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Analysis: Examining Declining U.S. Console Revenues - What's The Cause?
by Matt Matthews [PC, Console/PC]
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July 5, 2010
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[Gamasutra analyst Matt Matthews examines May's hardware NPD figures -- why have console sales slumped 20% year on year to $241.5 million for the month, and which platform bears the brunt of the responsibility?]
When the NPD Group released its May 2010 estimates for U.S. video game console retail sales, the headlines sounded grim. Not only were industry revenues down overall, but software sales had missed analyst estimates – estimates that had in some cases already been revised down based on publisher statements.
We want to step back and ask some very specific questions: In which segments are these declines? How are the individual platforms contributing to the decline, both in terms of hardware and software? Finally, what are the explanations being put forward and how to they jibe with the measurements we've made?
The first question, about broad segments, is fairly straightforward. For example, let us examine the hardware segment, looking at consoles and handhelds as subsegments.
The graph below, and several of the following graphs, provide a comparison of the first five months of each of the years from 2006 to 2010.
The introduction of the Nintendo DS Lite took place just after this window in 2006, and by January 2007 the Wii sales boom was well under way; this explains most of the huge jump in both handheld and console hardware sales figures from 2006 to 2007. That marks the beginning of the industry's last boom.
From there, console hardware sales for the first five months of the year peaked in 2008, driven mostly by strong sales of the Wii and, to a lesser extent, the PlayStation 3. Handheld sales for these five-month windows were boosted in 2007 and again in 2009 from sales of the Nintendo DS Lite and Nintendo DSi, respectively.
The fall in 2010, then, is primarily a matter of cooling Nintendo Wii sales (in the console segment) and DS sales (in the handheld segment), with smaller effects from the prolonged decay of both the PlayStation 2 and PlayStation Portable (PSP) systems.
The next figure, which represents the same data but split by manufacturer, makes it clear that Microsoft's hardware sales (in January through May) have remained solid throughout the past five years. As sales of the original Xbox ended, the Xbox 360 smoothly picked up and has managed modest increases for the past three years.
Sony's situation is a bit more complex. The transition from the PlayStation 2 to the PlayStation 3 has been a struggle, and only from January – May 2009 to January – May 2010 can we say that PS3 sales made up for the aging PS2. Over all of this was a rise and decline of the PSP, and the PS3 became Sony's dominant platform only in September 2009, nearly three full years after it launched.
Of course, unit sales are only one view of the hardware market. As system prices have fallen – or in the case of the Nintendo DS, risen – the amount of revenue generated by the hardware segment has varied. The figure below demonstrates that, even as hardware sales held steady in the first five months of 2009 (as compared to 2008), the money generated by those sales actually decreased.
Much of that 6% drop from 2008 to 2009 comes from a rather surprising source: the Nintendo DSi launch. As its unit sales helped keep the industry hardware total stable across those two years, its $170 price is lower than the average hardware price for the entire industry, thus pulling total revenue down despite its robust sales.
By the beginning of 2010, both the Nintendo Wii and the Sony PS3 had gotten price drops of about 20% and 25%, respectively. This jibes well with the 20% decline in total hardware revenue for the first five months of the year, but the underlying dynamics of the revenue picture are more complicated. It would appear that PS3 sales have increased so much in the first five months of 2010 that the system has generated roughly the same amount of revenue, despite the price cut.
The Wii on the other hand has a lower price and sales, which means it contributed to most of the decline in hardware revenue this year, in the neighborhood of $400 million.
The bottom line on 2010 hardware: The Wii price cut and subsequent lower sales during the January to May period has cut revenue significantly while the PS3 has not made up for the long term erosion of PS2 and PSP unit sales and revenue. Microsoft has maintained modest growth in unit sales, and is least to blame for falling hardware revenue.
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Shouldn't they be first and foremost to blame since they started this generation and have sales lower than the Wii? Why does a system released AFTER another system get blamed, when the Xbox 360 and PS3 sales have been lower than Wii sales nearly every month since the Wii released?
Perhaps if Microsoft and Sony increased in sales significantly, rather than "modest growth" that is still behind the Wii, we wouldn't have this problem?
an economic downturn (when faced with paying rent or buying a new Xbox game, more people would rather remain with a roof over their heads)
and market saturation (We're now looking at console developers scrambling to remain relevant with motion controls and 3D because the majority of game libraries contain massive amounts of redundant software - how many of the same types of shooters can one sell?).
