[In this analysis, Gamasutra analyst Matt Matthews estimates that at least $2 billion in U.S. online game sales went overlooked in 2009, as NPD Group currently only reports U.S. console retail sales on a monthly basis -- will new methods of measurement reveal a healthier industry?]
On the release of June U.S. video game industry sales figures, we took special notice of the comments about non-retail revenue made by the NPD Group's analyst, Anita Frazier, in the release sent to the press: “We'll also be reporting consumer reported sales of digitally distributed, rental and used games content to provide insight into those non-POS [non-point-of-sale] sources of game sales.”
This was made in the context of an annual retail revenue estimate for 2010, which Frazier suggested could come in around $20 billion.
If reliable estimates were made available for the revenue generated outside of retail, the industry could certainly point to a figure for higher total revenue amidst the reports of declining retail sales.
It has been known for some time that the NPD Group has been working to capture data about these other revenue sources, and they recently reported that an additional $4.5 - $4.75 billion was spent on video game content outside of traditional retail.
That figure includes “used video games, rentals, subscriptions, digital full game downloads, downloadable content, and mobile game apps” but excludes revenue generated from social networking games.
Based on figures reported by GameStop (most recently analyzed here and here), we believe that at least $1.6 billion was spent on used games at that specialty chain and that in total the used game industry in the U.S. stood at around $1.8 - $2.0 billion for all of 2009. That leaves at least $2.5 - $2.75 billion generated by other content purchases and rentals.
That means that on top of retail software revenue of $9.92 billion in 2009 (excluding retail PC software sales), we would speculate that the industry can claim a minimum of $2 billion in content revenue, i.e. from those “subscriptions, digital full game downloads, downloadable content, and mobile game apps”. One can understand the attraction in being able to cite another 20 percent in industry revenue simply through better measurements of consumer spending.
The wording of Frazier's statement suggests that we may not receive these figures until next year, but having regular reported data would be a much welcome addition to our view of the industry, especially if the industry has good reason to believe that data is reliable.
Given the NPD Group's close working relationships with the platform stakeholders (Nintendo, Microsoft, and Sony) as well as software companies and retailers, we will look to those parties for cues on the usefulness of any such NPD data - although many of the large online-only game companies may not want to release specific information.
The current industry position makes measuring the non-retail revenue particularly important. Just last week in his notes on the June 2010 data, Wedbush analyst Michael Pachter suggested that Activision will address the “monetization of multiplayer” as a way to increase industry revenues outside of traditional retail sales. The methods he suggests – “a monthly subscription, tournament entry fees, microtransaction fees, or a combination of all three” – would not appear in the retail figures reported each month by the NPD Group.
This comes close on the heels of the $10 Online Pass being tested with EA Sports titles and a similar $5 code system required by THQ for owners of used copies of its UFC 2010: Undisputed brawler.
Not only will accurate measurements of these non-retail revenues be important to assessing the changing size of the industry, but it will also be important for determining how quickly the shift from packaged goods to online distribution is taking place.
Some analysts, like Pachter, have suggested that retail still has a decade during which it will dominate the video game industry's revenue streams. We are somewhat less sanguine about the near-term prospects for retail, but are also have less access to industry executives who would presumably have access to better data than we have seen reported in public.
In closing, we'd like to return to that $20 billion figure cited by NPD's Frazier for total retail revenue in 2010. While that figure represents a mere 1.7 percent increase over the revenues for all of 2009, recall that the industry is $685 million behind where it stood in June of last year.
The figure below shows where the U.S. console retail industry stands this year compared to the previous five years, subdivided into monthly revenue segments.
In fact, to reach precisely $20 billion at retail in 2010 the industry will have to manage over 8 percent growth for the back of the year. Our conservative nature leads us to believe that total industry revenue will be roughly flat in 2010, falling into the $19.5 billion range if not slightly lower.