Not even November can save U.S. game retail now

"By practically every measure this will be the worst year for [U.S. video game] retail since 2006," says Gamasutra analyst Matt Matthews. Click through for some holiday retail gloom.
Last week the NPD Group released its latest estimates for the retail video game market in the United States, and for yet another month both hardware and software sales were down. For those who watch the market, this came as practically no surprise, but it was still disappointing. In the 44 months since February 2009, when this long term contraction began, the retail software market has shown year-over-year growth in only seven of them. The last month of growth was a year ago, in November 2011. You might recall that I thought retail had hit close to the bottom, and that the declines might moderate. It was a moment of positivity, searching for a glimmer of hope in what appears still to be a market in free-fall. I'll try not to let such reversed optimism happen again! So, let me discuss what happened in October, really for the year so far, and use that as a lens through which we can estimate where things will end up for the year. I'll let you in on the punchline now: November and December won't turn the year around, and by practically every measure this will be the worst year for retail since 2006 (as suggested in this column from six months ago).


The best news so far this year in hardware is that the Nintendo 3DS has outsold its total for the same period last year. Regrettably, even this isn't actually good news because the 3DS was only available for eight of those ten months last year, and since August of this year its sales have been down year-over-year on a monthly basis. Everyone else is down for the year, including Microsoft's Xbox 360 and Sony's PlayStation 3. The figure below presents this year's hardware figures compared to last year's, shown in shadow.
While the Xbox 360 has been the lead console at retail for 15 months now, it has still seen a very steep contraction in sales this year. In absolute terms, the Xbox 360 is down more this year than is the PlayStation 3 (down 1.2 million to the PS3's 0.66 million). It's also worse in relative terms: 31 percent to the PS3's 25 percent. Unless Microsoft's hardware and service plan really takes off in the next month, this will be the worst year for the company's console since 2009, the year prior to the introduction of Kinect. Every hardware push that the industry has tried in the past couple of years has run its course. Sony's Move system has only token support while Kinect is simply another part of Microsoft's shrinking monthly hardware sales. Nintendo's revamped Wii with a lower price and new bundles doesn't appear to have much traction in the market (which should come as no surprise). And Sony's handheld is just now crawling across the 800,000 unit mark and probably won't make it to a million by year's end. With the exception of the Wii U, due out in a week, there simply isn't anything exciting consumers and bringing them out to buy new models of old systems. There are several Black Friday deals worth watching, including a PS3 bundle finally hitting $200 and a Skylanders Xbox 360 for $150 (as I've been suggesting for months), but those will only provide modest relief in November. Microsoft will also probably see a modest bump from its Halo 4 bundle, but those sales will be difficult to discern from public data amongst all the other November sales. Looking out into the coming year it appears that the next 12 months will be just like the last 12, since Sony and Microsoft have made no public moves yet that suggest they will bring updated systems to the market any sooner than November 2013.


Of course, once a company like Nintendo or Sony or Microsoft has gotten a consumer to buy a console, they fully intend to make their profits by selling that consumer as much software as they can. And, unfortunately, consumers simply aren't doing that like they used to. The figures below show just how dire the situation has become this year at retail. First, we can look at the market in terms of revenue, and the picture looks like this:
Yes, you're reading that right. The total value of the January through October video game software market has shrunk by nearly 46 percent since 2008. For every dollar made during the heyday of the market, when Wii Play and Guitar Hero made regular appearances on the software charts, the industry is only generating fifty four cents today. Because software sold for a slightly higher average price a couple of years ago, due in part to the higher prices of software bundled with guitars and balance boards, the decline in units is not quite as steep (only 41 percent), but it is still shocking. Just look:
The industry is just now getting to 100 million units for the year at the beginning of November, according to my estimates. In previous years that milestone was reached as early as the first week in July. In previous generations, I believe there have been contractions in the lull before and during the launch of a sequence of new platforms. However, I don't believe that the industry has grown during a generation and then returned to its starting size at the end of that generation - until now. It's long past the time when the industry should be asking if retail will ever rebound. It won't. If the Wii U does well and if Microsoft and Sony both introduce successful hardware iterations next year and if those systems all continue to lean heavily on retail for software distribution, then maybe in two years the retail software industry could return to the same $10 billion level it had in 2008. But, really, do you expect all those ifs to go the right way for that to happen? I didn't think so.

The November Singularity

Now, having looked at the January through October sales, I know what some of you are thinking: What about November and December? After all, those are the two biggest months of the year at retail. And, yes, they are important. In fact, one interesting dynamic that I've not written about before is the increasing importance of November and the diminishing importance of December. Going back as far as 2006, software sales in November have generally been increasing. However, starting in 2009 and the launch of Call of Duty: Modern Warfare 2, we have seen December's software sales decline year-over-year. With the Call of Duty franchise generating 30 percent or more of the software revenue and unit sales during just the month of November, and Activision Blizzard's focus on pre-orders and day-one sales, it's no surprise that the growth of that series has helped drive up November's numbers. The confluence of Call of Duty: Black Ops 2, Halo 4, and Assassin's Creed 3 this year could help continue that trend of increasing November retail sales, and we could see December lose its title as the biggest software month of the year, at least in terms of dollars. The figure below shows just where things have been doing for the past several years.
The twist is that I think the middle of the market has hollowed out enough that November will show a year-over-year decline. Analyst Doug Creutz of Cowen and Company recently commented that last year there were seven "core gamer (non sports) titles shipping after Labor Day that went on to sell more than 4 million units" across the U.S. and Europe. Those titles were Gears of War 3, Batman: Arkham City, Battlefield 3, Call of Duty: Modern Warfare 3, Skyrim, Assassin's Creed: Revelations, and Saints Row 3. This year, he expects only four such titles, including Borderlands 2, Assassin's Creed 3, Halo 4, and Call of Duty: Black Ops 2. Some of this is due to the flight of some games out of the last quarter of 2012 and into the first quarter of 2013 (for example Bioshock Infinite), but some of it is the decline in the number of titles publishers have been releasing. This phenomenon isn't new (I've written about it before) but it is ongoing and will continue to exert downward pressure on retail sales. So even if Call of Duty: Black Ops 2 and the other top-tier releases sell up to expectations, I suspect that there won't be enough of a middle tier to push November sales higher than last year. And when that happens, when November shows another year-over-year decline, the industry will have finally gotten a full year of uninterrupted contraction. Add a December decline on top of that, and you have the making of the retail industry's annus horribilis. Perhaps that is what it will finally take to encourage publishers and other outlets to begin publishing digital sales figures at least in the very modest detail we get for retail. Even if digital distribution revenue isn't keeping pace with the decline at retail, it would help soften the image of a physical market in freefall.

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