With more and more Americans (the primary demographic that once had the largest disposable income) losing their jobs and facing unemployment, fewer of these potential customers have the capital necessary to invest in leisure activities like they did when employed.
Also, this industry is in dire need of an enema very soon.
Even though many people just dismiss that, this site runs stories on the thing. But somehow even here you can't lump it together with gaming, you keep it separate.
Super Mario Galaxy 2 : 1 month
Wii Fit Plus : 7 months
NSMB Wii : 6 months
Pokemon Soul Silver: 2 months
NSMB : 4 years!
Pokemon Heart Gold: 2 months
Just Dance: 6 months
Mario Kart Wii: 25 months!
Wii Sports Resort: 10 months (and it's now a pack in)
average : over 11 months apiece! That's coupled with an incredibly high and healthy standard deviation of over 15 months, and that's just in the top 20 !!??
Compare that (roughly) to the rest of the chart:
Red Dead Redemption : 1 month and 1 month
UFC 2010 : 1 month and 1 month
Alan Wake : 1 month
Skate 3 : 1 month
Lost Planet 2 : 1 month
GoW III : 3 months
Super Street Fighter IV : 2 months
Mod Nation Racers : 1 month
COD MW2 : 6 months
Average : 1.7, and a rather consistent standard deviation of 1.5
At least that specific part of your statement is quantifiably wrong, by an incredible degree.
1) Nintendo is doomed, Nintendo has been doomed from the late 80's when cheap computers would kill the NES, SEGA would kill Nintendo, Sony would kill Nintendo: first the console and then its handheld and off course Microsoft would extra kill them. Anything that supports that myth will be flagged as Nintendo being doomed. I have no idea why analysts keep going over this mantra, but it's there all the time. Also notice, Wii growth is never mentioned specific, Wii-growth is always Industry growth. But specific Xbox and PS growth is mentioned specific.
2) Casual gamers are stupid. Actually, they're very smart seeming to gyrate for 90% to quality titles (quality as in they perform better the job people want games to perform, not in "oeh oeh we just bought...i mean got 90% metacritic score!!" quality). If games keep selling over a long time, it means people like it, people play it at other pleople's places and go out and buy it. Hype products spike and then die off because a lot of people fall for the marketing but quickly the product is recognized for its shoddy quality. This is Product Life Cycle economic theory 101. Seemingly, simple economic principles are completely ignored by analysts. So "casual" gamers are actually smart because clearly they know what they want from a game and can recognize a good one and a shoddy one.
3) Revenue is everything. Did you know that Avatar is actually not in the top 20 of the best sold movies in theatres? Yeah sure it has the highest revenue, but revenue doesn't give you view to the people you attract. If you divide the revenue Avatar made with the average costing ticket and then count inflation compared to other movies, it doesn't even enter the top-20 of people reached. Same thing with these kind of analysis. Revenue doesn't say much, number of sales are far more important. If an industry can't keep attracting new people, it will die. I remember a financial report of the cinemagroup Kinepolis who achieved a revenue and profit increase but sold less tickets because they bumped up the price. This is what happening to the "hardcore" right now. It is in decline, the fact that game-companies are exploiting the hardcore's sheephead mentality so hard is proof of this, the decline of numbers of games that go over the 10 million benchmark is another. Off course, analysts will completely ignore this and just keep on looking to revenue.
Profit is sanity, Revenue is vanity.
I think personally companies rave about revenue to try and trick investors that don't understand that revenue /= profit. Especially when the profit of those companies is low. Otherwise you'd be raving about how you made 2 billion dollars in profit in the last fiscal year.
If you get the public statements of all big companies (EA, Ubisoft, Take Two, THQ, etc...) you will notice a trend in increasing revenues and increasing LOSSES.
Take Two for example, in the year of GTA 4, they reported a explosion in revenue, and increasing loss! It is like WTF?!?
I wonder how these companies keep running like that, making losses year after year (some, not all... obviously... but the majority is doing this in the majority of the years).
