In my last column
I separated total U.S. video game industry revenues from the hardware, software, and accessory revenues. Today we're going to slice the industry by platform stakeholder: Microsoft, Nintendo, and Sony along with their respective systems.
HardwareThe Xbox 360 has been in the console hardware driver's seat for over two years now. According to my records of U.S. hardware figures, it has outsold its competitors in all but one of the last 25 months, the exception being December 2010, the last great hurrah for Nintendo Wii sales. During this period, Microsoft's console has also frequently been the most expensive console, which suggests that consumers are choosing it based on its perceived value for the available price.
After the August 2009 introduction of the PS3 Slim at $300, Sony had a short period during which it appeared that consumers viewed the value of the PS3 favorably over the Xbox 360.
That enthusiasm faded after Christmas 2009, and the two were roughly at parity until Microsoft's launch of the Xbox 360 S Model in June 2010. The new S Model helped move the platform beyond its Red Ring of Death image and the addition of Kinect has kept the platform relatively strong since then.
Nintendo's Wii is basically an abandoned platform at this point, with only its back catalog and a handful of new releases before a Wii U launch expected in November of this year.
So, it is no surprise to see hardware sales so far this year that look like this, where I've put last year's totals in shadow for the sake of comparison.
Every console is down so far this year, with the Wii being particularly hard hit. Microsoft's ongoing, comfortable lead over its competitors is little solace given that they're down almost 30 percent from a year ago. At least, in their case, they can claim that fervor over the Kinect accessory was still driving hardware sales, an argument that has the virtue of being true.
In Sony's case, the PlayStation 3 is the least affected by this year's downturn in hardware sales, probably as a direct result of its $50 price cut in August of last year. However, this is the weakest first half for that platform since 2009. The platform is ripe for a price drop, and I believe they will introduce a new model next month along with a cut to at least $200.
On the handheld side, Nintendo is still the dominant player. Sales of the Nintendo 3DS are up 27 percent compared to the first half of 2011, but that comparison isn't completely fair since the 3DS was only available for four of the six months last year. In what I expect to be its last summer of relevance, the Nintendo DS platform (i.e. the Nintendo DSi and the Nintendo DSi XL) actually outsold the new PlayStation Vita for the first half of the year. Prior to June the Vita was ahead of the Nintendo DS, but the price cut in May drove June sales of the Nintendo DS to parity with the Nintendo 3DS.
The limiting factor in both the console and handheld hardware markets now is pricing. Microsoft has moved first by introducing a $100 Xbox 360 and Kinect package along with a two year Xbox Live Gold contract. Currently these are available only at a score of Microsoft stores and select GameStop and Best Buy stores. The NPD Group has confirmed to me that they are tracking the hardware sales as part of its usual point-of-sale tracking (i.e. the data on which I'm commenting) and that the $15 per month contracts being reported in the company's Subscription Tracker product.
If these hardware sales are reported as $100 systems, then that effect is not obvious in the average selling price (ASP) data that the NPD Group provided to me. According to the NPD Group, the Xbox 360 sold for $275 during June 2012, down $12 from its average price in May. While that change sounds significant, I would point out that it is not the lowest price even in 2012 since the average in March was $259.
Sony brought its average price down almost exactly $40 as a result of the $50 cut last year, and I expect that the effect would be the same if not stronger were they to move to a $200 entry-level model. The road to a $200 PS3 has been quite long, as the figure below shows. They launched with a $500 model and if they cut to $200 in August they would have taken about 69 months to reach that level.
This is one of the big shifts from last generation to this generation: hardware prices have started higher and remained high. Just look at how the Xbox 360 and Wii both took nearly twice as long to hit $200 as did the PS2 last generation.
Will Nintendo cut its Wii price to $100? Perhaps that will help smooth out the transition to the Wii U later this year, but I don't believe that greater demand on a lower margin will really help the company financially either.
A more important question is how Nintendo will price the Wii U. Various sources led me to believe back in January that the Wii U would be underpowered, and I think that those indications were largely on the mark. Yet from the perspective of production cost, this will help Nintendo in the short term, since it may be able to price the system competitively at around $300.
I spoke about consumer perception of value earlier, and I believe that that will play heavily into what happens to the Wii U in November. At $300 with a tablet controller and a Mario game on store shelves, the system could look quite attractive. Moreover, most consumers will not know nor care whether the Wii U has a modest CPU or more RAM than an Xbox 360 provided it gives them experiences they enjoy at a price they're willing to pay.
On the handheld side, Nintendo has differentiated its systems by price, and I don't see a compelling reason for it to shift them further. It has its older DS products at $100 and $130, well below the newer Nintendo 3DS at $170 and 3DS XL at $200. Titles like New Super Mario Bros. 2 and Kingdom Hearts 3D should maintain hardware sales through the late summer and into the fall when the holiday shopping season can carry Nintendo's handheld sales into 2013.
