NPD: Behind the Numbers, January 2009

[In the industry's most-read NPD analysis, Gamasutra analyst Matt Matthews looks at the state of the U.S. game market going into 2009, from Nintendo dominance through Call Of Duty's evolution.]

As 2009 opens, the video game industry is reorganizing itself. Publishers are restructuring and modifying product schedules, while some development houses have disbanded.

However, these are changes that the retail world will not feel for several months yet. Accordingly the modest sales growth from December 2008 has continued into the new year, and analysts expect modest gains to extend through much of 2009.

The reality is that Nintendo rules this industry. Hardware, software, and accessory sales for Nintendo's twin powerhouses, the Wii and Nintendo DS, accounted for nearly half of all revenue in 2008.

For the first month of the new year, Nintendo's platforms claimed nearly 52% of all industry dollars, up from 33% for the same period last year.

While Sony's platforms appear to be languishing, the Xbox 360 continues to sell hardware at historically high rates and is maintaining its robust software sales.

This year will likely determine whether publishers can continue to justify big budget cross-platform games for the PlayStation 3 and Xbox 360 -- even as Wii software dominates the top slots in the sales charts.

Nintendo Dodges Shortages, Microsoft Surges

During the second half of 2006, after the introduction of the Lite version of the Nintendo DS, headlines each month declared more extraordinary sales figures for the dual-screen handheld.

Since the introduction of the Nintendo Wii, whose sales have been just as remarkable, it has become nearly commonplace to see Nintendo leading both handhelds and consoles as new monthly figures are reported by the NPD Group.

The Nintendo Wii again led console sales in January 2009, as it did during the prior fifteen consecutive months. Coming down from the peak in December, Nintendo still managed to sell almost 170,000 systems per week, or nearly 2.5 times as many systems as it sold in January of the previous year.

In 2008, Nintendo appeared to struggle to supply Wii (and Nintendo DS) hardware during the first month of the year, and appears to have settled those issues for the beginning of 2009.

Microsoft sold over 77,000 Xbox 360 systems per week during the month, which should be considered quite strong.

By comparison, the only months during which the Xbox 360 has had a higher weekly sales rate were holiday months (Novembers and Decembers), the Halo 3 launch period (September and October 2007), and the strong October leading into the 2008 holiday season.

Xbox 360 Growth in 2009

For an idea of how the Xbox 360 will sell through 2009, it is instructive to look at Sony's position at the beginning of last year. The PlayStation 3 enjoyed a wave of sales from late 2007 through early 2008 after shifting the PS3 to a new $400/$500 pricing structure.

Once that wave died down, monthly sales appeared to settle in the range of 45,000 to 60,000 systems per week, up from the 20,000 to 40,000 seen before the new pricing.

Microsoft instituted across-the-board price drops for its Xbox 360 models going through the second half of 2008, and the higher January sales of the Xbox 360 suggest that we will see strong sales for Microsoft's system in 2009, just as we saw for Sony and the PS3 in 2008.

The average rate for the first three quarters of 2008 was just over 50,000 Xbox 360 systems per week, so that should be considered the baseline against which we measure any change in Xbox 360 sales in the coming months.

Dropping Sony Sales

For Sony, it appears that the well has nearly run dry. Not only were sales of its flagship PlayStation 3 down 25% year-on-year in January 2009 -- from 67,000 systems per week to 51,000 systems per week -- but the PlayStation 2 and PlayStation Portable (PSP) also saw declining sales rates of 62% and 25%, respectively.

While PS2 sales have been weakening for a long time, the drop in PSP sales could be a troubling sign for Sony. The handheld's hardware sales have steadfastly remained strong despite consistently weak software sales.

However, the PSP is still rather expensive and it is possible that dark economic news has made consumers less inclined to spend $170 - $200 on a handheld gaming device. (By comparison, the Nintendo DS retails for $130 alone or $150 and up in bundles.)

