Has video game retail become an entirely 'hits driven' industry?

Is the video game industry, in particular the brick-and-mortar side of the business, becoming more "hit-driven"? That's the claim that Wedbush analyst Michael Pachter made in his most recent note on March's retail sales. It's a temptingly straightforward thesis, but one that probably deserves some scrutiny. To explain a bit more about Pachter's thesis, he explains the hit-driven business as one in which "gamers [are] willing to pass on an abundance of catalog titles in anticipation of the industry's premier franchises." That is, while some middle-tier games languish on shelves, gamers are content to play the games they own until a truly big game comes along. I think there is another aspect to this phenomenon: the increasing concentration of sales of these popular games immediately after launch. Activision Blizzard, in particular, can be seen doing this with the last few years of Call of Duty releases. So, are sales becoming concentrated among the top-selling games? Are sales getting concentrated around the release of big games? I have only limited data, and it is entirely possible that what I have paints a skewed picture, but let me share it with you. I'll caution you ahead of time: I haven't seen a clear-cut answer just looking at sales figures. You may recall that the current market contraction began three years ago, with the negative results reported for March 2009. Out of the 36 months since that turning point, only nine have been growth months and the remaining 27 have shown revenue declines. The full picture, including the growth up to 2009 and the fall afterward can be seen in this table. Every one of those growth months included the launch of a hit game. September 2009 included Halo 3: ODST and The Beatles: Rock Band. Then God of War III, Pokemon SoulSilver/HeartGold, and Final Fantasy XIII launched in March 2010. Both Red Dead Redemption and Super Mario Galaxy 2 pushed May 2010 into a growth month. Fallout: New Vegas, NBA 2K11, and Medal of Honor topped a list of million sellers in October 2010. The rest of the list is predictably full of titles you've heard of, and likely even played. So, yes, the growth months have had extraordinary release slates, particularly for games that are part of established franchises that have historically sold well. These games are not only popular, but are often promoted more than untested games, creating a feedback loop that helps propel the big games further. However, sometimes there are big games released and things go the other way. March's sales are just such an example, I believe. The top 10, as shown in the table below, contains several new releases with licenses that ought to help push the industry higher, not lower: Mass Effect, Resident Evil, SSX, Street Fighter, Tekken, and Mario. Even with that lineup of games, software sales in March 2012 were down 25% in terms of revenue and 29% in terms of units. Keep in mind that that's comparing to figures for March 2011, which had themselves declined 12% in units and 16% in revenue from March 2010! So we have a quandary: sometimes big games drive up sales, and sometimes they don't. Moreover, it isn't clear just from top 10 lists (which, regrettably, is most of what is available publicly) how the games below the chart are doing. To see what's going on beneath the chart, let's take the month at hand and the same month a year ago and see what's going on with the top 10 (our proxy for hits) and the rest of the market (consisting mostly of catalog titles). According to Michael Olson and Andrew Connor, analysts for Piper Jaffray & Co., the top 10 games in March 2011 contributed 38% of the software revenue for that month and 30% of the software units. In March 2012, just last month, these figures shifted compared to a year earlier. The top 10 games accounted for just over 39% of the software revenue, a small increase in share. However, the share of units in the top 10 decreased almost two full percentage points, to 28%. In a nutshell: a lower share of units and a greater share of revenue for the top 10, since last year this time. That's again, not a perfectly clear picture. Most of the difference can be attributed to the kind of software which was popular a year ago, and that which is popular now. A year ago the top-selling games were Pokemon games which a relatively low average price, while this year the top games were $60 titles for the HD consoles. I asked the NPD Group if they could shed some light on where the games were going, and one of their analysts, Liam Callahan, offered to comment on new releases and catalog (older) titles. "While the relatively light launch schedule of Q1 2012 would lead one to believe that a decline in new launch sales are the reason for overall software declines, games released in the prior year performed poorly as well," he told me. The interesting part, however, was this: "Games that launched in Q1 2012 declined 37% in unit sales compared to launches in Q1 2011, while there was a 31% decline in units sales of games launches in 2011 versus Q1 2011 sales of games launching in 2010." That essentially says that new releases so far in 2012 are down even than the rest of the market (-37% versus -31%), at least in terms of unit sales. The comparison is, like everything else about this situation, slightly more complex. Callahan told me two months ago that January was a virtually empty of new releases, and from his new comments it's clear that at least part of the problem may be that fewer games have been released so far in 2012. Finally, there is the elephant in the room: Call of Duty sales. By now we've seen several articles on how Modern Warfare 3 sales are lagging behind comparable period sales by Black Ops. For example, you should check out Gamasutra's latest two pieces on the situation here and here. The latter article provides some extremely important context from Doug Creutz, analyst for Cowen and Company. He notes that while overall Modern Warfare 3 sales are down compared to the previous Call of Duty title, this is primarily due to a decline in sales on the Nintendo Wii, Windows PC, and handheld platforms. If anything epitomizes the hit game today, it has to be Call of Duty. Like Guitar Hero, sales of Call of Duty have gotten more concentrated around its release date, and residual sales in the following months have begun to trail off. When I asked Michael Pachter about Call of Duty, he told me that he agreed that "Black Ops was the high point for packaged goods" and that he's not sure that there's much that Activision Blizzard can do to change that fact. Surely the Call of Duty Elite service is helping to offset some of the losses at retail, but it isn't clear to me yet whether they're even close to a revenue growth situation yet. One thing the analysts appear to agree on is that the audience for video games has changed in the past couple of years, and this will necessarily define how sales play out. Piper Jaffray's Olson and Connor have said that they believe that "casual gamers have left the market permanently." Pachter has described the dynamics this way: "casual gamers are likely to shift their playing time from packaged products to mobile and social games, but hard core gamers are far less likely to do so." This, I think, is the essence of what will define a hit-driven market going forward. The hard core gamers will serve as the backbone for software sales on the HD consoles, while the few casual gamers that can be enticed to pick up a popular title will do so. Middle-tier titles on those platforms will suffer, as a result. The less hard core platforms, like the 3DS and perhaps the Wii U, will have to compete with the channels that the casual audience finds attractive now, like mobile and social gaming, while Nintendo-exclusives (like Mario Kart and Zelda) will continue to post huge sales through long-term, low-level sales.