NPD: Behind the Numbers, January 2011

[Gamasutra analyst Matt Matthews examines NPD results for U.S. video game retail in January, including close-up looks at rising Kinect popularity and "extended declines" in Wii and DS hardware and software sales.]

According to the latest NPD Group sales estimates, U.S. retail video game sales are still contracting. On Thursday the firm revealed a 4% decline in overall sales, with both the hardware and software segments contributing to the shortfall.

Only the accessory segment showed a year-over-year increase in revenue, with Microsoft's Kinect and Sony's Move likely contributing most of that growth.

Below these figures are some intriguing trends, including the continued rise of Microsoft's new motion control system and growth in Sony's software revenue.

We also look at Nintendo's plight as both the Wii and DS experience extended declines in hardware and software sales.

Along the way we also find the opportunity to comment on Dance Central sales as they pass a new milestone and put the launch of LittleBigPlanet 2 in historical context.

January At a Glance

With only one month in the year so far, our monthly review of the top-line figures is somewhat simpler than usual. As the chart below shows, both software and hardware revenue were down approximately $30 million each.

The accessories segment showed a $12 million, or 5.5%, gain. Along with Sony and Microsoft's new motion control systems, it is likely that points/money cards for Xbox Live and PlayStation Network continue to contribute to the growth in this segment.

According to industry analyst Michael Pachter of Wedbush Securities, overall software unit sales were down just 1%, with most of the software revenue decline coming from the 4% decline in average software prices.

For the record, the NPD Group is now clearly labeling their media releases to indicate that the figures include only retail sales. They are providing quarterly estimates of extra-retail sales, including mobile games, downloadable content, and casual games, along with other segments, but those figures are not included in the figures above nor are they considered directly in this analysis.

Kinect Continues Xbox Momentum

A year ago when Microsoft's Kinect was known as Project Natal, we were dubious about the system's value to the Xbox 360 market. At the time we wrote that we doubted that “Microsoft's Project Natal will actually lift and sustain the platform significantly.”

While three months is still early in the game, there is no question in our minds that Microsoft has done exceptionally well convincing consumers of the value of the Xbox 360 Kinect platform.

While not in precisely the same class as the Wii fervor of 2007 and 2008, we were impressed to see the Xbox 360 move 381,000 units in January, a 14.4% increase over last January's record 333,000 units.

For a system in its sixth year on the market, which hasn't had a proper price cut since September 2008, and whose average price has increased to over $300, those kind of January sales are unheard of.

We have previously drawn parallels between the Xbox 360 S Model's June 2010 launch and the PlayStation 3 Slim launch back in late August 2009.

However, with holiday and January sales now known, we find it productive to return to that comparison.

Starting in September of each system's relaunch year, the monthly sales rates are shown below.

There are some important details here. First, recall that the Xbox 360 S Model launched in June 2010, and so this comparison excludes at least some of the initial rush to buy that model; conversely, the PS3 figures in September may include some discounted older models.

Second, there is the issue or price. When we looked at hardware prices for October 2010, the average price of the Xbox 360 was $256, suggesting that consumers favored the $300 Xbox 360 model over the $200 model.

With the launch of Kinect in November, that price rose about $25 to $281. As of January, the average Xbox 360 is selling for around $306, according to official NPD Group data.

That means that any significance of the price differential has actually disappeared in the more recent months, the ones in which the Xbox 360 has been outperforming the PS3 Slim in seasonally comparable months.

The increased hardware sales are also correlating with increased software sales. To view this, we have put together an annualized sales graph for Xbox 360 hardware unit sales and retail software revenue, which is shown below. (We also have included similar graphs for Nintendo's Wii and Sony's PlayStation 3 elsewhere in this article.)

That is, for the hardware curve, we are measuring total hardware unit sales in the trailing 12-months. Similarly, the software curve is retail software revenue in the trailing 12-months. (One side effect of this view is that it mitigates seasonal effects.)

As the hardware (blue) curve above shows, the annual rate of hardware sales has increased from around 5 million systems per year prior to the launch of the Xbox 360 S Model in June 2010 to nearly 7 million per year as of January 2011. Moreover, both November and December of 2010 were key hardware growth months.

Clearly Kinect is the primary driver of interest in the Xbox 360 at the moment. According to statements made by Michael Pachter of Wedbush Securities, the Xbox 360 Kinect system hardware bundles have totaled around 1.7 million since launch.

Moreover, with the $250 million increase in accessory revenue since November 2010 (compared to the same period in the prior year), it seems likely that the total Kinect installed base is between 2.5 million and 3.0 million.

Looking back at the hardware and software graph above, we can add some comments on the software trend. After a relatively flat period, software sales have begun to creep up, roughly corresponding with the increases in hardware sales. The launch of Halo: Reach in September 2010 appears to have been the starting point for the recent growth.