The Nintendo DS, like the Wii, enjoyed a strong month coming out of the 2008 holiday season.

Whereas January was the double-screen handheld's weakest month of each of the past two years (48,000 systems per week in 2007 and 63,000 per week in 2008), Nintendo seems to have supply to meet the demand, shifting nearly 128,000 systems per week in January 2009.

If indeed consumers are becoming more price conscious, Nintendo may need to consider pricing carefully when it launches the Nintendo DSi later this year.

Conventional wisdom has so far put the system at $160, comparable to the price of the system in Japan. Keep in mind that the upgraded hardware and strong software library could mitigate perception of the system's value.

Shifting Revenue

As Nintendo's platforms have continued to perform well, the company has been more generous with illuminating data points in its monthly NPD-related press releases.

In this month's press release, the company revealed that January revenue due to Nintendo platforms was up $300 million year-on-year while the industry as a whole was up only $150 million.

The implication is clear: the industry grew some only because Nintendo grew more.

Combined revenue on systems from the other two platform holders, Microsoft and Sony, must be down.

Last year, the distribution of revenue in January 2008, looking over the major players in the U.S. video game industry, looked something like this:

That is a picture of an industry with three robust competitors, each with a sizable piece of the market. Note that Sony's piece of the pie comes from three systems (PS2, PS3, PSP) while Nintendo's comes from essentially two (Wii and Nintendo DS) with only trace amounts from the Game Boy Advance. Microsoft's part comes from primarily the Xbox 360 and some tiny percent from sales for the original Xbox.

While we don't have individual figures for Sony and Microsoft in January 2009, we do have the figures for Nintendo, and those are sufficient to show a shift.

Revenue due to Nintendo's platforms has grown from 33% of the market to 52% in just a year's time. In last month's industry overview, we saw that sales of hardware, software, and accessories for Nintendo's platforms accounted for 48% of all videogame revenue in all of 2008.

The figures for January 2009 are consistent with that fraction, and suggest more Nintendo dominance going forward.

Who Lost What?

The big question that remains: Whose revenue decreased? Sony or Microsoft or both?

We can determine a few items from the figures available to us. From a drop in hardware unit sales and a drop in the PlayStation 3 average retail price to $407 (according to NPD), Sony's monthly hardware revenue appears to have dropped almost $68 million from what it was in January 2008.

According to Michael Pachter, industry analyst for Wedbush Morgan Securities, January 2009 PlayStation 2 software sales were down 57% year-on-year, which would have further depressed revenues for Sony's platform.

Sales of PlayStation 3 software would have had to increase by 1.1 million units priced at $60 just to offset the lower hardware revenue.

As for Microsoft, we know that the combined revenue from its hardware and third-party software sales came to around $222 million. (According to NPD, the Xbox 360 now retails for $268 on average, down from a launch-to-date average of $376 prior to the system's price drop last year.)

Total first-party Xbox 360 software sales and Xbox 360 accessory sales would have to have reached $80 million in January 2009 for revenue on the platform to have remained constant year-on-year. While possible, such strong sales in those categories seem unlikely.

We lack enough data to make more precise statements, but it would appear that January platform revenues were down for both Sony and Microsoft, with the former taking rather a bigger hit than the latter.

Rise of the Consoles

While the rise of the Nintendo DS as a leading platform has been impressive, the real software money is being made on consoles. From 2006 through 2008, the mix of console and handheld software revenue in January has been indicative of the mix for the entire year.

For example, in January 2006, the software revenue was divided 73% to 27% between consoles and handhelds. For all of 2006, the market was essentially the same, divided 74% to 26%.

According to data from Cowen and Company, nearly 82% of the industry's software revenue was for consoles in January 2009. In fact, as the figure above shows, the proportion of software revenue coming from consoles has increased each year since 2006.

Two factors are probably driving this growing disparity: first, the increase in premium-priced console products such as Guitar Hero and Wii Fit; second, the explosion of value-priced software at $20 or less for the Nintendo DS.

