Analysis: Breaking Down 'Alarming' U.S. Game Retail Contraction

[U.S. physical video game retail saw a an "alarming" decline in August, Gamasutra analyst Matt Matthews says in his monthly NPD analysis -- and the absence of Madden NFL 12 certainly isn't all to blame.] The retail software figures for August are alarming by just about any measure. In terms of units, or dollars, or prices – we have not seen anything like this for a very long time. Certainly, the delay of Madden NFL 12 by EA Sports left a large hole in August sales, but even that is not enough to explain away all of the decline. The NPD Group reported that software revenue for August 2010 was $403.5 million and that declined by over $138 million (or 34 percent) to $264.8 million for August of this year. According to Wedbush analyst Michael Pachter, EA's Madden accounted for over $100 million in software sales last August, and had it done as well this year it would have brought the decline in software to only 6 percent (or about $24 million). However, Cowen & Company analyst Doug Creutz noted last year that 1.97 million units of Madden NFL 11 were sold during the game's launch month, and that is almost exactly the decline in software units from August 2010 to August 2011. That is, had Madden NFL 12 actually launched as usual and sold as well as it did last year, software unit sales would have been about flat (down less than 3 percent) but actual software revenue dollars would have declined at over twice that rate. As usual, this situation signals a dramatic decline in the average price of software, and in fact that is what happened in August. You may recall that, in July, we noted that the average price of software fell below $34 for the month, and that that was the lowest average for a month in our records going back several years. In August that average fell below $32, more than $2 lower than the rate we found alarming just a month ago. As Pachter noted to us in an email, the very low ASP tells us that software sales in August were “all catalog,” i.e. older releases and licensed games. Indeed, as the August 2011 top 10 list released by the NPD Group shows, only two new releases (highlighted in blue) made the cut, Deus Ex: Human Revolution and Phineas and Ferb: Across the 2nd Dimension. Three titles, highlighted in red above, were from 2010. The remaining titles are all from May, June, and July of this year. Moreover, the titles themselves are more casual, licensed, and family-oriented than what the industry has come to expect recently. August's list contains a college sports license, two animated cartoon licenses, two licensed dance games, and a licensed fitness game. One can hope that the lull during the summer has just been a calm before the storm, and that industry will pull of a strong finish during the remainder of the year with both its core and casual titles. Because the focus has shifted away from the Nintendo Wii, and the Nintendo 3DS still has a relatively small installed base (just over 1.1 million systems), most of the sales will have to come from titles on Microsoft's Xbox 360 and Sony's PlayStation 3. September alone will have Madden NFL 12, a big cross-platform title, and the platform-exclusive Gears of War 3 (Xbox 360) and Resistance 3 (PS3). Another wave of games will drop in October with Rage, Batman: Arkham City, and Battlefield 3 fighting for action game dollars while Just Dance 3 takes that hot casual franchise into multiplatform territory for the first time. Finally, the year will finish with Call of Duty: Modern Warfare 3 in November, for all major platforms, Uncharted 3: Drake's Deception on the PlayStation 3, and Halo: Combat Evolved Anniversary on the Xbox 360. The following figure shows just how much ground the retail industry will have to make up in order to finish the year flat – or even just down a small amount – compared to 2010. It shows year-to-date software unit sales for the past three years using the record high software sales of 2008 for comparison. (That is, each curve below shows year-to-date sales for each year after the comparable figure from 2008 has been subtracted. Because every year has come in lower than 2008, the curves are largely at negative values.) Except for the first two months of 2009, the retail industry has been far behind its peak in 2008, and it now appears headed for another down year. In the past few years, the retail industry has sold approximately half of its annual software units prior to the end of August, and the other half from September through December. If we take that general rule of thumb and apply it to this year, we arrive at an estimate of 215 – 220 million software units for all of 2011. That would put 2011 sales at around 10-15 million units below 2010's total. Even if August 2011 was just a fluke – the kind of slow sales month that comes once every decade – the fact remains that 2011 has been yet another weak year at retail. At some point the industry will have to make the case that it is not undergoing a “secular decline”, to use the words Michael Pachter famously used to characterize investor pessimism about the the video game business. Larger publishers like Electronic Arts, and more recently Activision Blizzard, have begun to embrace a future which integrates online digital delivery and services with retail products and services. Smaller companies have long been plying their wares online – as direct sales, as services, and as free-to-play venues which sell virtual goods. Unfortunately, the metrics used in those online areas are still so ill-defined and so different from traditional metrics, that the overall health of the video game industry remains difficult to discern. In cooperation with the NPD Group, publishers and platform holders, have agreed on some definitions for transaction classifications. The next step is regular, transparent reporting of revenues using those definitions, both by publishers and the NPD Group itself. Perhaps then we can say whether software sales growing, flat, or truly down $500 million as the retail estimates suggest.