After three straight months of gains according to the sales-tracking NPD Group, the U.S. retail video game industry pulled back in December for an end of the year that caught many by surprise.
The basic story appears to be that no one truly appreciated just how front-loaded the holiday season would be, both in terms of software and hardware.
Prior to the release of the official estimates, the consensus expected flat software sales with discounts helping buoy hardware sales through the end of the year. Unfortunately December 2011 software sales actually fell by 14% in terms of revenue (from $2.37 billion last year to $2.04 billion this year) and hardware unit sales fell by around 25% (from 8.4 million units to around 6.2-6.3 million units).
Add on top of that a 5% decline in average hardware prices and a brutal collapse in the accessories market (down 27% in terms of revenue) and the industry might actually feel lucky to get out with a mere 21% decline in overall sales for what is typically the biggest month of the year.
It's tempting to look at a single month – especially the biggest month of the year – and draw dire conclusions. That's a bit premature, I think, since software sales didn't so much contract suddenly as shift about a month earlier, into the November results. Moreover, two platforms singlehandedly delivered most of the hardware and software declines: Nintendo's Wii and DS. Outside of those platforms, and of course neglecting Sony's inconsequential PS2 and PSP, the picture is a bit more rosy (or at the very least far less dire).
You can almost see this in the figure below, which shows the retail video game industry revenue over the past seven years, subdivided into monthly segments. The November 2011 segment is larger than any other November in history, but then there is a contraction in December.
Regardless, let me put some actual figures to my claims. First, if we look at November and December combined, we see that total software revenue was down a mere 3% while total software units were actually up slightly. The heavily promoted Black Friday sales appeared to draw a tremendous number of consumers but after that, the consumers felt they had most of what they needed in terms of software.
As Andrew Connor, an analyst for Piper Jaffray, commented "the 2011 holiday was heavily front-end loaded" which demonstrates that "the core gamer demand is still there, but the casual gamers are losing interest". This kind of consumer fatigue, I expect, will dominate sales discussions for much of 2012.
As to the other point, Nintendo's Wii saw its software sales drop by over 40%, according to comments from Doug Creutz of Cowen & Company. Further, Anita Frazier of the NPD Group highlighted sales on the Xbox 360 and PS3 as being particularly positive, “up 8% in dollars in December, and 9% for the total year.” These platforms are currently sustaining the industry, although it's a bit more of the Xbox 360 and a bit less of the PS3.
Finally, we know that the Wii was selling for an average price closer to $120 than $150 this year, and yet had unit sales of just over a million systems (down from over 2.3 million last year), The Nintendo DS, while perhaps not lower in price this year, was at the very least contributing far fewer units. Reading between the lines of the various comments made to the press, I think the Nintendo DS came in just over 600,000 units in December, a drop of almost 2 million units from December 2010.
As I've said before, Nintendo was more than willing to take credit when it was driving practically all the industry's growth with the phenomenal sales of the Wii and DS back in the 2007 and 2008 period. That cuts both ways, however, since they must now also own the contraction caused by the collapse of those same platforms, while admitting that the 3DS is still not (yet!) filling the gap left by the Nintendo DS and the successor to the Wii is still at least nine months away.
There is a lot more to say about software, specifically, but I'm going to save that for the next installment of this column. For now, let's just look at the hardware situation.
Last year we saw dramatic declines in Wii and Nintendo DS hardware sales, and the dramatic growth of the Xbox 360, fueled by both Kinect and the new S Model hardware. Sony's PS2 became negligible while the PSP moved toward irrelevance. The PS3 saw a very modest increase.
Here is the picture for 2011, with the 2010 totals shown in shadow for reference.
Microsoft continued its growth again this year and became the top-selling hardware platform of 2011 as a result. When the history books are written, I strongly suspect that 2011 will be the peak year for that platform.
Nintendo saw its Wii hardware sales fall by over 35% from 2010, while Nintendo DS sales fell by over 50%.
Of course, the Nintendo DS story is closely intertwined with the 3DS story, and that's one of the big success stories for 2011. After what has to be seen as a disastrous summer after the spring launch, the price cut from $250 to $170 helped the Nintendo 3DS leap to over 4 million units for the year. Given two more weeks at its current price and its current slate of software, it might even have outsold Sony's PS3.
Finally, Sony. What to say? The PS3 again eked out a very modest increase – about 4.3% according to Michael Pachter of Wedbush Securities. Still it only sold about as well as mortally wounded Wii, and Pachter added that he's “not sure Sony is panicking about this, as they are at least gaining some traction at this price” but it looks like there is another price cut in the cards, “likely at E3”.
That seems perfectly reasonable to me, but we'll have to see what happens through the beginning of 2012. It seems likely Sony can hit its hardware targets for this fiscal year, but it can't expect to maintain that level for another year without a price drop.
Further, the system hasn't had a major hardware revision since the 2009 introduction of the PS3 Slim. Can Sony wait until E3 to launch a new model, drop the price, and still hit its next fiscal year goals? If nothing else, the company has shown immense patience as it cuts costs and grows marketshare, and the third parties and the analysts have always been calling for cuts before Sony was willing to make them.
Regardless of whether the hardware manufacturers are ready or not, the history of hardware sales over the past few years makes it look like a generational shift is imminent. Here is a picture that makes this point.
Annual hardware sales have been in decline since 2008, and if not for the appearance of the Nintendo 3DS this year, the results for 2011 might well have looked even more cataclysmic. What we see here is the huge growth of the Wii and Nintendo DS growing the installed hardware base in 2007, 2008, and 2009 with a dramatic contraction after that.
We're now two years on since that contraction began and despite Microsoft's success with the Xbox 360 during that period, the number of new systems being added each year is still shrinking.
Nintendo has at least addressed its handheld problem, and the 3DS has hit a price and software selection that consumers find very attractive right now. Just look at the graph below.
If Nintendo and third parties can continue to supply the system with good software, we should see a return to growth in the handheld software segment. That is, the graph above should show an upturn when we update it a year hence.
Frankly, I don't hold out much hope for the PlayStation Vita. The handheld market appears to be extremely price-conscious – or more precisely value-conscious – and I don't think Sony has justified the value of its new handheld in a way that will make it cross over from the hardcore to the mass market. Remember, the question is not so much whether other handhelds are better than the Vita in terms of games or price, but whether they are good enough to fill someone's needs. I expect the middle of 2012 to be very unkind to the PS Vita, but it should at least sell better this year than the PSP did in 2011.
That could be nothing, however, as the industry begins its long wait for the Wii U. It's predecessor, the Wii, is essentially an abandoned platform for 2012 and Nintendo has few options left to prop up its sales into the second half of the year. Until that time the company will focus on its only growth segment, the Nintendo 3DS.