or, to give another reference point, the retail software market has contracted 40 percent between its peak of $11 billion in 2008.

The figure below gives total video game software from retail since 2005, for historical context.



In terms of units, however, the picture is slightly different. Last year, I estimate that a total of 229 million units of software were sold at retail and in 2012 that figure fell to 172 million, a decline of 22 percent. That's below even the 2005 total of 191 million units of video game software.

The figure below shows total unit software sales since 2005, to give a sense of scale from the market's peak in 2008.



A lot of this is simply a return to normal after the explosive popularity of the Wii, the Nintendo DS, and the music genre. However, the comparison to 2005 is troubling. In terms of revenue, the market is less than half a billion dollars larger than it was back then, and is far lower on unit sales. This suggests something a bit more serious.

As I pointed out in my last column, there has always been a baseline of around 10 million consoles sold per year for at least the past decade, and in fact software revenues have grown over 20 percent on consoles compared to 2005. So the problem, frankly, isn't the console segment.

The money instead is draining out of the handheld segment. By my records, retail handheld video game revenue in the U.S. was about $1.4 billion in 2005 and in 2012 the same segment of the market came in at well under a $1.0 billion, a decline of around 30 percent.

In a nutshell, the final significant year of the Nintendo DS, the second year of the Nintendo 3DS, the first eleven months of the PlayStation Vita, and the death gasp of the PSP weren't enough to match the middle life of the Game Boy Advance, the first full year of the Nintendo DS, and the first 10 months of the PSP. We can try to point fingers at Nintendo or at Sony, but the fact is that both are underperforming right now.

Wii U Launches as Xbox Peaks, PS3 and Wii Decline


On the other side of the market, the year ended with four significant consoles on the market. Nintendo's Wii U launched with somewhat disappointing hardware sales, but the software was actually quite strong, with a life-to-date (LTD) tie ratio of 1.8 according to official NPD Group data. That means that each Wii U console sold so far as an average of approximately two software titles, for a total of around 1.6 million units of software.

Speaking about December's sales for the Wii U, Wedbush analyst Michael Pachter told me the total was "pretty weak" but better than November's total.

A tie ratio of 1.8 puts the Wii U in the same company as the PlayStation 3, which launched with a tie ratio close to 1.9 during November and December of 2006. However, it is significantly behind the original Wii whose launch tie ratio was around 2.8 in 2006 and also behind the Xbox 360, which moved nearly four units of software per system in November and December 2005.

Should we also count the NintendoLand software bundled with the Deluxe Wii U model? If we do, then that significantly bumps up the actual amount of software in the hands of Wii U owners, and thus the tie ratio. However, the Wii tie ratio of 2.8 didn't include Wii Sports either, and it was packed in with every Wii back at launch.

One key difference that does have to be acknowledged, however, is that the Wii U is the first console to launch with most retail games also available as downloads on day one. So some Wii U owners are undoubtedly all-digital, and aren't contributing a single unit of software to the physical retail count.

Until Nintendo releases information about its software sales figures including digital, however, we're left simply speculating.

Back in the last generation of consoles, the Xbox 360 and PlayStation 3 and Wii are each faring differently in terms of retail software sales. According to the figures that I have collected over the years, this is the picture I have for annual software sales throughout the generation.

First, here is an update on LTD sales for each console, given in the figure below.



After being passed back in 2009 by the explosive software sales on the Wii, the Xbox 360 is now firmly back in the lead for LTD software sales. Its tie ratio now stands at 9.7, a record for the platform and up from 9.5 back in September 2012.

The corresponding tie ratios for the other platforms, according to official NPD Group estimates, are 8.2 for the Wii and 8.9 for the PlayStation 3. At the comparable point in its lifetime, last December, the Xbox 360 had a tie ratio of 9.1.

(If you want a launch-aligned version of the graph above, just click here.)

Perhaps the really important story here is the annual software sales rates. The figure below shows my estimates for those figures, launch-aligned.



Just look at the way the Wii came out of the gate, doubling its software sales between its first full calendar year and its second. Then it peaked briefly in its third full calendar year (2009) and has been on a downward trajectory ever since.

Moreover, for the first time all generation, I believe the PlayStation 3 outsold the Wii in a calendar year. Remember that the Wii hardware base is almost 75 percent larger than the base for the PlayStation 3, so outselling the Wii on software is a reasonably notable achievement.

