NPD: Behind the Numbers, March 2011

On Thursday of last week, the NPD Group released its estimates for video game hardware, software, and accessory retail sales for March 2011 in the United States. Sales for all console and handheld products were down 4 percent relative to March of last year, despite the launch of Nintendo's new 3DS platform.

In addition to breaking out the top-line figures, we will look at three specific areas of interest this month. First, we'll examine hardware and software figures for the Nintendo 3DS launch, and give them some historical context. Second, we'll take a look at the software unit sales of the big three consoles, and also provide some insight into the latest growth segment in software: dance games. Finally, we'll look at some figures relating to Sony and its three platforms, and in particular the prospect of a price drop for the PlayStation 3.

Before we get to those areas, let us take a moment to look at the key revenue figures for the month of March 2011.

Industry at a Glance

The hardest hit segment of the retail video game industry in March 2011 was software, which contracted by 16 percent from the level of sales in the previous year. Despite a huge release for Pokémon White/Black, which moved 2.5 million units for the month, there were few other stand-out new titles, in particular on consoles.

The weak software performance was compounded by a comparison to an exceptional set of releases in March 2010. That month saw four new million-sellers: God of War III (PS3), Final Fantasy XIII (PS3/Xbox 360), Battlefield: Bad Company 2 (PS3/Xbox 360), and Pokémon SoulSilver/HeartGold (NDS).

It's worth noting, however, that one needs to go all the way back to 2007 to find a March in which software sales were lower than they were this year. The figure below shows this, as well as a rough breakdown of console and handheld software distributions.

The hardware segment showed significant growth over last year, with sales up about $50 million. Without the additional $100 million generated by hardware sales of the new Nintendo 3DS, it is likely that the hardware segment, like software, would have been down year-over-year.

And, as has become the custom, the accessories segment showed significant growth, up 13 percent or $28 million, fueled by Kinect and Move accessories and increases in sales of cards for the PlayStation Store, Xbox Live Marketplace, and Wii Shop Channel.

The chart below summarizes the latest results, both for March 2011 and for the year-to-date.

For the record, the NPD Group is now clearly labeling their media releases to indicate that the figures include only retail sales. They are providing quarterly estimates of extra-retail sales, including mobile games, downloadable content, and casual games, along with other segments, but those figures are not included in the figures above nor are they considered directly in this analysis.

That said, NPD analyst Anita Frazier did elaborate on the full year figures that the firm produced for 2010. If all segments of the market that they track are considered, sales of video game content were down about 0.5 percent from 2009. Those figures include new and used sales, physical and digital, as well as casual and online games.

Perspective on the 3DS

The latest retail sales estimates released by the NPD Group covered the first seven days on the market for Nintendo's new handheld, the 3DS. The last time the U.S. video game industry observed the launch of new dedicated gaming hardware was in November 2006, when the Sony PlayStation 3 and Nintendo Wii were launched in the weeks prior to Thanksgiving that year.

Priced at $250 and sporting an impressive 3D screen that doesn't require special glasses, the new handheld runs both new 3DS software and software designed for the previous generation Nintendo DS/DSi systems. Shortly after U.S. release, Nintendo of America stated the 3DS sold better in its first day than any handheld system in the company's history, but declined to release actual numbers.

When the NPD Group released its estimates, which Nintendo cited in a press release, the official one-week figure was just under 400,000 units. In fact, Barclays Capital analyst Haruka Mori sharpened the figure to 398,000. According to NPD Group analyst Anita Frazier, the top-selling 3DS game was Super Street Fighter IV 3D Edition by Capcom.

In a follow-up comment to Gamasutra, the NPD Group added that U.S. unit sales for SSF43DE were 100,000 units. Consequently all other games, from Nintendo and third parties, had sales below that level.

Commenting on the system's launch, Wedbush Securities analyst Michael Pachter told us that he felt that 3DS software sales were “miserable” with “literally a 1:1 attach rate." That is, each new 3DS owner purchased a single game, on average.

We would add that this means that the remaining launch titles – of which we counted 15 – sold fewer than 20,000 units on average.

Those are the basic facts of the 3DS launch, from which we will now examine two points. First, we will address how the 3DS launch compares to that of prior handhelds, in particular the Nintendo DS line of systems and Sony's PSP. Then we will address what to expect of the 3DS in the coming months.

