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As the middle market falls out, game retail collapses
As the middle market falls out, game retail collapses Exclusive
May 16, 2012 | By Matt Matthews

May 16, 2012 | By Matt Matthews
More: Console/PC, Business/Marketing, Exclusive

[In his latest Behind the Numbers column, Gamasutra analyst Matt Matthews illustrates a "sustained contraction across a period of several months" at U.S. and UK retail. What have been the driving factors?]

In my last column, I tried to give a broad picture of how the overall U.S. video game retail market across all segments was contracting extremely quickly, and then focused on hardware specifically. Today I want to discuss the software scene, which has been undergoing some very interesting changes in the past couple of years.

Before I get to the reasons behind the decline, let's get a sense of scope for the changes in retail software sales. So far in 2012, console and handheld software has generated $1.67 billion in revenue, according to official NPD Group data. That's down from $2.42 billion in 2011 for the same period, a decline of $750 million or 31%. The peak for this period of the year was $2.9 billion for the first four months of 2008, so the industry is down 42% from its best showing.

The results for units are similar, down 30% from 63 million units of software in 2011 to 44 million this year. From the peak of 73 million units of software in January-April 2008, the market has fallen 39%.

It's helpful to put this into a visual form so you can see just how much is being lost. Here are the monthly retail sales for console and handheld software in the U.S. for 2011 and 2012, showing just the change in a single year's time.

So it's clearly not a single month's sales that are down, but rather a sustained contraction across a period of several months.

I'd also make the point that this phenomenon isn't restricted to the United States. The data in the UK are just as dire, both in terms of revenue (in British pounds) and units. The picture for that market looks like this.

(The figures above, unlike the U.S. figures, include PC software revenue. Adding the PC data to the U.S. figures would in fact make them look worse.)

Which systems are contributing to the falling revenues in the U.S.? Most of the $750 million decline came from Nintendo's Wii, which I estimate is down $300 million in revenue, year-over-year. Nintendo's handhelds probably lost another $150 million in revenue compared to last year. Most of the rest is from the two HD consoles, the Xbox 360 and PS3, which collectively contributed about $260 million.

Splitting it slightly differently, console software is down 29% while handheld software is down 39%.

So there's plenty of weakness to go around, and we don't really need to pick on any particular system or segment.

Let's look, then, at what might be driving the market down. One obvious culprit is the slim release slate for software this year. As Cowen and Company's Doug Creutz put it in a pithy headline to his notes on the latest retail results from the NPD Group: "It Turns Out That Collapsing Release Slates = Lower Industry Sales."

He goes on to say that over the past few years publishers have "aggressively slash[ed]" their title output, and points to only nine title releases in April 2012, far below the 28 titles in April 2011.

I asked NPD Group's Liam Callahan about the number of SKUs being released so far this year compared to last year, and he told me that the company had seen "a 25% decrease in the number of new SKUs released in year-to-date April 2012, compared to year-to-date April 2011".

Creutz adds to this that a "lack of depth" to the release slate is particularly driving the decline. That is "smaller titles may not individually contribute significant sales" but "in aggregate they do have a meaningful impact."

So the middle of the market has fallen out, and that's consistent with the flight of the casual gamer that is a common theme among market watchers.

The Non-starter

As Wedbush Securities analyst Michael Pachter said to me in a recent email, "casual gamers are never buying consoles again." If true, that would signal a sea change in the balance of power in the video game industry. No longer would companies like Microsoft and Sony and Nintendo hold the reins of power.

I prodded him on this point, asking if console makers could turn consoles into platforms for the kind of bite-sized and socially-networked entertainment that currently drives the mobile, tablet, and web-based markets. After all, each console now has a user-friendly interface: Microsoft has Kinect, Sony has Move, and Nintendo has the Wii remote and the Wii U tablet.

"It doesn't matter," he told me, since "the hardware purchase decision is a non-starter."

Is there another way? Mike Olson and Andrew Connor of Piper Jaffray take the stance that the HD consoles need price cuts as soon as possible and that "it would be a wise strategy for Microsoft and Sony to invest in the service offering" accompanying those consoles. In particular, they point to the Amazon model, where consumers with different interests (video, reading, shopping) are all drawn to the single Amazon Prime service.

So, for example, offering a broader variety of video-on-demand providers and add-on services could help make the HD consoles more attractive to the casual consumers, increasing the audience for everything that the console has to offer, including games.

Let me be clear that even with price cuts and new services, none of this is going to revive the software situation at retail. Those graphs at the top of this article, the ones showing the dire year-over-year declines, are the same pictures we're going to be seeing for retail software, likely for years.