On the other hand, the annual rate of PlayStation 3 software sales fell slightly, and that has to be somewhat worrying for Sony. I've said in the past that Sony could soon be a one-system company again, and at least in the U.S. that appears close to coming true.

What of the PlayStation Vita? I don't have official figures, but the estimates I've seen suggest that the Vita sold a mere $100 million in software at retail for the year on a base of 1.3 million systems. That's approximately two $40 games per owner, not counting any software bundled with systems. It's also an order of magnitude below what Nintendo generated in the past year on its two handhelds.

Of course, the Vita also has an online store, and I'm sure there are people there who have gone all digital just as there are on the Wii U. (For the record, I'm one. I went almost completely digital back in 2009.) So it is possible that we're missing the big picture, because so much commerce is being done digitally, but it's up to Sony to reveal that kind of revenue.

In a recent conversation about the PlayStation Vita and its difficulties, Wedbush analyst Michael Pachter said that the system is going to have "trouble getting third party support" going into 2013. That just strengthens my sense that the system could really be Dreamcasted this year unless something dramatic happens, and soon.

Nike Helps Microsoft Kinect


Speaking to a retail insider recently about a third holiday with Kinect, I was told that Microsoft's Nike + Kinect Training title had sold exceptionally well. It occurred to me that Kinect might be pulling in former Wii Fit consumers, and helping Microsoft maintain its competitive edge at retail.

I spoke with Liam Callahan, an analyst for the NPD Group, and he was able to provide some interesting background about Nike + Kinect and the fitness genre overall.

According to Callahan, the units of Nike+Kinect Training sold after its November 2012 launch "represent[ed] 15 percent of all Fitness genre games during Q4 2012 and 22 percent of the dollars." So that does suggest that Nike+Kinect Training was a fairly successful product, especially with big names like Zumba and Jillian Michaels already established on the market.

But is the Xbox 360 gaining any share in the fitness genre? Yes, says Callahan, since "in 2012, Xbox 360 accounted for 36 percent of all Fitness software units compared to 24 percent for 2011".

But, I should point out that the fitness genre is one that is contracting, just like the rest of the market. In the full year of 2011, the total number of fitness software units was 5.2 million, and that fell 46 percent to 2.8 million in 2012. So Microsoft has a greater share of a shrinking pie.

Call of Duty: Not Dead Yet


Last month, it looked like Call of Duty: Black Ops II sales were not going to compare well with the previous year's installment. However, according to comments from Michael Olson of Piper Jaffray and Company, the title came roaring back in December and ended the year down only 2 percent in terms of units. Given that we know that Modern Warfare 3 ended 2011 with around 12 million units sold, that means that Black Ops II is right in that same neighborhood, maybe just below 12 million.

Prior to the release of the December figures, Olson was expecting Black Ops II to be "down low double digits". But in his notes on December's final results he commented that the title showed a 28 percent improvement over December 2011 sales for Modern Warfare 3. Moreover, revenue for Black Ops II was up slightly even on fewer units sold, an impressive accomplishment.

Other titles in the top 10 also did well, compared to predecessors a year ago. According to Olson, LTD sales of Assassin's Creed III are more than 100 percent higher than sales of 2011's Assassin's Creed: Revelations while LTD sales of FIFA 13 are approximately 20 percent higher than FIFA 12 for the comparable period.

Olson attributes these bright spots at the top of a troubled retail environment to the quality of the software and the experience it offers consumers. According to his analysis, "high quality console titles are positioned to take share and, in some cases, grow nicely."

At long last, it's good to hear some good news, isn't it?


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Comments


Russell Carroll
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I'll bite...again...
"Nintendo's Wii U launched with somewhat disappointing hardware sales..."

I'm curious Matt at this statement you made that seems to be very popular in the media, but doesn't seem to fully paint the picture.
Last Generation - (these are all NPD publicly reported - back when they did that ;)
X360 - (Nov-Dec 2005) - 607,441
Wii - (Nov-Dec 2006) - 1,080,200
PS3 - (Nov-Dec 2006) - 343,850

New Generation -
WiiU - (Nov-Dec 2012) - 890,000

Considering that the market today is considered to be much MUCH more difficult than when the last generation of consoles launched, the WiiU numbers look *very* impressive to me. They are clearly much better than the X360 & PS3 launches, which should be considered a good sign no? This while the home console market seems to get *doomed* articles nearly every day.

It seems to me the WiiU should be getting a lot of positive press for having sold so much better than its last generation counterparts in a market that is considered to be much worse.

