Behind The Numbers: Much-Needed Holiday Cheer From November Game Sales

[November was the third consecutive month of year-on-year increases at U.S. game retail. Gamasutra analyst Matt Matthews examines how Call of Duty drove the much-needed boost.] The video game industry in the United States finally got some truly good news last week when the NPD Group reported its latest estimates for retail sales during the November 2011 period. For the first time since February 2009, software sales showed a third consecutive month of year-over-year increases. The retail video game industry peaked in that month, over two and a half years ago, and has been sliding downward practically every month since. The total retail video game market in the U.S. -- new games, hardware, and accessories -- totaled over $23.7 billion through the 12 months ending that February. In the 12 month period ending this past November, the NPD Group estimated that the same retail market segments generated $18.1 billion, a decline of $5.6 billion or 24 percent from the peak. After an extended contraction of that scale, the industry truly needed some holiday cheer. Starting early in the month, Activision Blizzard's Call of Duty: Modern Warfare 3 had the clout to bring consumers out by the millions and then retailers, publishers, and platform holders cut various deals to bring even more consumers to the stores during Black Friday. When you get down into the figures, however, it becomes clear that Modern Warfare 3, developed by Activision's Infinity Ward and Sledgehammer Games, was the real driver for the month's sales. According to the NPD Group analyst Anita Frazier, the latest Call of Duty title "bested last year's [Call of Duty] Black Ops by about 7 percent," which would put Modern Warfare 3 around 9 million units total across four systems (Xbox 360, PlayStation 3, Wii, and Windows). In a conversation with Michael Pachter, analyst for Wedbush Securities, he elaborated on the situation for the HD consoles (Xbox 360 and PS3), where sales were actually up nearly 10 percent. These are clearly the growth platforms for the franchise, at least at retail. To put the results into historical context, the figure below shows the growth of the Call of Duty franchise since the launch of the original Modern Warfare in 2007. The launch of Modern Warfare 2 in November 2009 set the franchise on its current trajectory, tripling launch-month sales of the previous entries. Then Treyarch-developed Black Ops added another 32 percent to launch-month sales to score 8 million units in the single month of November 2010 and Modern Warfare 3 has pushed nearly another 10 percent beyond that. Of course, these are just the HD console versions of the franchise. Out of the total 8.9 million units of Modern Warfare 3 sold in November (a figure supplied by analyst firm Cowen) fewer than 100,000 were for the Wii, and even fewer were for Windows. The Windows version, notably, was available on Steam and the NPD Group does not track those sales. Without official information from Activision Blizzard or from Valve (which owns and runs Steam), we will not know how many additional copies were sold through directly to those consumers. This year Activision Blizzard is pushing Call of Duty players to subscribe to its Call of Duty: Elite service. The free version of Elite offers stat tracking and social network integration while the paid version (currently $50 per year) adds free monthly downloadable content, competitions, and various other perquisites. According to a company press release, over 1 million subscribers had paid for the annual service within six days of its launch. Last year, Frazier of the NPD Group noted that Black Ops accounted for 25 percent of all software unit sales during November. The share for Modern Warfare 3 in November 2011 was around 23 percent. That's a decline in share, but that appears to simply be the rest of the market growing slightly faster than Call of Duty itself. That is, Call of Duty grew by about 7 percent, while total software unit sales were up at twice that rate, around 15 percent. In terms of revenue, Modern Warfare 3 was probably very similar to Black Ops, taking in about $1 out of every $3 spent on software for the month. However, that does not include the $50 million (and counting) that Activision Blizzard has already gotten from Call of Duty: Elite subscriptions. This week, Activision announced Modern Warfare 3 generated $1 billion in 16 days. But where will the franchise go from here? Clearly its growth is slowing, but is still positive. (That is, it still has a positive first derivative, but its second derivative is negative.) In an email Wedbush's Michael Pachter wrote that it will certainly grow at least once more, in 2012, but after that it's impossible to know. Last year's game reached over 20 percent of the HD console installed base in its first month (8 million units on just fewer than 38 million systems). Modern Warfare 3 reached only 17.5 percent of the HD console installed base (8.8 million units on 50 million systems). With both the Xbox 360 and PS3 currently expected to grow their installed bases significantly in 2012 (especially the Xbox 360, which hasn't had a proper price cut in years) we can expect an even larger installed base when the next Call of Duty launches in about a year. The shifting hardware landscape is another area worth looking at, so I've put together the following figure which shows how things are shaping up for the end of 2011 compared to all of 2010. The colored bars show the year-to-date sales for each platform (eleven months) while the shadows behind them show the full-year sales for each platform last year. The Xbox 360 is within 1.3 million units of besting its record sales in 2010. The PlayStation 3 should also beat its 2010 sales figure after December's results are reported, and it will have also had its best year ever. (However, Sony will still have lost significant ground to its primary competitor for HD console sales.) Given the gaps between last year's total sales and this year's sales without December, it is impossible that the Wii and Nintendo DS can even hold even for the year. The question is how far down they'll end up for the year compared to 2010. I'd bet on it being down by around 30 percent, year-over-year. (Moreover, because of rounding, the apparent gap between the PS3 and the Wii is slightly exaggerated by the numbers above; by the end of the year, it seems quite likely that the Wii will have higher full-year sales than will the PS3.) Finally, we can eyeball the situation with the Nintendo DS and the 3DS, combined, and see that Nintendo's handheld sales will end the year not nearly as dire as it appeared during the middle of the summer. At this point, we would expect total Nintendo handheld unit sales to be down by around 15 percent for the full year, which seems reasonable given the death of the Nintendo DS Lite and the unfavorable reaction consumers had to the $250 launch price for the Nintendo 3DS. As the software consumers really want (like Mario Kart 7 and Super Mario 3D Land) arrives, the new handheld should see strong sales to go along with it. The system's fate in 2012, however, should be further defined by what Nintendo and its third parties can offer consumers beyond today's titles. Finally, I'll finish with one more graph showing how software sales have turned around since August of this year. I've gone back through the data for several past years and for each year I have broken up software unit sales into two periods: January-August and September-November. The results are displayed below: The first period, from January through August for each year, shows a decline each year from 2008 through 2011. However, for September - November, there is a decline in 2009, followed by a modest increase in 2010 and then a large increase (up 10 percent, or 6 million units) in 2011. One thing that this clearly shows is how the retail business has become even more concentrated toward the end of the year. Part of this, surely, is about consumer demand. But, we still maintain that adequately promoted and timed products during the first half of the year - and even during the summer - could help even out this disparity. Just look at how well a game like Red Dead Redemption did through the middle of 2010. But look more closely at the 2010 and 2011 figures. As of the end of August, software unit sales in 2011 were about 6 million units behind the same point in 2010. But 172 million units of software had been sold in both years by the end of November. That means that while software was slowed down in the first half of 2011, and then slowed further through July and August, sales in the last three months were enough to make up for that 6 million unit deficit and bring 2011 in line with 2010. That's a huge turnaround, and one that we hope continues through 2012.