While he and I have had our disagreements, I think I can agree with Pachter that the casual gamers are gone for good -- at least from the traditional business model. The industry giants are still largely focused on packaged game software for dedicated game hardware, and that simply does not make sense in the face of ubiquitous mobile devices and web-based free-to-play entertainment.

In my next column, I want to take a closer look at that digital segment of the market. Despite the growth we're seeing there -- in the form of quarterly and fiscal year reports from publishers -- I think there are still some major concerns. The latest NPD Group comments on content sales outside of retail, which includes that digital segment, suggested to me that there might actually be contraction going on there too.

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John Flush
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Are online numbers part of this at all? Amazon? I treat them as a retailer at this point and only buy games from them because they usually come with $10 off the next game, release day delivery, no hassle, the fact I can't return a game once it is open so might as well go online to buy them. One of the reasons for the decline is happening because you aren't tracking your customer base anymore.

Next, I don't agree with the casuals are moving on. I think this is a figment of the gaming worlds imagination. Kids want Video game consoles and they will beg for them until they get them. I'm not buying an iPad or iPhone for my kids (teenagers maybe). I think the problem is no one markets to kids anymore. Everything has to be 'online connected' (generic adult speak for 'unsafe') - you have to pay a fee (xlive). Kids like to get together and play games in a local multiplayer experience, but the devs have basically killed that idea in favor of online play (see previous statement).

I do believe you might have lost the 'casual' adults though. I think they (I) have realized they don't want to flail around playing games with their kids that make them look stupid (example: see every Kinect ad).

To add to that a lot of the games have gone beyond 'M' now. I recall a good set of play time with Doom in my day, clearly a 'M' game for violence. But 'M' games these days can't just limit it to one questionable set of material anymore. Instead they have to swear, have violence, and throw in sex. If you are going to slippery slope your customers you need to have 'bridge' games.

Matt Matthews
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If you mean are Amazon sales tracked, the answer is yes. If it's physical retail in the U.S., then the NPD Group either has the data or is modeling/accounting for it.

Nicholas MacDonald
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As Wedbush Securities analyst Michael Pachter said to me in a recent email, "casual gamers are never buying consoles again."

It's hard to take his comments seriously when he makes these sorts of statements. Casual gamers are a diverse bunch, and many people that consider themselves casuals still really enjoy new experiences. To think that an entire demographic would write off new console hardware is foolish.

Bob Johnson
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Exactly. It is up to the console manufacturers to provide new must-have fun experiences for consumers. If they do that then they sell consoles.

I think right now too many are driving while looking in the rear view mirror. New consoles with new graphics and new improved controls and new experiences will do a lot to change this bad attitude.

Right now everyone is looking at 7 yr old hardware. And seeing the world around them change and improve while their consoles are still 7 yrs old.

But when the manufacturers flip that switch......suddenly those folks won't be looking in the rear view mirror. Their attention will shift to the windshield. Their attitude will change overnight.

Granted new hardware is no guarantee of success. You have to come up with something costumers will shell out their hard earned dough for.

But this notion of hhmmm oh casuals are moving iOS instead of consoles. I just don't think that rings right. What were "casuals" buying a console for and what are they now playing on iOS instead? I wish guys like Pachter would give some specifics.

k s
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@Bob I think the casuals were buying the Wii (though I don't consider it a casual system) and have moved on from it, they have short attention spans and gaming doesn't really hold theirs' for long. They are not us and when they partook in our hobby/way of life it temporarily inflated the industry and now things are returning to more natural levels.

Bob Johnson
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@k s

Yep you're right. That is why the Wii went up like a rocket and why it is coming down like a rock.

I just want Pachter and company to point out the names of big games that casuals bought consoles for and then tell us what games they are buying on ios as substitutes for those games. I want them to do this every time they open their mouths about consoles going away.

Andrew Chen
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While I view the downward sales trends and general transfer of value from the retail-driven boxed game business model to be irreversible, I disagree with Pach here in alluding that console platforms cannot hope to offer mass market-friendly value propositions.

One example: let us look at Nintendo and their strong reputation for delivering shared family-friendly entertainment experiences. For all the wonderful and convenient usages that mobile devices have gifted us, I can't see the family "gatherin 'round the 'pad" for a nite of Touch Monopoly or the like.
In this case, if the platform holder (i.e. Nintendo) can deliver and market a compelling experience at an acceptable price I feel they can find a healthy market.
Other platform holders will need to identify and develop their areas of differentiation (MS perhaps with Windows 8 and Live integrated ecosystem, Sony...ummmm), as well as continuing to service their high-revenue/user "core" customers. Mobiles don't yet look ready to satisfy that demanding segment and there is certainly billions to be made from it (albeit from a smaller and smaller cross section of titles!)