Matt Matthews
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It is my recollection that the Xbox 360 launched with shortages and the PS3 launched at a minimum of $500. Neither of these was even close to true for the Wii U. Also those two platforms had fewer titles available for each and no pack-in game for any model at $350.

The Wii U also launched with a Mario game out of the gate, and that has generally been seen as an impressive motivator for Nintendo hardware sales. It also had the stage to itself, as the competition had no comparable new system to offer, and didn't even drop price (unless you count the temporary $50 cut Microsoft ran from October through January).

In terms of just retail calendar timing, this was practically the longest run you can have between Black Friday and Christmas. The November period ended the Saturday after Black Friday and therefore the five weeks for December included a week of November and all 24 shopping days in December. (Incidentally, this also happened when the Wii launched.)

It's my opinion that Nintendo put all of its cards on the table for this launch, had a long run up to Christmas day, and it came up shorter than I expected. I believe I even wrote in early December that, given its November launch sales, results from history suggested it should reach a million by year's end.

I'm not out to get anyone. I'm just stating an opinion informed by my experience and expectations. There is no agenda, although I take it some feel I have one.

Edit: From my December column putting the Wii U launch into context: "I stand by my previous comments that the Wii U should hit right around a million units in the U.S. by the end of this year, if it maintains the sales velocity that it had out of the gate."

That was my expectation.

Joe Zachery
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Nintendo is expected to preform better since they are the current market leader. So we can assume the PS3 was under the same stress, and pressure the Wii U is given now. The problem is Nintendo was never given the praise for expanding the market. Yet they are giving all the flack for bringing the market down.

The PS3 has never pulled it's weight at any time during this generation. Under performing hardware from PS3,PSP and now Vita in the US market.
Under performing first party games sales, and when compared to the 360. Most major third party games have sold better on the 360.
Add the Move and it's lack of sales when it comes to hardware, and software. That's your black hole that is bringing the market down.
Don't get me wrong Nintendo has a part in the decline, but they are only doing what they have always done. 5 to 6 year console cycle for their consoles. Cut software on current systems to begin working on new software for new consoles.
The 360 sales increase is more about them canabalizing on the PS2 to PS3 userbase, and some of the casual Wii market. They are not bringing any new consumers in just taking existing consumers, and making them 360 owners.
The next group of consoles will suffer a similar fate. They will only fight over current generation owners, and not attract a new market of gamers in. Something the Wii was able to do when it launched. Thanks to the their will always be a decline in the gaming industry.

kevin Koos
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@ Matt-

I would add the Wii was going up against a just released ps3 and a newer x360 that had gained a lot of momentum. In contrast the wii u was going up against the same (and IMO now outdated) x360 and ps3. I would argue the Wii U couldn't have had a better time frame to lauch in regarding competition.

Leon T
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Everytime I see someone mention that the 360 and PS3 had shortages when comparing it with the Wii U launch it always seems like they think it is a positive not to be able to ship as many consoles as Nintendo has with the Wii U. The Wii suffered from shortages too and still shipped more than the PS3/360 consoles so their shortages seems more manufactured than market driven.

I would say the Wii U launch in a much harder enviorment than the 360 launched in. The PS3/360 are just coming down from their peaks and the Wii is still selling as well. The 360 really only had to contend with the PS2 when it launched. This is not to say that Nintendo didn't screw up the launch too. Mario's attach rate shows that it is the only software pushing the hardware and it is clearly not enough to stop Wii U sales from dropping week to week in todays market.

Matt Matthews
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Christian: The double punch of Super Smash Bros. Brawl (March '08) and Mario Kart Wii (April '08) was pretty notable on Wii hardware sales. Although it doesn't prove causation, of course, but I'm not inclined to argue that they weren't motivators for Wii hardware sales.

January + February 2008: Wii = 710K (although some of that is post-holiday stock problems)
March 2008: 720K
April 2008: 710K
May 2008: 675K

And so forth. Mario software helps push Nintendo hardware. That's the only point I was making, not a specific comparison to launch.

Russell Carroll
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Thanks Matt.
The factor I actually key my personal thoughts of Nintendo weakness in sales is not listed in your post. Nintendo over-indexes on Christmas compared to MS & Sony, making it more critical for them to sell consoles during the holidays.

Still, as I see many articles claiming the death of console, I strongly believe that the 2012 Christmas market that the WiiU released to was a much more challenging one than the last generation of consoles faced, and when considering that fact and the number of units the WiiU sold, which compared historically was an impressive number of units, the WiiU launch was a pretty good thing. 610K units would have been disappointing :).

