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The bad news in April was manifold: software was down year-over-year by more than 20% (measured in total revenue or total units) and hardware was down by more than 35% (again measured in total revenue or units). Fortunately, there are a few reasons to think that April could be an outlier and that May's results will be closer to what the industry demonstrated during the first three months of the year.
First, the software launches in May will offer “something for everybody”, to echo Wedbush's Pachter. It isn't every month that one sees the launch of hotly anticipated exclusives like Super Mario Galaxy 2 and Alan Wake along with big cross-platform launches for titles like Red Dead Redemption and UFC Undisputed 2010.
Our only concern for the software launches of May 2010 is that we don't want a repeat of Fall 2008 situation, where even deserving games got passed over by overwhelmed consumers.
The analyst consensus seems to be that May software revenue could see 15-30% growth from last year's results, and that certainly is a significant improvement from last year. However, to put that estimate in another context, a growth rate of 30% would still make May 2010 the second weakest month for software sales this year (behind April, of course).
Even if hardware sales rebound to last year's levels – something we haven't seen all year – and accessories achieve just a modest bit of growth the total industry revenue in May will still be around $1 billion, up 15% year-over-year but still weak compared to January and February 2010. And that's under the best-case scenario of 30% growth in software.
Ultimately we are concerned that the retail industry may have peaked, and that revenue has escaped to other sectors that cannot be measured by the NPD Group's retail estimates.
We appreciate the skepticism of analysts like Cowen & Company's Doug Creutz who feel that games on social networking sites, iPhone games, downloadable console games, and other extra-retail segments are not the explanation for the weak sales in April. The impact of those factors has yet to be fully quantified, but we are not as confident that they aren't in aggregate taking a toll on the retail system.
It seems entirely reasonable to us to consider that while no single external segment might itself pose a threat to the current console/handheld market, the traditional gaming platforms may still suffer a death of a thousand cuts from total set of competing external segments. All that has to happen is for a consumer to have his or her gaming time and dollars sufficiently diminished (not depleted) to provide a barrier to additional retail purchases.
As we suggested earlier with the Call of Duty: Modern Warfare 2 DLC, the total effect of that release could easily exceed the total dollar value of its online sales. Not only did each consumer have his or her available cash reduced by $15 – which could take them out of the market for another $60 game – but their available time for games was probably also reduced by significantly more than it would have been with any other $15 purchase.
Let's be clear: We're speculating about the effects here, and we openly admit we could be misreading the importance of the extra-retail markets. But we have at least one data point from a retail company that we feel is relevant.
In its latest full-year results specialty retailer GameStop updated the way in which it described the threats to its business model. The relevant section now says this (with our emphasis):
While it is currently only possible to download a limited amount of video game content to the next generation video game systems, at some point in the future this technology may become more prevalent. If advances in technology continue to expand our customers’ ability to access the current format of video games, PC entertainment software and incremental content for their games, as well as new types of browser and casual games through these and other sources, our customers may no longer choose to purchase video games or PC entertainment software in our stores.
That filing, made at the end of March of this year, is the first time that GameStop has seriously addressed downloadable games on current generation consoles, downloadable content, and casual games. If the world's biggest videogame retailer is worried – even just a little – then we're willing to bet there is money being made in these segments that is not insignificant.