Analysis: How Nintendo's Contraction Has Impacted U.S. Game Retail

[Once the driver of retail growth for the U.S. games industry, Nintendo is now leading the contraction, says Gamasutra analyst Matt Matthews, who examines the company's prospects for 2012 in his most recent analysis of monthly NPD Group U.S. sales figures.] In January 2009, Nintendo claimed that it was responsible for 99 percent of the growth in the U.S. retail video game market in 2008. Those were halcyon days, indeed, for the fortunes have shifted and Nintendo is no longer contributing to the growth - it is leading the contraction. For example, software revenue has seen a year-over-year decline from 2010 to 2011. According to our estimates, based on analyst comments, Nintendo is the leading contributor to that loss. For the first three quarters of 2011, Nintendo saw its software revenue in the United States decline by over a quarter of a billion dollars. In the same period, the retail market for console and handheld software declined by over $420 million. That means Nintendo contributed approximately two-thirds of the decline in the retail software market from January through September 2011. For the sake of comparison, Microsoft's software revenue was essentially flat while Sony's PS2 and PSP contributed to the rest of the decline in software sales. Through the end of October, according to our estimates (based on NPD Group figures and public statements made by Nintendo, Microsoft, and Sony) Nintendo saw its U.S. hardware unit sales decline by nearly 875,000 units compared to the same point last year. Across the entire U.S. hardware market, unit sales are down around 970,000 units, so - by the same logic applied to market growth in 2009 - Nintendo's platforms contributed 90 percent of the decline in hardware sales for this year. Truly, the picture is far more nuanced than that - as it was two and a half years ago. This year Sony has seen its year-to-date (YTD) hardware sales decline by around 400,000 units, a relative rate of decline on par with what Nintendo has seen contemporaneously, while Microsoft has seen a nearly 9 percent increase in YTD hardware sales. It's simply a fact that Nintendo saw tremendous growth from 2007 through 2009, and was contributing a tremendous amount of revenue. When that growth slowed, inevitably the industry as a whole was sure to feel the effect. Unfortunately for Nintendo, its biggest market - the United States - is the one that has been most problematic in the past year. Looking at the company's latest financial results provides an enlightening window into the company's global revenue picture. For example, if we look at the trailing 12-month revenue for Nintendo globally, measured at the end of September in 2010 and then again 2011, the results look like the following. Nintendo has two major segments in its business: hardware and publishing. In the past year, revenue from publishing has fallen by approximately 35 percent while revenue from hardware has fallen 27 percent, relative to the previous comparable 12-month period. During the period ending in September 2011, shown above on the right, the company launched its Nintendo 3DS handheld at a prices that consumers were unwilling to accept. As a result, the company cut the price by about 40 percent and as a result its hardware revenues - and margins - were trimmed significantly. At present, consumers are buying the new handheld at a rapid clip, and the price cut has been effective. However, software for the 3DS has yet to stem much of the decline in software sales for the Nintendo DS and Nintendo Wii. Whereas Nintendo has preserved its profit margins for years by selling hardware at a healthy profit, then added more profit on software sales, that strategy has been upended by the failure of the 3DS at its original premium price. As we noted earlier, Nintendo's declines differ regionally. As the graph above shows, North America not only generates the most revenue for Nintendo, but it also has experienced the greatest decline in revenue. During the last 12 months, hardware and publishing revenue in North America fell to ¥376 billion ($4.9 billion) from ¥573 billion ($7.4 billion) in the previous comparable 12-month period. That's a decline of over 34 percent, compared to declines of 25 percent in Europe and 29 percent in Japan. A vivid demonstration of the difference between Nintendo's position in the U.S. and its position in Europe was made by Satoru Iwata, president of Nintendo in his briefing to investors in late October. In describing Nintendo's position in the U.S., Iwata showed the following all-format top 20 chart created from the NPD Group's data from January through September 2011. The Wii titles are highlighted in cyan and the Nintendo DS titles are in magenta. While Nintendo does dominate the top 10, with five titles on its two platforms, ten of the top 20 games are for the Xbox 360. Only seven out of the 20 are on Nintendo's platforms, and only the two Nintendo DS Pokemon titles are new in 2011. All the Wii titles are from late 2010 or earlier. By contrast, eight of the other slots on the chart are new 2011 titles for the Xbox 360 or the PlayStation 3. Now compare the chart above to the top 20 titles from a collection of 14 European countries, again taken from Iwata's presentation: The difference is clear, as the Wii dominates with seven titles in the top 20. Include the three Nintendo DS titles and Nintendo owns half of the top 20 in Europe for this year. More importantly, the Wii itself has five titles in the top 10 - so even if there is a significant decline in unit sales toward the end of the list, it's clear that Nintendo titles are still selling well. Regardless, its performance in Europe is cold comfort. The company isn't really growing its sales there, just seeing a slower contraction than in the U.S. And that really is the difficulty for Nintendo overall: it barely has any prospects of maintaining reasonable sales levels, much less fostering growth, compared to what it was capable of just a year ago. If we take the face meaning of Nintendo's public comments, that it will release more details about the Wii U at E3 2012, the company's next console appears to be headed for a launch sometime in the second half of next year. Without a home run from the Nintendo 3DS - and that's far from guaranteed - Nintendo's business through this time next year looks very grim indeed. For more in-depth analysis of October's retail video game sales in the U.S., read the full Gamasutra feature, available now.