Examining August's results, from continual software sales erosion to a comparison of the Xbox 360 S launch versus the PS3 Slim's and beyond.
For the fifth month in a row, the U.S. retail video game industry experienced another decline, according to estimates by the NPD Group. Software contributed most to the 10% decline, despite robust sales of Madden NFL 11, the latest American football simulation from Electronic Arts.
Below we examine a variety of aspects of these latest sales results, from the details of Madden sales to the continuing erosion of Nintendo Wii and DS software sales. We also compare the Xbox 360 S model launch to the launch of Sony's PS3 Slim in 2009.
Before we begin, however, let us look at the top-line sales figures and where the industry stands as it heads into the final four months of the year.
We were most alarmed by the software figures for August, where dollar sales dropped from $471 million in 2009 to only $403.5 million this year.
At least one heavily promoted title, Kane & Lynch 2: Dog Days from Eidos, didn't even make the top 20 for the month. Moreover, handheld software sales were particularly hard hit, falling to levels we haven't seen since 2005.
In terms of unit sales, software has been tracking under 3 million units per week for several months, and in August that measure hit its lowest reading in over three years. The only consolation is that software prices have done better in 2010, with each unit selling for 2% more on average, year-to-date.
(See the table below for the key sales figures for this month.)
For the first time in its data release to the press, the NPD Group added a footnote to the software sales segment noting that it “includes sales of new physical games sold at retail” but “does not include revenue from used, digital downloads, DLC, rental, subscription, mobile or social network games”.
They go on to explain that, in addition to their monthly releases, they “will report on the total market, including these other forms of revenue, on a quarterly basis in the near future.”
We applaud the effort (by the NPD Group now, and hopefully others in the future) to provide a more complete picture of the state of the video game business. While we don't yet know the details that will be provided in the Group's quarterly report, we hope that it will provide at least the level of transparency currently available from retail.
It would indeed be unfortunate if the contraction at retail gave the impression that the video game business overall was contracting. It seems plausible to us that the whole market, in all its forms, is actually growing. How ironic that the overprotective secrecy regarding online sales and extra-retail revenue streams could lead investors and analysts to precisely the wrong conclusion.
For years the Madden NFL franchise found its strongest sales on Sony's PlayStation platforms, but last year's Madden NFL 10 launched strongest on Microsoft's Xbox 360.
Along with defection of former PlayStation exclusive titles, one must also count this victory as an important milestone for Microsoft's console.
Even when August 2009 unit sales from the PlayStation 3, PlayStation 2, and PSP versions of Madden were combined, they could not top the 1 million units sold for the Microsoft console.
Sony reclaimed its dominant position this year, with August 2010 Madden NFL 11 sales of around 1 million units across the three PlayStation systems.
Despite the rapidly weakening PlayStation 2 market, where Madden sales were down over 45%, the PlayStation 3 version rallied by more than 220,000 units over last year's first-month total, more than making up for the loss.
Those figures don't include sales of copies bundled with PlayStation 3 hardware, exclusively available at Best Buy, nor copies bundled with the custom PSP color released as part of a Madden NFL 11 bundle.
What explains the flat sales on the Xbox 360 and robust PlayStation 3 expansion? We would speculate that this is a side-effect of Sony's introduction of the PlayStation 3 Slim model at $300 over a year ago. That relaunch of the hardware came too late to affect August 2009 software sales significantly, but did grow the PS3 installed base by 60%. Subsequently, those 4.9 million new PS3 owners no doubt contributed to the extra Madden sales in August 2010.
That is, while the Xbox 360 was already priced to appeal to consumers willing to buy a $300 console, that was not a possibility until last August for potential PlayStation 3 owners. Since the pricing of the Xbox 360 hasn't changed signficantly in the intervening period, its population of Madden fans likewise hasn't increased.
As the figure below shows, the first month of Madden NFL sales across all platforms used to regularly ring in at 2 million or more units. The last time it achieved that mark was 2008 when sales of Madden NFL 09 hit 2.3 million units, and it missed this year by a mere 30,000 units.
The challenge for EA Sports, and for Sony, is to continue the growth through next year's version. It seems likely that Madden PS2 sales will fall at least another 50% when the next version launches in August 2011. Furthermore, the PSP version may well cease to exist.