Sony's handheld business, however, is in serious trouble. Since the anemic Vita launch I've voiced my concerns and for the time being I'm done looking for a turnaround. Not only is its price a serious impediment to consumer interest, but the software catalog is shockingly weak.
A quick search of GameStop's online storefront shows approximately 33 titles at retail, a third of them unavailable for purchase except in physical stores. On the other hand Sony's own PlayStation Store has nearly 50 Vita-specific titles available for download, but I am still alarmed that the company hasn't chosen to avail itself of the entire library of classic PSP software that could run on the machine. Just this week it made the PSP's best-selling game, Grand Theft Auto: Liberty City Stories, available for the Vita at a regressive $20 price.
When I asked Michael Pachter of Wedbush Securities about his PlayStation Vita sales expectations several weeks ago, he said that they expected 3 - 4 million Vita systems to be sold in the U.S. by year's end. He told me this week that Sony will not see "a pickup in sales at this price," despite what he sees as the great value in the system. He added, "it costs the same as a PS3 and that's a tough trade-off."
SoftwareOf course, software is the biggest part of the market and I'll put up a column soon with some more detail comments about 2012, but for now I want to address the software market from a platform-specific point of view.
I want to bring up a point that Wedbush's Pachter made in his notes prior to the release of the NPD Group's latest retail estimates, that addresses the fortunes of casual and hard core software consumers. He said "We acknowledge that former Wii and handheld gamers have migrated to social and smart phone games, but do not believe that these emerging categories have impacted the market for hard core games much, if at all."
That comment came back to me when I reviewed the estimates I had after the June 2012 results, particularly because of the data in the following figure. As I did for hardware, the 1H 2012 data is in the foreground with the corresponding 2011 data behind it in shadow.
In the midst of all the turmoil at retail, every platform has been hit with declines in software sales. But, indeed, it has been the Wii, the console we most associate with the casual consumer, which has been most hurt by the contraction. Not only are its software sales now far below those of the Xbox 360 and PS3, but it is losing sales more quickly.
And the system I consider the most hard core, the Xbox 360, has been least affected by the downturn this year. The PS3 isn't as insulated as the Xbox 360, but it still doing better than the industry at large in terms of revenue declines.
Finally, an update on the lifetime software sales for these three key platforms. You may recall that back in 2009 the LTD software total for the Wii shot past the LTD total for the Xbox 360, even though the Xbox 360 had had a full year headstart in the market.
According to the new official tie ratios provided to me by the NPD Group, it appears that the Xbox 360 has retaken the lead in total software sales. The figure below shows the history of these software sales, as estimated by me on available data. (For a launch-aligned version, click here.)
The tie ratio for the Xbox 360 has now reached 9.4, a new high for the system in the data I've collected over the years. That puts the total Xbox 360 software somewhere between 321 and 325 million units. By comparison, the Wii tie ratio rose to 8.0 giving that platform total software sales of 315 - 320 million units. The PS3 now has a tie ratio of 8.5 and software sales of 180 - 183 million units.
We're looking at the end of the Wii's lifetime, so it is possible that as hardware sales fall off and some additional software sales accrue, it's tie ratio will continue to climb.
Also, I should point out that these don't include any pack-in software that has even been included by manufacturers like Uncharted for the PS3, Wii Sports for the Wii, or Call of Duty: Modern Warfare 2 for the Xbox 360. Nor do these figures any software sold digitally through services like Xbox Live or the PlayStation store.
To get back to what Pachter said, I think this is a point worth pondering, especially as the Wii U comes to market and Microsoft and Sony prepare their next systems. Given the revenue that can be generated by just the hard core video game consumer - which may be essentially what the revenue at retail essentially represents today - the platform holders and publishers would be foolish to leave that money on the table. But, at the same time, to grow significantly in the coming years they will also have to provide hardware and software that are attractive to the casual part of the market.
The Wii U will have several modes of input, and that appears to be a clear means of appealing to gamers from the hard core to the casual. An improved Kinect device and Microsoft's Smart Glass technology will add to the standard Xbox-style controller to achieve the same effect. When Sony does reveal details of its next platform, I expect it too will follow a similar method, possibly building on the existing PlayStation Move technology.
With all those pieces in place, the stage will be set to pursue consumers of all stripes in their living rooms with what amounts to high-powered set-top boxes. At that point, it will be up to platform holders and third parties to attract the gamers. We know they can appeal to the hard core, since this is precisely what they're doing now. Will they also be able to bring back the casuals?