Bob Johnson
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I do think there is a divide between the hardware required to do decent casual games and media streaming and the hardware that not only does that stuff but also does the graphics required for tomorrow's "AAA" games.

There is room for someone to say hey here's a $150 console the size of an Apple TV, quiet, plays Angry Birds or any Xbox Live-type game or even shooters with lesser graphics. And it streams media.

Do you really want to pay $400 for the next Xbox 360?

Especially when it takes up 10x the space, runs hot and is loud and sucks power.

And games are cheaper on this new hockey-puck sized console. They are all digital too. You can play them on every console in your household that is tied to your account. And play them at the same time even. And online play is free.

That would be the worry I have for consoles.

Nicholas MacDonald
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Thing is, unless the more hardcore market converts, there will always be a demand for both of these devices. The only thing a console maker could do (and Microsoft seems to already be testing) is create a low cost version of the hardware to compete with an Apple TV like device. But this introduces the question of whether or not those casual gamers playing on web browsers and smart phones even care about gaming on TV. I would almost expect them to prefer the games stay on their phones, while they simultaneously watch streaming video on the TV, rather than doing one or the other.

Bob Johnson
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Well they don't necessarily have to want to game on the tv. Streaming could drive the sale and games could be a side benefit. Most who get an iPHone aren't getting it just because of games afaik.

That's why I say a smaller cheaper device the size of a hockey puck that does streaming and also plays Xbox Live or IOS type games might have a place in the market.

Now their could very well still be a market for a higher end device. But when you take away the lower more casual end then it becomes more difficult to support.

WE already saw it this generation to an extent. The Wii vs the "core" machines. Who made the most money? Wii did. The other guys are still in the red.

That's why I worry about the hi-end of consoles. Especially with games that cost more than ever and don't have bigger audiences than ever.

Then I wonder about the pc. Anecdotal but I see a bunch of guys now building gaming pcs that went pc-less for many years. Maybe the pc could take over this high-end gaming. It could make a comeback for the more serious gamer.

I think these folks are building them because the gaming pc is cheaper than ever to build and the power gap between pcs and consoles is quite large. Of course this happens at the end of cycles.

Pcs tend to swing back in favor.

Cordero W
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I guess he never heard of Nintendo.

Ujn Hunter
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Nintendo stopped releasing video games.

Lukas Arvidsson
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Regering the casuals not buying a next gen system, we will have to wait and see. I can only give examples from my friends and family. The wii was something many bought. They played for a while and bought few software titles for it. It attracted many of my friends who would not buy a 360 or ps3. They wanted to play wii sports, Mario and potentially something else. I think many people got very curious by the wii and made an impulse decision to buy it. Many of these people were not defining themselves as gamers.

Some of these people who bought a wii also owned a ps2 where they played games as singstar and buzz etc.

I seriously doubt if they will buy any of the next gen consoles, if the rumours regarding their specs are true that is. One would have to think about what kind of needs the next gen consoles could fulfill for these kind of people that a smart phone / smart tv / facebook is not all ready doing.

The price point is of course extremely important for this demographic. That is one of the reasons the wii was so successful. You also need new types of experiences, like guitar hero, singstar and wii sports provided.

Another challenge for next gen is creative capital. Who is going to create the next great franchise? At the start of this generation there where many more developers trying things out. Now it is almost exclusively in house developers at publishers that create AAA. The results from this are many great games but I am not sure they will attract new audiences with innovative and new types of games. This change was apparent with the transition from the ps2 to the ps3-generation. Many great games were made in both generations, but the "ps3" generation has been more impressive in production values and tech than in ideas. What would break this trend in the next generation?

One could hope that by beeing more open the consoles could let the innovation happen inside digital marketplaces. If they create a good ecosystem great things will undoubtley come. Digital products often lack the marketing spend that retail products have, so the platform owner (MS, Sony) really has to market this shit out of great digital ideas to be able to get casual people to buy the console for these games only.

As I see it. They have two basic options with the next gen consoles.

First is to create a piece of hardware that is an "entertainment device", not a "games console". Here you would make it cheap, say 250 - 350$ at launch. It needs to be small, neutral, simple. It still could be quite a bit more powerful than the ps3 and 360. It would possibly have to be renamed to something that does not give associations to hardcore gaming (like XBox does now). Think of it like a smaller white box. When you see it you think "entertainment" not "Video Games". This would be an apple-esque approach.