R G
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I have to ask, and I mean no offense by this: Are you a stalwart Nintendefender?

I've seen you post for a few years on any article with a hint of negativity towards Nintendo or Nintendo being "disappointing" or what have you.

Russell Carroll
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No offense taken, it's a fair question and the answer is yes.

...but it's a lot deeper than what may show at the surface. It's about the industry, innovation, the impact of the media on people's perceptions and how that impacts their actions.
The reality is that I, as a nearly over the hill gamer and someone who makes games for a living, appreciate Nintendo's approach and I evangelize things I think are worthwhile. Art Academy, for example, for me is very worthwhile and I hope to continue to see Nintendo doing things like it, Personal Math Trainer, Endless Ocean, and America's Kitchen (to name just a few). I might not buy all those games, but if those types of different approaches to entertainment stop appearing and Nintendo became just like the rest of the industry, in my mind it would be a great loss to what Video Games are and can be. I'd still pick up other games, I play them by the dozens, but the industry is richer precisely b/c Nintendo doesn't do things like everyone else.

There is no lack of anti-Nintendo articles out there, it's fascinating how much negative press they get and how often people go out of their way to say something negative (Pachter is a great example). I just provide the opposing view point, and hopefully some positivity too :).

Georgina Bensley
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Dear Nintendo: Region-locking a portable console was stupid. Please release a 3DS that works properly so that I can buy one and the airport market can go back to selling the games.

Kevin Alexander
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Funny, I've never really considered the limitation in this respect before.

Food for thought!

Bob Johnson
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Wii U sales are weak because even Nintendo said sales "aren't bad."

It has some issues. It isn't a console that has the immediate mass appeal of a Wii. Many think it is just a Wii upgrade. And it doesn't have the next-gen cred for the CoD gamer, the Madden gamer or the Fifa gamer etc.

Wii U is targeted more towards families. That is where its appeal lies.



That being said. Some new game or experience can change things quickly. You never know what new software will come out and grab the imaginations of the public. That is why this industry is not that predictable. It is an entertainment industry and entertainment is always about new and fresh experiences.

And the opposite is true as well. If nothing interesting comes out of the new Wii U hardware then they will be hurt by it all.

The difference between Nintendo and a company like Sega though is Nintendo is much better capitalized and I think much more conservative. They say they only have to sell 1 title per Wii U to make a profit. And thus they be able to maintain some decent levels of hardware sales to do well. I think they know the industry has its ups and downs and that it is never as good as the highs or as low as the lows if you manage your resources well for either.

And remember as bad as Nintendo is doing right now they still sold some 2.5-3 million units of hardware during December in the US alone. It ain't all bad.

Leon T
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"So Microsoft has a greater share of a shrinking pie."

That has been true since the 360 started outselling everything month to month.

Jakub Majewski
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Matt,

I was a bit surprised, reading the section about declining handheld sales, to find no mention of the elephant in the room: smartphones. I do not see how it is possible to discuss handhelds in a reasonable manner without mentioning their key competitor. It's as if you were to write an article that compares the PS3's performance to the PS1, without ever mentioning that in the meantime, this company called Microsoft has run off with a huge chunk of the console market.

Furthermore, in regards to the article as a whole - I am sorry, but I have to question whether there is any sense at all in writing an article along these lines. I'm getting a bit tired of "doom and gloom" articles about the decline of the games industry that somehow manage to omit the changes in the market, the rise of the free-to-play model fuelled by microtransactions, and the huge explosion in the smartphone market. Yes, things are bad for the big old dinosaurs of the market, and yes, this is certainly bad news for any company that is not adapting fast enough to the changes, but...

Well, to use yet another analogy, this whole article feels like a doctor telling me "you have the flu, you are dying"... when what he really should be telling me is to take an aspirin.

Nooh Ha
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I know it will be tiny, but how big was the PC retail games market? Add that in and you have the complete (retail) picture...

Wylie Garvin
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@Jakub:
This article is about U.S. retail software sales. In other words, you walk into a brick-and-mortar store and buy a physical box containing a DVD with some software on it. Xbox360 or PS3 games, that sort of thing. That's why smartphones aren't mentioned, you can't buy any retail software for smartphones, all software you can install on smartphones comes as a digital download.

Eventually, most game software (even huge AAA games) will be distributed digitally over the Internet, that is kind of inevitable. The laziness and anticompetitiveness of the ISPs (bandwidth caps, etc.) is the biggest factor holding it back.

