In early 2009, Nintendo of America proudly - and correctly - claimed to have provided 99 percent of the U.S. retail video game industry's growth in 2008 across hardware, software, and accessory revenue. Directly comparable figures aren't available across all segments, but I can say that in terms of software revenue, Nintendo was responsible for over 50 percent of the industry's fall in 2012. Moreover, out of the 7 million unit decline in hardware sales from 2011 to 2012, Nintendo's share was just under 4 million units or over 55 percent. Without Nintendo, the highs of 2008 and 2009 wouldn't have been so high but that cuts the other way when that same company falters. So, the die is cast. The brilliant success that Nintendo enjoyed with the Wii and the Nintendo DS has been replaced with the extremely weak Wii U and a merely healthy Nintendo 3DS. On top of Nintendo's difficulties, Sony is in deep trouble with its PlayStation Vita handheld. Not only is Sony now effectively a single-platform company, but the sales of that one platform (the PlayStation 3) are shrinking. The positive reception of the PlayStation 4 has helped gloss over these uncomfortable facts, but once the elation of E3 2013 passes in June, there will be a period of several months during which sales will likely decline further. And Microsoft is not immune to criticism here. The company has yet to tip its hand about a new system, and while it still rules the monthly sales figures from the NPD Group, this merely makes them the biggest fish in an ever-smaller pond. Let me take you briefly through the status of the industry from a variety of perspectives, and at the end point out what to look for in the coming months.

First Quarter Hardware -- Down, Down, Down

Let me show you what how the hardware market is faring and how Nintendo's and Sony's situations look in context. Estimated hardware unit sales for the first quarter of 2013 are graphed below for each of the currently active platforms, and the corresponding 2012 figures are shadows in the background. There are several points to make here, but let me start with Sony. In the first quarter of 2012, the PlayStation Vita was only available in February and March. Moreover, the first quarter periods in these two years are not entirely comparable, because there was an extra week of sales (called a leap week) in the retail calendar for January 2013. So that 76 percent decline in sales from last year is actually underplaying how catastrophically low Vita sales are right now. At some point retailers have to begin asking how much space they're willing to commit to a system that is barely selling. Certainly the chains would like to keep on good terms, especially since they have to be planning for PlayStation 4 retail sales later this year, but no one wants to tie up prime space with a product that is as big a failure as the Vita. The Wii U is still selling much better than the Vita, but that's faint praise. With LTD sales now approaching 1.1 million units after five months on the market, Nintendo is struggling to keep the system warm until it has enough software to interest consumers. Given that Nintendo shipped 1.32 million Wii U systems to North America before the end of 2012, it seems unlikely at this stage that the company reached its sales goals for the fiscal year that ended in March, three weeks ago. Every system has a chicken-and-egg problem to solve, where a hardware sales increase demand for software and interesting software drives demand for hardware, but Nintendo seems content to let the current state of affairs continue while the platform slowly establishes itself. That kind of slow burn is dangerous, since any traction gained by new Microsoft or Sony consoles later this year could diminish Nintendo's sales before a self-sustaining Wii U consumer base is created. Both of Nintendo's handheld systems saw approximately the same decline in sales, and while that's expected for the Nintendo DS (the system is now in its ninth year on the market), it's a troubling sign for the 3DS. A price cut would certainly help prop up the system, but I think Nintendo's plans are not so simple. As I said last year, I think it makes sense -- following the lessons of the Nintendo DS Lite, DSi, and DSi XL -- for Nintendo to begin updating its handheld hardware every year. Along those lines, I would be interested in seeing Nintendo make three big moves this year. Move the Nintendo DSi XL down to $100, then plan to end sales of that model by January 2014. Simultaneously, move the original Nintendo 3DS down to $130 and the 3DS XL to $170. Then, introduce a new, improved model at the top end, with the kind of forward-thinking features that will attract new consumers. (Personally, I'd be interested in a 3DS Lite that has a very thin design, longer battery life, and more on-board storage.) Microsoft's Xbox 360 has also seen its hardware sales erode significantly this year, and unless something helps slow that descent, this will be the weakest calendar year for the Xbox 360 since 2006, the year after its launch. If Microsoft intends to make a move and launch a new system, this is the period in which to begin that process. Looking at Nintendo's Wii U and Sony's PlayStation Vita, which launched six and seven years, respectively, after their predecessors, I think we can draw the lesson that you should not let an older platform grow completely stale before introducing a new one. Sony appears to realize this, and has begun preparing for the PlayStation 4's launch. It will be interesting to see how Microsoft and Sony handle their generational transitions. Nintendo has allowed the Wii to continue to exist, and even introduced a cheaper Wii Mini in some territories, but has seen software sales all but dry up. Back in 2007, Sony's PlayStation 3 rode out a rough first year while the PlayStation 2 propped up the company's game business. On the other hand, Microsoft cut the original Xbox off quickly after the Xbox 360 launched, allowing the new system to stand on its own almost immediately.