The second option is to continue the way they have started, but really focus on games. This machine would attract gamers. It might cost 400-500$ and they have to make it their primary focus to show how awesome gaming is so that potential casual gamers might be turned into more hardcore ones. It needs to have a great digital ecosystem that is promoted heavily within its UI (much less focus on other entertainment services). It is a machine that oozes video games and everyone can find something they enjoy within its vast digital and retail catalogues. The idea is "let's make the ultimate Video game ecosystem and see how many it is that loves to play games".

I really really hope they won't take any middle path to these two alternatives. You can't sell a machine that costs 400$ to one consumer saying "play call of duty in awesome graphics on this system!" and also try to sell it to someone casual as a "media hub" where you watch tv and film. I think the next gen consoles really have to take a stand, is it a dedicated gaming machine? Or is it an entertainment device?

Bob Johnson
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Great post!!!!

I have been posting similar thoughts in a few threads and you have said them much better than me.

k s
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I fear MS and sony (long before MS) have already gone the media device route, Nintendo's Wii U is the only one that at this point really seems to be focusing on games.

I don't need super awesome graphics, I need super awesome gameplay, the kind that was so common in the 90's.

Geoff Yates
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Great post Lukas.

Streaming to Smart TV I think opens a huge window of opportunity especially to casual gaming market. Been looking at the latest Samsung and LG Smart TVs motion and voice controlled fast CPU. May take a couple more iterations to get it right but I think smart money may be there.

Social gaming has captured the casuals imaginations. Unfortunately none of the major console vendors actually cater for this very well or at least no better than iPad, IPhone or the Android equivalents.

Question does NPD retail take into account iTune, Steam, Xbox Live! and PSN purchases?

DanielThomas MacInnes
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Pachter has been boasting of the inevitable fall of the "casual" gamer ever since 2007. By this point, it's just part of his comedy act. He must be feeling happy, now that one of his predictions has finally come out right.

If the Expanded Audience has left, it's because the game industry didn't want them, Nintendo included. It's as simple as that. We all know how loudly this industry moaned and whined about those "non gamers," as though the boys' tree house was invaded by girls, or worse, their parents.

This industry wants nothing to do with the Expanded Audience, the Non Gamers and the Lapsed Gamers alike. They want their $50 million cinematic gun games, and the ever-shrinking "hardcore" fan base that will buy them. The goal now is to monetize, nickel-and-dime the fans to death, on the exact same franchise titles in the exact same franchise genres, year after year. As production costs continue to spiral out of control, the $50 video game becomes the $100 million video game, and the cycle accelerates.

What if you were turned on by the Wii Remote and its promise of fun, accessible video games that aimed back to the roots of the Atari/NES era? What if you were turned on by Wii Sports or Wii Play? You're out of luck. There's nothing for you. Even Nintendo, to my eternal bafflement, wants nothing to do with motion controls. And so the best opportunity for growing this market is squandered, and people stick with their iPhones, or polish off their old Sega Genesis, or simply find something else to do with their lives.

The game industry has no right to complain. This is what they wanted. They wanted those intruders out of their tree house? Mission Accomplished. Enjoy your gun games.

Hmm, this came out rather dark, hah hah. I'm really in a good mood, honest! If this sounds goofy, by all means, laugh it off.

Ian Uniacke
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Even more baffling, developers didn't change tack after the ridiculous success of Just Dance proved your theory to be correct.

Bob Johnson
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I always had the feeling that Nintendo was holding back. And was saving their best stuff for a rainy day aka next-gen once the Wii became a colossal hit.

wes bogdan
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The hardcore gamers (us) always led the sheep (casuial) to series like metroid,mario and zelda or whatever we were playing but then wii made a bid for people who weren't even playing games.

So with the current wii crashing hard before wii u arrives is it any wonder the whole industry suffers...if it were just playstation vs xbox we'd be better off and with everyone silently preparing the next gen is it any wonder releases are down.

As someone who saw sega burn through hardware faster than the compitition in a bid to out perform their boxes which led to first out and first out of date or sega's hardware death sprial i can see nintendo with wii u began parreling sega of old.

360/ps3 are still here with no news on the next gen but nintendo is rushing out wii u then ps4/720 will arrive in 2013/2014 or the latest by 2015 but regardless of when then arrive nintendo will rush out a wii u too @ most 2 years after the real next gen begins so then nintendo will become sega as 1st out and 1st out of date.