While we don't yet know how much Kinect software is driving sales, we can at least identify Dance Central, published by MTV Games and developed by Harmonix, as the defining title of the Kinect launch.

According to exclusive data provided by the NPD Group, 217,000 copies of Dance Central were sold in January 2011. Moreover, the title has now shifted more than 1.2 million copies of the standalone version. These figures don't include copies of Dance Central included with Xbox 360 Kinect system bundles or with Kinect accessory bundles, so the total number of copies exceeds the 1.2 million figure.

As we enter nearly four months on the market, the pressure will mount on Microsoft and its third party partners to produce more software for Kinect of the same quality as Dance Central. Moreover, we have yet to see the impact of Kinect-compatible games sold through Microsoft's Xbox Live Marketplace.

Microsoft appears to have a strong product with strong marketing and a good first wave of software. We will be watching through 2011 to assess their follow-through.

PlayStation Not Moving

While Microsoft has been on fire for the past eight months, Sony's good fortunes appear to have run out. It is the only platform holder with three systems still actively being sold, two of which are no longer meaningfully contributing to the market. The third, the flagship PlayStation 3, is saddled with a $300 entry-level price that is killing its mass-market appeal.

The venerable PlayStation 2 has finally ceased to be relevant to the industry's new retail sales, where it accounted for only 1.5% of all hardware unit sales in January and a mere 0.7% of software revenue. (If we're more generous and look only at consoles, then its software share rises to 0.8%.)  

While the NPD Group will likely continue to track the system's sales at retail for years, we expect that even analysts will cease to comment on it in the coming months.

The PlayStation Portable, or PSP, has also fallen on hard times, although the circumstances are very different. According to comments made by Wedbush analyst Michael Pachter, the system's hardware sales were down about 24% from January 2010, pegging January 2011 sales at around 76,000 units.

Pachter also noted that software sales for the platform were a mere $10 million in January. That's around 12% of console software revenue, or 1.7% of the overall video game software market.

While our focus here is on the U.S. retail market, we should note that the PSP continues to do exceptionally well in Japan. Regardless, the U.S. PSP market appears to be on a terminal trajectory.

We expect that it will end its run in the American the market with lifetime sales of just over 20 million systems, a remarkable achievement for Sony's first true gaming handheld venture. For context, Sega's GameGear had but a fraction of the PSP's sales while neither Microsoft's original Xbox nor Nintendo's GameCube reached 20 million systems in the U.S.

Which leaves Sony with one active platform, the PlayStation 3. And while the system is still coming down off the surge in sales created by the PS3 Slim launch and price cut, its software sales have continued to grow. Consider, for example, the curve below, analogous to the similar curves for the Xbox 360 and Wii produced elsewhere in this article.

The blue hardware curve shows that the official launch of the $300 Slim in September 2009 immediately drove the annualized rate of PS3 hardware sales to a peak a year later. During that 12 months, PS3 sales reached 4.91 million systems.

However, hardware sales growth ended with the anniversary of the Slim price cut and have declined ever since. Sony can reverse this trend at any time, with a price cut. We would favor one as soon as April of this year, while Wedbush's Pachter has said he expects a cut in June.

A price cut of $100 would be game-changing, and we would expect Microsoft to immediately respond with a cut of their own. However, we feel that a $50 cut (to $250 for the low-end PS3), is probably more realistic.

While Microsoft has Kinect to thank for at least some of its current momentum, it is very difficult to argue that Sony has gained any such bump from its Move control system. The camera and wand combination launched very softly in September 2010, with a few Move-specific titles and Move-compatibility updates for others.

Since that time, no Move-required title has made it into the top 10 software. The biggest Move-compatible title in the near term will probably be Sony's own Killzone 3 which we expect will chart when the February 2011 results are released.

According to data provided by the NPD Group, the top-selling Move-required title in January 2011 was The Fight: Lights Out, a game in which the Move controls are used for fist fighting. With Fight sales of only 16,000 units for the month, we can conclude that all other Move-required titles had similarly low sales. That list includes titles like Sony's EyePet, Start the Party!, Kung Fu Rider, The Shoot, TV Superstars, and Ubisoft's Racquet Sports.

Put another way, Kinect's Dance Central probably outsold the combined total for Move-required titles in January 2011. This doesn't address the titles with Move-compatibility patches like NBA 2K11 from 2K Sports, but it can't be easily established to what degree consumers are buying that title for its Move features.

Of course, part of this speaks to the size of the Move hardware installed base. One straightforward measure we can take is the number of PS3 systems sold with Move bundled in the box. Judging from what Michael Pachter has said, we believe that those system bundles are in the neighborhood of 500,000 units since Move launched.