The original Nintendo DS launched with sales of around 480,000 units during the week of 21 – 27 November 2004. During same month (over four full weeks), Nintendo's previous handheld, the Game Boy Advance, sold well over a million units. It sold fewer than 400,000 units of software giving it a first-week attach rate of less than 1.0.

The next system to launch was Sony's PlayStation Portable, arriving on 24 March 2005, with 620,000 units in 10 days according to NPD Group data reported at the time. Reports also stated that 1.1 million units of PSP software were sold, giving the system a launch-window attach rate of approximately 1.8. In that same month the Nintendo DS sold fewer than 150,000 units and had sold fewer than 500,000 units during the first three months of the year.

From that time until the launch of the Nintendo 3DS, the only handhelds to be released have been revisions of either the Nintendo DS or Sony PSP. We are in no position to discuss the PSP, since we have no data on how, say, the PSP-2000 sold in its original week. Even so, the revisions to the PSP, with the exception of the PSP Go, have been very modest upgrades to the existing hardware. And the lowly PSP Go appears to have sold so poorly at retail that it would serve little purpose to include it here.

The three revisions of the Nintendo DS are worth considering. The launch of the Nintendo DS Lite in June 2006 is the beginning of the system's truly amazing sales trajectory. Even so, in its first week it managed only 226,000 units, according to Nintendo. As we noted at the time, the DSi launched in March 2009 with 58,000 units at its midnight launch and 435,000 systems during its first week. The larger DSi XL sold a more modest 141,000 units during its first week.

If we convert all the first-week results above to units per day, we arrive at a diagram like the following. Note that the PSP figure is the only one averaged over 10 days instead of seven.

In this context, the Nintendo 3DS launch looks quite reasonable. While it lags somewhat behind the original Nintendo DS, one must remember that the 3DS did not launch during the holiday shopping season and was priced approximately $100 more than the original DS at launch.

In our correspondence with the NPD Group, analyst Liam Callahan also pointed to the share of the market claimed by the 3DS. "While the Nintendo DS sold a higher number of hardware units in March than the 3DS, this is not surprising considering historical data. When the Nintendo DS launched in November 2004, the Game Boy Advance sold extremely well, its fourth-best month at the time. However, the 3DS had a higher percentage of portable hardware sales for its launch month compared to the Nintendo DS during its launch month.”

Knowing how things turned out for the Nintendo DS and the PSP, the chart above also crystallizes how a single week of sales cannot predict how well a system will sell in the long term. While the original Nintendo DS and PSP both had similar first-week sales rates, the install base for the former is now more than 2.5 times larger than the latter.

Moreover, while the PSP sold more software initially and the Nintendo DS had a very low attach rate, the software situation on the PSP degraded quickly about two years after the system's launch and has never recovered. With Pokémon Black/White sales reaching 2.5 million in March 2011, it is manifest that software can still sell very well on the Nintendo DS.

Looking over this context, the Nintendo 3DS is off to an average start in terms of hardware but still must demonstrate its potential to sell software. There is no reason for excess alarm, nor celebration, at this time.

When more and bigger software titles are released for the 3DS, then we will see how the system stacks up against the competition. Going forward we expect sales in the range of 300,000 to 400,000 per month, as the system's price meets resistance from the average consumer. We are notably more pessimistic than Wedbush's Pachter, who told us that he expects sales in the 400,000 – 500,000 range in April, with sales continuing around that level throughout the year. He also pointed to titles like the remake of The Legend of Zelda: Ocarina of Time as key to pushing the system's sales.

As long as Nintendo offers the Nintendo DS line of systems, it may also be giving consumers a cheaper alternative that may hinder uptake of the 3DS. According to NPD Group data provided to us, the line of DS systems currently averages around $156 per system sold. While the monthly average may have been skewed some in March from sales of Pokémon bundles, that $156 figure is consistent with data from previous months. With an average above $150, we believe it suggests that consumers are eager to buy the higher end systems, including many units of the larger DSi XL at $170.