So what will happen to nintendo with their war chest and sucessful handheld biz though even that is under siege i expect a partership,buyout or they'll become the next ubisoft/ea because their real value is their games and if valve or apple enter gaming then nintendo will likely leave home hardware.

Personally i expect adverse reaction if the next gen will not work with this gen as it's been around so long a thanks for your support now buy our new gear and oh yeah everything you bought is garbage so start again.

Nintendo should use wii SD bc as a bullit point and lack of bc on the ps4 and xbox as another bullit point...that should help early sales of wii u but after the hardcore buys a system then parents who want past purchases validated like thanks for buying our gear and it works on your new box as well.

Digital games should be $10-30 cheaper than packaged goods i just got sonic 4 ep 2 @ $14.99 and while good it would sell better at $9.99 but worse is when digital costs more than a packaged game at retail. Something might be $19.99-29.99 but despite that it's $59.99 on psn not a good strategy.

Lots of things to fix in an economy that is in shambles might be harder than normal to release new gear as even when ps3/360 arrived times were better than now.

k s
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What we need is a platform that doesn't focus on graphics and instead aims for solid gameplay at reasonable development costs. Consoles may or may not achieve this but in the end only time will tell.

Now of the big three I suspect Nintendo has the best chance of surviving in the long run, they focus much more on gameplay and less on graphics which is what we need. Now as for their development tools I can't say as I've never work with their system but I've never heard anyone moan about them on that front either. MS has strong tools but their increasing focus on graphics worries me.

I've actually played more awesome 2D games then I have 3D games but that is over the course of my life and many of those 2D games were from the 80's and 90's. I'm not sure if more power will do anything else then run our industry into the ground. I really hope it doesn't but we will see in time.

Joe McGinn
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"What we need is a platform that doesn't focus on graphics and instead aims for solid gameplay at reasonable development costs. "

That would be the Wii then. Which was a succcess, but now that even Nintendo is joining the HD arms race, that's out.

Dave Endresak
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Well, for one thing, this is all number-crunching but only with numbers that are available. A lot of the gaming market is in numbers that are NOT available, so the basic source of the data must be kept in mind, including the bias (which means the conclusions are also biased).

Likewise, the gaming market is global. This kind of number crunching is only looking at the Western market. These analysts might also look at Japan, but they are ignoring other East Asian markets such as Korea and China, let alone other newcomers. Considering where the vast majority of the world's population is located, this obviously biases the data (and all conclusions made from it).

Finally, I can state one simple reason for the contraction: consumer have no money. Simple, isn't it? If companies really want people to spend money on games and other products and services, they have to (a) hire us and (b) pay us reasonable living wages that account for all life necessities AND allow us extra cash to both plan for retirement and spend on transient entertainment today. They are not doing that, so we cannot spend anything, or not much, at least not without going into debt (as was the case during the 2000's, of course, and why that comes to an end such as we see here).

k s
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@Dave Christian has a point the vast majority of revenue comes from the west (Europe and NA), India, Asia, the middle east, etc combined barely register compared to the west.

Matt Ployhar
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[My Disclaimer/Caveat] I've worked closely with NPD, DFC, IDC, JPR, ABI, Screen Digest, you name it etc etc over the years; as well as seen the purchased data from GFK/ChartTrack/VGChartz etc. I'm spoiled in that I get to cross reference all of them & I do in fact go back & see just how accurate their predictions/forecasting are. The added bonus is that I've seen the internal books of a few monster ISVs & 1 Console Mfg.

In short: Retail will continue to be largely diminished. It's hard predicting where it'll bottom out. I'm not sure I agree with Pachter a 100% on this one either. I think he might be onto something though. The reality is that the Console has many more screens to compete with for share of mind & wallet. It's seriously just that simple. The result is going to be the declines we're seeing at Retail - further exacerbated by improved Digital Distribution Services (e.g. STEAM, BattleNet, Impulse, PSN, Xbox LIVE, et al) and even more exacerbated by another huge exodus towards the Free to Play/Freemium Business model. No telling yet if GaiKai/Onlive will make it worse for Consoles... but in time.. they too will likely also have an impact.

When you add it all up... you get the charts like what you see above.

Yes Matt Matthews - adding PC to the mix does make the picture look a little worse. However; the holistic picture once you move beyond the Retail/Brick Mortar story isn't so bad. The advice to give to the Games ISVs is to ensure they're getting the full picture on all the Channels/Distributions in a global context. I have a great model for that I'd be happy to share sometime.