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SIG Analysts Examine The Deteriorating Video Game Life Cycle

Analysts from the Susquehanna Financial Group have released a new report focusing on the rapid deterioration of game sales past their initial launch, and wonder if its perceived effects could be offset with retailers reporting used game sales to the NPD.

Jason Dobson, Blogger

January 30, 2007

3 Min Read

In the new issue of the Susquehanna Financial Group's Video Game Journal, authors Jason Kraft and Chris Kwak ask the question “What’s going on with the pace of sales?”, specifically looking at the deterioration in the video game sales throughout the console life cycle. The analysts begin by noting that a majority of video games that are released generate nearly 85 percent of their lifetime sales in the first year of availability, after which these games are generally replaced by new versions. In addition, the report cites some annual titles, such as Electronic Arts' NCAA Football, actually generated more than half of their lifetime sales within the first three months at retail, according to the most recent NPD data. However, the report concedes that this trend does not apply to all titles or franchises, such as those which may be influenced by one-time events, such as EA's FIFA Soccer for example. In addition, the writers further add that a game's life cycle may also be impacted by the sale of used games, particularly by major U.S. video game retailer GameStop, though the report notes that very little information concerning used game sales figures has been released by the retail chain. “We believe used-game sales probably explain a significant portion of the phenomenon of the shrinking half-life of games through the cycle,” wrote the analysts. “It is not that used games take up more shelf-space (the premier AAA titles, we contend, remain untouched). It is that used games are substitute-SKUs not captured by NPD. So while the data may suggest that demand for a title falls more rapidly through the cycle, we posit that it is not the demand at issue but rather the supply meeting some of the demand that NPD data does not capture.” Continuing, the report adds that when a game console's user base is rapidly growing within its first two years of availability, “the revenue concentration distribution is distorted by the sheer force of the new consoles entering the market.” In short, the report hypothesizes that the quicker a console's installed base expands, the broader its software sales distribution will become. However, as a console's installed base slows following its first two years of availability, the writers note that “sales distribution [should] ease into a stable curve where non-console factors have a greater impact.” Attempting to explain this, the analysts offer an example: “Imagine if Europe received one unit of the PS3 in November 2006 and Resistance: Fall of Man were attached to that game. If no new PS3s came to Europe until March 2007 (when Sony dropped 1 mln PS3 units), Resistance: Fall of Man would generate 0% of its first twelve months revenue in the first three months.” In conclusion, the authors note that very little may be done to extend the life of titles on retail shelves, stating, “The various causes of the phenomenon we observe (especially console installed base and brand expansion) will likely repeat every cycle. The used-game phenomenon, however, may be something the industry could address. Addressing this issue would probably temper the slope of the trend.” The authors add that the “ideal solution” would have GameStop releasing used-game data with NPD for analysis of its impact. The analysts add: “If the phenomenon of the half-life of titles shrinking reflects just the appetite of consumption and is not reflective of pricing or other supply-side factors, in the best of all possible worlds, we believe publishers and retailers should try to maintain AAA pricing longer with successive releases of games through the cycle." "Given that a greater percentage of a title’s first twelve month sales will be captured in the first 3 and 6 months, publishers have every incentive to capture the most retail dollars possible in that shrinking sales window. We caution that this prescription is complicated by the interplay of prices of new games vs. used.”

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