Likewise, sales of the Wii version are down again this year, from 67,000 last year to around 55,000 by our estimate, and we believe that the former All-Play version may soon get no play at all. That is, it does not appear to us that the custom models and motion controls of the Wii version are consistent with EA's plans to focus only on profitable projects.
Even if the smaller versions continue to exist, their combined sales will be dwarfed by the HD versions of Madden NFL 12. If sales have peaked on the Xbox 360 (quite likely given the last three years) and Sony can't continue to expand the audience on its PS3, we may have seen the best years for the Madden franchise until a new generation of hardware is launched (if indeed there is a new generation).
For the time being, EA may be willing to bide its time as the hardware market sorts itself out. While unit sales were only up 5.7% from last year, revenue for Madden was up a healthy 9% according to Michael Pachter, analyst for Wedbush Securities. The difference, no doubt, was the increase in sales of the game at the $60 level, with a corresponding decrease in sales in the $40 and $50 versions.
For at least six months analysts have been asking serious questions about the direction of the Wii market, in particular the software segment. This was not idle chatter – the Wii software market has had only one month of year-on-year growth in it the past year.
When Nintendo introduced its Wii MotionPlus hardware bundle, which comes with both Wii Sports Resort and Wii Play, Wedbush's Pachter suggested that this would erode software sales further.
While we are in no position to assign causality, we will note that software sales have declined by 19%, 30%, and 38% in June, July, and August, respectively, compared to those same months a year ago.
One difficulty is the continued strength of Wii titles on the top 20 software chart. In August alone, six titles for the Wii made it into the top 20, two developed and published by third-parties. The figures for July were similar, with seven Wii titles of which three were by third-parties.
One must accept that the top 20 chart does not tell the full story. Combined with what we know about software sales generally on the Wii, we can say that a selection of titles that do exceptionally well – Nintendo's Mario titles along with trendy third-party titles like Just Dance and Wipeout: The Game – while many others languish somewhere below the public rankings.
At some level, this is true on all platforms. The absence of Kane & Lynch 2: Dog Days in the August top 20 suffices to establish this point.
However, the Wii is notable for being both the best-selling current generation console of the last 12 months and the one with the greatest decline in software sales so far this year. Year-to-date Wii software dollars are down an estimated 23%, while the Xbox 360 is essentially flat and the PlayStation 3 is up about 35%. (See table below.)
While total software dollars are down nearly 9% so far in 2010, the current generation console sofware segment (Wii, Xbox 360, and PlayStation 3) is practically flat with the same point last year. That is, all the ground lost by Wii software has been made up by gains in PlayStation 3 software, for a net change of approximately zero.
As long as Nintendo continued to sell Wii systems at a blistering pace, the software market seemed able to support itself. We believe that a significant portion of Wii software is bought by new owners (what we would define as those within the first six months of ownership), and continued hardware sales provided ample supply of new owners to snap up Wii software.
Wii hardware has now hit an all-time low, recording its weakest monthly total since the system launched in November 2006. In terms of average weekly sales only March 2007, a five-week month, was weaker. The figure below gives an idea of just how weak this summer has been for the Wii; April, May, July, and August 2010 are identified in red.
Given the amazing sales the Nintendo Wii racked up in December 2009, we are hesitant to write off Wii hardware and software sales for the entire year. If sales return for the holiday this year, much of Nintendo's lost ground could be made up, especially with the pending launches of Wii Party, Kirby's Epic Yarn, and Donkey Kong Country Returns. Even if the Wii consumer is a seasonal creature, it seems unlikely that consumers will again buy 5 million Wii consoles and $1.5 billion in Wii software during the last two months of the year.
The Nintendo DS platform, represented by three hardware models, is also experiencing a similar weakness in sales. Ever since the launch of the Nintendo DS Lite back in the summer of 2006, the dual-screen handheld has consistently dominated hardware sales. There have been only three times in those 51 months that the DS and Wii haven't taken top hardware sales: September 2007 with the launch of Halo 3 and July and August of 2010.
There are several possible explanations here. We consider the large installed base (second only the PS2 for systems still being sold) and the current price structure to be the key limiters. The base system is still $130, and has remained at that price since 2005, and the DSi and XL models are $150 and $170, respectively, after a price drop on 12 September 2010. Sales of hardware at these prices will be recorded in the NPD Group's estimates for September.
