Analysis: Digital Vs. Retail At Major Third-Party Publishers

[As part of his monthly analysis of video game sales figures, Gamasutra analyst Matt Matthews breaks down public data from EA, Ubisoft, Activision and other publishers to determine digital sales growth, and how their sales are split between game platforms and geographical territories.] As part of our regular reports on sales in the United States, as provided by the NPD Group, we hope to begin integrating more data from other sources. One primary source for information is from the public companies that produce games. For our initial foray into this area, we have included several third-party publishers: Activision Blizzard, Electronic Arts, Take Two, THQ, and Ubisoft. In the future we will include several other publishers, such as Capcom, Konami, Majesco, Namco Bandai, Sega Sammy, and Square Enix. We have data for Nintendo, but are not including it in this overview of third-party publishers. The two other first-party publishers – Microsoft and Sony – may be included in some limited way, where possible. We will focus on several major questions, addressed through the revenue data for our given five publishers. First, how fast is the digital part of the market growing, and how big is it relative to the retail market? Next, where are these publishers generating the most revenue, and which platforms are seeing the most growth? Finally, as this column is primarily U.S.-centric, we will get an idea of how big the North American market is compared to the rest of the world and, again, look for the changes in the past year. As we discussed in last month's column, the effect of non-traditional content sales is still unclear. Not only are the revenue streams difficult to measure, but the NPD Group's current Games Industry: Total Consumer Spend is focused on the United States and, though it is clearly getting better, we still harbor some concerns about the margin of error in its current figures. In the public documents provided by three publishers – Activision Blizzard, Electronic Arts, and Ubisoft – we believe we were able to get reasonably clear statements of digital revenue compared to traditional retail revenue. (Below, as with all the subsequent graphs, we are comparing two periods: October 2009 through September 2010 (on the left, except in the pie graphs) and October 2010 through September 2011.) Here is the picture of digital versus retail that we have pieced together: We believe that there are two important takeaways from these figures. First, the combined growth rate in digital over the past 12 months has been around 31 percent. While a figure of 30 percent has been tossed around elsewhere, we believe the data above is about as concrete a measure of that segment's growth as we have seen, especially across multiple publishers. Second, the decline in retail sales is actually quite modest – almost precisely 1 percent – compared to what one might have expected. How do we square this with the much-reported decline in retail sales? Here, we believe it is partially a side-effect of the choice of publishers. Both Activision Blizzard and Electronic Arts have taken pains to insulate themselves from the decline of the Wii and Nintendo DS over the past year. Their investment in the HD consoles, where the market is still growing, has limited their exposure to some of the weakness at retail. In a year, we hope that Take Two will have continued to report its digital revenue figures as it has over the past several quarters. If we were to include its digital figures in the October 2010 – September 2011 data above, we could add an estimated $110 million to that total. It would be helpful for the industry as a whole, in fact, if more publishers released clear data about their retail and digital sales segments. Before moving on to other issues, we wish to note two more points. First, at least by this measure, the current market's split is approximately $2 from retail for every $1 through digital distribution. There is still a long way to go before digital eclipses retail, but the industry certainly appears to be a lot closer than it was just a year ago. Finally, we should keep in mind that profit margins on digital sales are probably much higher generally than are retail sales. So while the digital segment is smaller, it may actually be contributing significantly to a company's profits. Next we ask, of the current three consoles, which are generating the most revenue among our larger group of five publishers? The graph below shows the latest 12-month data available, compared with a year earlier. Here we see an already familiar story. The big publishers are generating tremendous revenues on the HD consoles while the Wii looks more like a side business. Even so, the Wii business by this measure has only declined by less than 1 percent in the past 12 months, which isn't as bad as one might have expected given the situation the United States. The Xbox 360 eked out a modest 2.5 percent increase during this period, while revenues for the PlayStation 3 increased a more pronounced 10 percent. It will be very informative to see where the situation stands in two years, after Nintendo's Wii U has had an opportunity to establish itself. Current indications are that it shares much of the same power as the existing HD platforms, and should therefore be a natural third target for publishers creating content for them. However, Nintendo will likely still have to evangelize its platform to third-parties and create the right incentives to get first-class treatement. On the handheld side, the picture is not pretty for anyone. The decline in PSP software revenue is expected: these publishers have largely abandoned that platform. As for the Nintendo DS, we believe the larger factor at work here is the insurgent mobile platforms, like the iPad, iPhone, and other smart devices. We believe it unlikely that the Nintendo 3DS will break this cycle any time soon. For our final slice of the data, we have looked at how the revenue of these publishers varies regionally. Because we have no Japanese publishers represented, we believe that that Japan specifically and Asian countries generally are under-represented in these tallies. The data we have is presented below for October 2009 – September 2010: And then the same measure, but for October 2010 – September 2011: The story here is that Europe's share of the global video game content market appears to be growing – as is its actual revenue – while revenue in North American is contracting. Outside of North America and Europe, which largely includes what the publishers generally refer to as the Asian or Asian Pacific region, revenues for these publishers grew over 10 percent. In three months all these publishers, and the others we hope to add, will have reported results for calendar 2011 and we will revisit these measures and possibly some others.