I like Ben Cousins' take on this whole thing... he posed the rhetorical question "When the Consoles Die, What Comes Next?" and made an interesting presentation comparing this transition to a previous transition from dedicated arcade machines, to home gaming consoles / personal computer games. The arcade machines were based on stable technology that wasn't improving very fast, while the (then) new home consoles were disruptive technology that was improving very fast. The transition happened around the point where people could get a home console experience that was "almost" as good as the arcade experience, but with the massive extra convenience of being able to play it on their own livingroom couch. The result was the arcade business continued to exist, but as an ever-shrinking niche. Meanwhile a whole new "home gaming" market grew up beside it and after only a few years it was several times larger than the arcade business. I think Ben's analogy is pretty good, we're seeing a similar thing happen now with mobile gaming (smartphones, iPads, etc) where a whole new market has grown up for that but the existing AAA home console market still exists, it still serves the hardcore gamers who want to sit on their couch and play a "real" game for 2 hours, and that market niche is not going to just melt away... but the smartphone/tablet hardware is growing more powerful by leaps and bounds, and is almost good enough to disrupt the current home console market in the same way that systems like the NES disrupted the arcade market a few decades ago.

Imagine a few years from now, you have a smartphone with 4 GB of RAM and a relatively good quad-core CPU in it. Imagine it can connect over WiFi to your home network, and can stream HD video directly to your TV over WiFi. Imagine it can also communicate with the same kind of wireless controllers as "real" consoles such as the Xbox360 or PS3 use. At that point, why would you really need to have a dedicated console? You could buy your games as digital downloads over the Internet, and play them on your TV with a standard wireless console controller, but using your smartphone as the console. It still sounds a little fanciful now, but the next 5 years might bring gamers some wonderful new toys. And the retail software market might be an increasingly small niche in the overall game software eco-system.

Bob Johnson
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Except it isn't disrupting the console market. It is more just a coincidence. People aren't buying phones instead of consoles except those under extreme budget considerations but consoles have never been a must purchase item ahead of a necessity like a phone or a computer.

And remember the console market was always much smaller than the phone or pc market.

And despite what you may think, the power of consoles will grow just as fast as that of phones. The difference is in the business model.

Most always considered it a positive that they didn't release a new console every year. That was the beauty of the console market.

And don't think that people will keep buying the latest phones and tablets ad nauseum. I hear folks whining about $300 consoles. Does anyone think folks are going to buy new tablets every year? or Phones? The only reason folks buy as many phones in the US as they do is because it doesn't make sense not to if your service provider is one of the big three. Your monthly payment is the same if you do or don't.

Also mobile devices are restricted by battery life and size. And there is always pressure to make them thinner and lighter. Graphics power is lessened by these restrictions. And I believe this is at odds with gaming to some degree.

And the fact that mobile devices aren't gaming first devices is also at odds with gaming.

And remember consoles and mobile aren't mutually exclusive any more than dedicated handhelds and consoles were mutually exclusive.

If a new mainstream gaming hit is released on consoles customers who have phones and tablets will be buying. Just like they bought into Guitar Hero or WiiSports or Kinect.

Matt Ployhar
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@Nooh Ha - The Global PC unit sales for CY 2012 were ~30 million units sold through. However; that segue ways to my next point.

Retail is just such a rounding error for some platforms - specifically the PC. That will also likely happen more over time to Consoles. Couple things going on. There continues to be a major shift to digital sales, subscriptions, game cards, web-gaming, 'direct downloads'. F2P games can be accessed in several ways.

For context.. I like to say that League of Legends has technically sold 'zero' copies. Yet... when you look at their registered/playing user based. This (1) PC gaming title has over 70m registered users, 30m monthly active users, & ~12m daily active users. (These types of #'s start dwarfing the Console volumes and it simply boils down to economies of scale). So I contend that to get a holistic picture we have to look at the entire chain. Retail+Digital+F2P/Freemium+Web+Cards etc. The other aspects to track are: Piracy, Game loaning, & Secondary Sales. I disclose some of this up on the PCGA home page. Stay tuned for more. : )

As to the article itself..... good stuff. Given that this is just a small slice targetting retail this is great to see what's going on. The limitations of course come back to NPD & VGChartz & various public reportings.

Ian Welsh
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Without download figures I don't know how much this tells us about the market. Unless I'm missing something obvious?


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