These factors would suggest that the gap above has grown more pronounced while at the same time actual console and handheld unit sales may not have changed by nearly the same proportions.

Nintendo Dominates Top Software Sales

As has become nearly routine, Nintendo's hit software -- Wii Fit, Wii Play, and Mario Kart Wii -- took the top three spots in the January 2009 software chart. 

The top 10 is eerily reminiscent of the chart for January 2008. Consider that last year's top 10 contained Wii Play, Guitar Hero III, and Super Mario Galaxy all for the Wii, along with Mario Party and Mario & Sonic at the Olympic Games, both for the Nintendo DS.

For comparison, this year, the chart has Wii Play, Guitar Hero: World Tour, and Mario Kart all for the Wii, along with New Super Mario Bros. and Mario Kart DS, both for the Nintendo DS.

Throw in a Call of Duty title on both charts, and the resemblance is uncanny.

One shouldn't place too much emphasis on trends visible in the top 10 or top 20 software titles. Still, those are the games which make the most money.

According to Mr. Pachter from Wedbush Morgan, the top 10 titles in January 2009 captured 27% of software dollar sales from only 14% of unit sales.

Looking further down the chart, Nintendo announced that the top 30 titles for January 2009 included 20 titles for its systems. Combined with the titles listed in the top 20, here is what we can deduce about the top 30:

The candidates for that last title are NBA 2K9 for the Xbox 360, Guitar Hero: World Tour for the PS2, or Skate 2 for the PS3. Given these choices, the final game is most likely for a Sony system. (Personally, we suspect it was GH:WT for the PS2.)

As noted earlier, Microsoft's software continues to sell well, and according to Microsoft, it has maintained its tie ratio of 8.1 software titles per console owner. That puts Xbox 360 software unit sales near 115 million units after 39 months on the market.

The dearth of PlayStation software in the top 30 is a danger sign for Sony. Not only does it suggest a rapidly slowing PlayStation 2 software market, but an essential weakness in PlayStation 3 software sales. A platform as expensive to develop for as the PlayStation 3 likely cannot lead a healthy existence with only one title in the top 30.

As we have suggested previously, Sony may have fought two wars simultaneously with the same weapon -- the PlayStation 3 -- and subsequently been defeated in both.

The PlayStation 3 appears to have played a significant role in Blu-ray player penetration and driving the market for cheaper players. Yet, those same consumers may have little or no interest in PlayStation 3 software.

With the current weakness in HDTV and Blu-Ray player sales, Sony is saddled with a an expensive product that is rapidly losing relevance in both the video and videogame markets.

Call of Duty Sales, in Detail

For two years running, Activision's Call of Duty series has enjoyed very strong sales. However, there are a few points one can make about sales of the previous iteration of the game, Call of Duty 4: Modern Warfare, and the latest version, Call of Duty: World at War.

Consider the following figure showing sales of each of these games on the Xbox 360 and PlayStation 3 for the first three months after release: 

As the figure above demonstrates, Call of Duty: World at War did not sell quite as well as its predecessor during this crucial sales period.

Moreover, the results for the two platforms were mixed: sales for World at War were up on the PS3 compared to CoD4, while sales for World at War dropped on the Xbox 360 from the level set by CoD4.

Yet, Call of Duty: World at War on current generation consoles is still ahead of Call of Duty 4 during the analogous period. The key here is the Wii port, which is known to have sold in excess of 366,000 units during December 2008.

The Wii version appeared at #19 on January's top 20 list, and these additional sales will no doubt encourage Activision to produce another Wii port for any future Call of Duty titles.

[As always, many thanks to the NPD Group for its monthly release of the videogame industry data. Additional credit is due to Mr. Michael Pachter, analyst for Wedbush Morgan Securities, for his industry analysis. Thanks also to Cowen and Company. Moreover, thanks to my colleagues at Gamasutra and on NeoGAF for many helpful discussions.]