One of the few profitable companies are Nintendo and Square. (square actually has a obscene profit, even not hitting top20 constantly... how they do it? :P Although it is not obscene as Nintendo and their 2 billlion PROFIT in 2008...)
Perhaps because game companies are like movie publishers? They take all the profit they made on one title and apply that to anything that could be considered a loss, thus they don't need to pay out royalties or large dividends.
Remember: Peter Jackson had to sue in order to get paid for the LoTR trilogy.
Not really, if you look the numbers, like I mentioned, the publishers are having LOSSES every year (with exception of Nintendo, Square and some other smaller publishers), the holydays usually get the most expensive games released, games that tend to have a huge amount of income, but their profit is not high, specially if you divide (instead of use a difference) the amount of income and the cost. (example, some stuff may have low income, but have 200% profit, others have high income, but have meager 2% profit...)
"Unless I'm mistaken, isn't May one of the worst months for video games sales? At any rate, one could spend weeks, even months discussing why sales are down, but at the end of the day, this isn't going to matter. By the holiday season, publishers will be seeing huge gains, major profit, etc."+
That doesn't matter, cause this may was down YoY.
@ Mauricio
"I wonder how these companies keep running like that, making losses year after year (some, not all... obviously... but the majority is doing this in the majority of the years)."
The reason for this is, if you are making losses and manage to increase your revenues at the same time, the banks, that lend you money will be completely satisfied.
They will even shoot more credit money into your company. In long term, this is bad for the company, but in short and mid term, the bank can be sure, they get back their money, cause they expect you to rise revenues in the next year again, if the company generates any profit is nothing, that matters to them.
If you only try to raise profit instead of revenue on a small scale, banks tend to refuse to lend you money.
"If you only try to raise profit instead of revenue on a small scale, banks tend to refuse to lend you money. "
Wait...What? Profit is completely dependent on revenue. If your profits are going up, that means that revenue is also going up. revenue - expenses = profit.
But I guess if you are talking about a company that brings in $2 billion in revenue versus a company that brings in $2 million in profit after only $20 million in revenue, I can see your point. The first company has a chance to bring in far more profit for the lending bank.
"Profit is completely dependent on revenue."
This is not the case, there are several things, companies can do to seperate the development of profits from the revenue.
- You can lower the price of you product, this will lead to higher sales in many cases. But in console business, especially in the hardware business, products are often sold below their production costs. I give you an example. If you sell a console for 300 US$, that costs you 350 US$ to produce (please note, that I don't take any retailers, distributors, marketing costs into account, cause it isn't necessary here), you have a loss of 50 US$ per unit. Imagine, you sell 1 million units of this hypothetic console per year, this will lead to 300 million US$ in revenues and 50 million US$ in losses.
If you see, that the market doesn't want a console priced this high, you may consider a price drop to 200 US$, if you sell more consoles, you can achieve lower production costs. Maybe you can reduce the production costs to 250 US$. Imagine, your price drop is successful, you sell 2 million consoles in the next year. You will have 400 million US$ in revenues and 100 million US$ in losses. You see, higher revenue doesn't lead automatically to higher profits.
- On the other side, you argue "If your profits are going up, that means that revenue is also going up."
This isn't the case either, imagine a software company, that produced in Year1 a title, with a production budget of 10 million US$. They sell 400000 units of the game (again, I know, that there are retail costs and distributors, but lets put this aside for a moment and assume, the company sells every copy for 50 US$ and gets the full money from each game, this makes everything clearer to understand).
At the end of the year, they had revenues of 20 million US$, this makes a profit of 10 million US$.
In Year2 they produce another game, they can use many of the tech developed for the game of Year1, so costs only 5 million in the making. They sell only 300000 units of the game, each for 50 US$. In the end of the year, they have a drop in revenues of 25%, but profits are the same as in Year1.
You see equal profits can be achieved with lower revenues.
In Year3 the company has to develop a new game, with a new engine, the costs for this are again 10 million US$, the average price for games has risen to 55 US$, the company manages to sell again 300000 units, as in Year2, this makes revenues of 16.5 million US$. The revenue is higher, then in Year2, but because the expenses were higher, the profit dropped by nearly 30%.
You see, you can experience a drop in profits even, when you manage to rise your revenues.
Carry on. :-)