Specifics of accessory data are closely held information, and we can merely speculate about how well the standalone Move systems have sold. Were we wildly optimistic about Move sales (which we aren't) we'd estimate that 1 million PlayStation 3 systems are Move-enabled as of the end of January 2011. The actual figure is probably well below that.

While Move may not being living up to Sony's hopes, the PS3 software situation continues to improve. Even as hardware growth has fallen, PS3 owners have maintained the momentum in software, as shown in the annualized rate graph above. More than that, however, Sony has a strong slate of software for all of 2011.

The first big PS3 release of the new year is LittleBigPlanet 2, a proper sequel to the 2008 platformer and editing title, LittleBigPlanet. After its memorable reveal at GDC 2007, the original LittleBigPlanet launched in October 2008 with sales of only 215,000 units. By the end of November 2008, total sales had reached 356,000 units.

The NPD Group has revealed that sales of 353,000 copies of LittleBigPlanet 2 during January 2011, nearly matching the first game's two-month total. In just the period around launch, the sequel has reached roughly one quarter of the original game's 1.47 million units in sales. (That original LittleBigPlanet figure includes the original 2008 release and the 2009 Game of the Year edition, but not the PSP version.)

With a steady stream of exclusives in 2011, including Killzone 3, inFamous 2, Uncharted 3, and Resistance 3, Sony is making a strong play for consumers this year. If it can reach a price that will renew interest in its hardware, we should see each of these titles do well in 2011.

Nintendo Hardware/Software Declines Continue

For Sony and Microsoft, there are at least some obvious paths to take in the course of 2011. For Sony, it should cut its hardware price and execute on its software plans. Microsoft needs to maintain its Kinect momentum and, if necessary, keep its hardware priced competitively against the PS3.

For Nintendo's Wii, the future is less clear. While its hardware sales rates are still comparable to the Xbox 360, Microsoft's platform is on track to outpace the Wii in annual sales within the next two months.

To put it plainly, the Xbox 360 sold 6.81 million systems in the past 12 months, compared to the Wii's 6.92 million. That 110,000 unit advantage could easily disappear by the end of March 2011. Just in January the gap closed by 62,000 units.

More alarmingly, the platform hasn't seen a single month of year-over-year growth in software revenue since December 2009.

While we do not have access to unit sales figures, we do know that the Wii just barely edged out the Xbox 360 in unit sales during 2010. Under current trends, it seems like that the Xbox 360 will best the Wii in both units and revenue in 2011.

To see the situation graphically, we have produced below the same annualized hardware and software sales chart provided elsewhere in this article for the Xbox 360 and PlayStation 3.

While the annual rate of hardware sales has declined 26% from 9.38 million systems per year in January 2010 to 6.92 million per year in January 2011, the estimated annual software revenue rate has declined 20%, from just over $3 billion to just over $2.5 billion.

Following the trendlines, it is possible that Sony's PS3 will generate more software revenue in the coming months than will Nintendo's platform. Given the disparity between the two systems – the Wii installed base is more than twice the size of the PS3 base – those revenue figures should concern Nintendo.

Regrettably it may be too late to do anything substantial about the situation for this calendar year. While it is possible that Nintendo has a refresh of the Wii platform waiting in the wings, it isn't altogether clear how that will fix the longer term software issues.

In a recent investor question-and-answer session, Nintendo president Satoru Iwata commented on the Wii software environment: “[A]lthough in the beginning there was a complaint that only Nintendo's own software could sell well on Nintendo DS, that feeling has waned in the midcourse. Unfortunately, however, we have not been able to create a similar situation for Wii, which is one of the points we need to improve on.”

It is possible that this comment was intended primarily about the Japanese market, it is a commonly held and long-standing belief that the same is true in the U.S.

Whatever Nintendo does, we will be watching, and we suspect that it will make for some interesting dicussions.

Finally, we note that Nintendo will soon have three platforms on the market, as the 3DS handheld is due for release by the end of March 2011. For the third time in as many years, Nintendo will be introducing major changes to its handheld lineup, and we may be nearing the point at which the Nintendo DS begins to make a graceful exit from the market.

Estimating based on historical data and comments made by Michael Pachter of Wedbush Securities, it appears that combined sales of the three Nintendo DS models (Lite, DSi, and DSi XL) reached only 291,000 units in January 2011.

Excluding January 2007 and January 2008 when the Nintendo DS Lite was supply-constrained following unprecedented December sales, the January 2011 sales rate was nearly the worst the platform has seen since the Lite model launched in mid-2006. Only August 2006 had a lower weekly rate of sales. We have seen no indication that the Nintendo DS was supply-constrained this year.

Fortunately for Nintendo, the launch of the 3DS should revitalize its handheld business. By all accounts, the hardware's 3D features are very impressive and we expect that it will sell well in the short term based only on these features and strong initial third party software support.

[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. 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.]