Software: Hit Driven

While hardware sales are contracting across the board, the software market is continuing the hit-driven trend that I first discussed in detail about a year ago. You might recall that March 2012 sales were down 25 percent in terms of revenue over the previous year. This year, software sales held their own, and dropped a mere 1.4 percent. That's still not a growing market, but it does show that when the right slate of software titles is offered, consumers do respond. Last year's March lineup included Mass Effect 3, Resident Evil: Operation Raccoon City, SSX, and Street Fighter X Tekken. The names this year were just as storied, but had some obstacles to overcome. Both Bioshock Infinite and Tomb Raider come from a lineage of respected games, but the previous installments are several years in the past. Bioshock 2 came out a full three years ago and the previous Tomb Raider game was Underworld, released in November 2008. Despite that, Bioshock Infinite had the strongest launch of any Bioshock game so far, at 878,000 units. According to Liam Callahan, an analyst for the NPD Group, the dollars generated by Bioshock Infinite were 40 percent ahead of the Bioshock 2 launch. To put the Tomb Raider figure into perspective, the previous best launch for a Tomb Raider game was Tomb Raider: Legend back in April 2006. According to NPD's Callahan, the 2013 Tomb Raider more than doubled the launch revenue of Legend. The rest of the chart is shown below. The hit-driven market doesn't need just big, flashy games to be released, but for that new software to connect with consumers and entice them to open their wallets. Look back at January and February's top 10 charts: Far Cry 3, DMC, Dead Space 3, Crysis 3, Metal Gear Rising: Revengeance, Aliens: Colonial Marines, and Sly Cooper: Thieves in Time. These titles came and briefly flashed in the market, but then quickly saw their sales diminish. You can see this effect of the hit-driven market in the average selling price (ASP) of software. According to Michael Pachter of Wedbush Securities, the ASP for console and handheld software during March 2013 was almost $41. During January and February, when all those big names in the previous paragraph were the top-selling games, the ASP was only in the $36 to $37 range. That is, when the hits connect with consumers, the sales are so strong that they bring up the average significantly. Even the 3DS helped this month, with the introduction of Luigi's Mansion: Dark Moon. At $40 and nearly 364,000 units sold in March, that game alone added an estimated $14 million to the handheld retail sales tally. I also took a some time to investigate sales for the Wii U, since it is the newest system on the market and is notably having difficulty moving hardware. Just from the perspective of dollar sales at retail, the figures I've seen from a variety of sources indicate that Wii U software accounts for somewhere around 2 to 3 percent of total software revenue this year. For comparison, I went back and dug out some old estimates I have for Wii software back in the first quarter of 2007, and that platform was generating much closer to 10 percent of the software revenue in the market at the beginning of its lifetime. The Wii U has a digital storefront that the Wii never had, so its retail software sales are necessarily lower because some consumers are buying their software online only. However, I do not believe that it is enough account for the stark difference here. Second, when I asked Pachter his view on Wii U software sales, his assessment was blunt: "embarrassing." While he declined to go into specifics, he did say that generally only a handful of Wii U titles are doing well enough to discuss at all. Speaking about the broader industry, analyst Doug Creutz of Cowen and Company noted that fourteen new releases across all platforms sold in excess of 100,000 units in March 2013. Given the releases last month, I believe that the Wii U exclusive LEGO City Undercover was one of those titles. It's not a proof, but given the slate of new releases and the known list of top 10 titles, it's difficult to imagine another new release for the Wii U doing well enough to break that threshold. That would make LEGO City Undercover the best Wii U title launch all year. Looking back over the charts I have from the period right after the original Wii launch, Warioware: Smooth Moves, Wii Play, and probably Sonic and the Secret Rings all released in the first quarter of 2007 and reached sales of 100,000 units or more. Given the relatively few titles being released or promised for the Wii U, and the scope of their sales, I can understand why Pachter described the Wii U's status to me as "eerily reminiscent of the GameCube."

Coming Soon

Of the big three platform holders, only Microsoft has released information about the first quarter of 2013. Nintendo is scheduled to announce its results this week, and Sony will release during the first week of May. In Microsoft's figures, the company showed that its global Xbox business had improved, but the annualized revenue rate (i.e the revenue over a given 12 month period) is still more than $1 billion below the peak it hit 15 months ago during the final calendar quarter of 2011. The graph below shows the Xbox division's annualized revenues over the past three years. While some analysts, like Wedbush's Pachter, have suggested that Microsoft's new console might not launch until 2014, I think the figure below argues for moving sooner than that. When Nintendo announces its figures this week, I expect that it will miss both its hardware and software targets for the U.S. and Europe, and therefore its overall targets. The company will likely focus on its upcoming first- and third-party titles for the 3DS and Wii U, and attempt to reassure investors that its basic business model is still viable. It won't be an easy job, and I don't think their arguments will reassure anyone. As for Sony, the key indicator for their U.S. business is whether they continue to talk about the PlayStation Vita. The PlayStation 3 is essentially guaranteed a solid release slate for the remainder of 2013, and should help smooth the transition to the PlayStation 4. But with the utter collapse of their handheld brand in the U.S., they have an option to drop the platform entirely. They will finally release distinct PSP and Vita hardware sales figures in May, along with distinct PS2 and PS3 sales, and those will likely tell the story. Sony may not want to abandon the Vita in the U.S., but without a miracle I don't see how they convince retailers (or, perhaps more importantly, publishers) to stick with them for much longer. Finally, I want you to see where the retail industry stands in the U.S. so far this year. The figure below shows how the January-February-March period this year measures up to the same period from every year going back to 2005. The revenue shown here includes hardware, software, and accessories. The industry is still contracting, but is just ahead of the first quarter of 2006. Unless something changes dramatically, that's precisely where it will end up when we're celebrating the new year in 2014.