Michael Pachter of Wedbush Securities suggests that the iPod Touch has become a legitimate threat to the handheld segment, and that the Nintendo DS is suffering as a result. We did our own examination of the console/handheld sales figures and found that, indeed, handheld software marketshare is at a historically low point relative to console software. (See the figure below.)
Whereas handheld software often accounts for around 25% of all software revenue in any given 12-month period, that share has dropped nearly constantly since around January 2008, six months after the launch of the iPhone and four months after the launch of the iPod Touch. As of August, it hovered between 18% and 19%.
The fortunes of the handheld market should reverse upon launch of Nintendo's new handheld, the 3DS. Except for speculation about the price (an announcement is expected within two weeks), practically all press about the system is exceptionally positive. We expect that consumers will buy it at least as quickly as they bought the Nintendo DS Lite and Nintendo DSi at their respective launches, despite our estimated $230 - $250 price tag. Along with a compelling slate of announced software, the 3DS will make the handheld segment hot once again.
Prior to the launch of the new Xbox 360 S in June of this year, sales of Microsoft's console were already up 6.7% in 2010, year-to-date. For a console finishing its fifth year, that's a significant accomplishment.
After three months of Xbox 360 S hardware sales, the system is up a staggering 34%, year-to-date.
While sales in August were still short of the 400,000 unit level we favored after seeing the July figures, we can still say with confidence that consumers are buying the new model on its own merits and not simply snapping up clearance-priced older models.
Given the launch of the PS3 Slim model last year, we felt it might be useful to compare the sales bump for that system to that for the Xbox 360 S model.
The table below shows the year-over-year PS3 sales growth for August – October 2009, and the corresponding YOY growth for the Xbox 360 from June – August 2010.
The Xbox 360 S model clearly demonstrates growth quite similar to that of the PS3 Slim, even though the comparison isn't perfect. In particular, the first month of the PS3 Slim was just barely in August 2009, when some systems arrived in stores just before the end of the NPD Group's reporting period. So, while sales were up modestly, the full effect was not felt until September.
Sony's Slim boosted its annual system sales by 66%, up from 2.95 million to 4.90 million. Were Microsoft to realize a similar rate of growth by the end of May 2011, they would have realized sales of 8.07 million systems annually, up from 4.86 million in the previous 12-months.
(For a bit of perspective, the Nintendo Wii still realized sales of 8.99 million systems in the past 12 months, even with its recent weaker sales.)
Naturally, Microsoft should also realize stronger software sales in the coming months as a result of the higher hardware sales. Again, looking to Sony's experience as a guide, Sony saw its software sales increase by over 25% in the year following the launch of the PS3 Slim.
By our estimates, based on Microsoft's periodic press releases about its software sales and analyst comments on growth rates, that would put Microsoft's software sales in excess of $3.2 billion during the 12 months after the launch of the Xbox 360 S model.
None of the above estimation takes into account Microsoft's first ace in the hole: Halo: Reach. According to analyst Doug Creutz of Cowen and Company, sales of that title could reach 3.6 million units in September alone. Sales at that level could add $250 million to Microsoft's software revenue, and just from a single title. We also expect that hardware sales for September will easily exceed 400,000 units.
Microsoft's second ace is its ability to drop its hardware prices at the time of its own choosing. Provided its hardware sales remain strong through the end of the year – and we see no reason for them to slow down – it can easily afford a $50 price drop on all its systems in early 2011. We feel the Xbox 360 offers a superior value, and at $150 the Arcade model could do exceptionally well throughout next year.
Whether Kinect, the new motion control technology launching on the Xbox 360 in November 2010, will represent a significant factor in the system's sales remains unclear to us. (For the sake of completeness, we are also not clear on Sony's strategy for its Move system.)
[As always, many thanks to the NPD Group for its monthly release of the video game industry data, with a special thanks to David Riley for his assistance and Anita Frazier for her helpful analysis. Additional credit is due to Michael Pachter, analyst for Wedbush Securities, for his perspective and instrucive conversations. We also wish to thank Doug Creutz of Cowen and Company for his insights. Finally, many thanks to colleagues at Gamasutra and particularly regular commenters on NeoGAF for many helpful discussions.]
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