Were the Nintendo 3DS priced closer to $200, naturally sales of the 3DS would increase, but likewise we believe we'd see a corresponding decrease in interest in the $150 and $170 Nintendo DS models. We believe that Nintendo will allow the DS to have one last holiday (the system's eighth) and then simultaneously phase it out while dropping the price of the 3DS in early 2012.

Console Software Fortunes

Occasionally we have the opportunity to examine console software sales at either the dollar level or the unit level. This month we will be able to consider the latest software tie ratios for the Xbox 360, Wii, and PlayStation 3 and from those figures be able to determine some indication of how well software is selling on each platform.

Before getting to the figures, we should clarify what we mean by tie ratio, since the meaning can vary from analyst to analyst.

By software tie ratio we mean the total number of software units sold for a platform divided by the total number of systems sold for that platform.

So, for example, if the installed base of a system is 10 million units and 60 million units of software have been sold for that same platform, then the tie ratio would be 6.0 (i.e. 60 million divided by 10 million).

The term attach rate is commonly confused with tie ratio, but the former typically refers to the percentage of the installed base that owns a software title or accessory.

For example, as of March 2011, the attach rate for Super Street Fighter IV 3D Edition is 25 percent, since 100,000 copies were sold and the 3DS installed base is about 400,000 systems.

Here are the latest tie ratios for the big three consoles, according to exclusive data provided to us by the NPD Group.

The tie ratio for the Xbox 360 first hit 8.8 around October 2009 and has remained in the 8.8 to 9.0 range during the eighteen month period since. Because a software tie ratio is combines both software and hardware sales into a single figure, it is affected by the dynamics of both areas. Since the introduction of the Xbox 360 S Model in June 2010, the console's hardware sales have been quite high.

Given that the Xbox 360 tie ratio has remained approximately the same, and possibly even declined marginally during that period, we can assume that software sales have not grown sufficiently to increase the average number of titles purchased for each system. Moreover, the 1600 Point Card for Xbox Live has been a top-selling accessory for several months during the past year, and it is entirely likely that many consumers have been opting to purchase downloadable games from Microsoft's online storefront rather than disc-based games at a retail store.

The Wii has increased its tie ratio consistently over the past 15 months. As of December 2009, each Wii owner had purchased 6.5 titles on average, and that ratio grew to 6.8 in September 2010 and approximately 7.1 in December 2010.

During that same period Wii hardware sales rates have decreased dramatically, which means that it has been somewhat easier for that system to drive its tie ratio higher. Existing users haven't stopped buying software, and several hundred thousand new systems are being sold each month.

Likewise, the PlayStation 3 has seen several year-over-year declines in system sales starting in September of last year, and so it comes as no surprise to us that its tie ratio has also increased from approximately 6.7 in December 2009 to 7.7 in December 2010.

In terms of launch-to-date software sales, we have assembled the following estimates.

The Wii, with its installed base of over 35 million units, clearly leads in terms of total software sold. We also note that the Wii launched a full year after the Xbox 360, so it has moved significantly more software per year on average than has Microsoft's platform. By our estimates, about 50 million fewer units of PS3 software have been sold at this point in the system's lifetime than Xbox 360 software at the comparable point in its lifetime (i.e. March 2010).

While the figure above gives a clear image of where the platforms stand on total software, we think it is also instructive to look at the average rate of sales over shorter periods of time.

Let us consider the current-generation console market to consist of the Wii, Xbox 360, and PlayStation 3. Then in the last fifteen months, the Wii has accounted for 38 percent of software unit sales while the Xbox 360 has accounted for 36 percent. The PlayStation 3 claimed the remaining 26 percent.

In the 15 months prior to that period (i.e. from October 2008 through December 2009), we estimate that the breakdown was 48 percent for the Wii, 32 percent for the Xbox 360, and 20 percent for the PlayStation 3.

The key dynamic at play here is that Wii software unit sales dropped by over 25 percent from the first 15-month period to the second while PlayStation 3 software grew by 18 percent. Software unit sales for the Xbox 360 were basically flat between the two 15-month periods.

This is a point we've made before, and one that's worth making here again: Wii hardware and software sales are still at healthy levels, for the moment. However, the system has declined from its peaks and shows no signs of slowing its descent. Simultaneously, the Xbox 360 and PlayStation 3 are either increasing sales (hardware for both, software for the PS3) or maintaining already strong levels (software for the Xbox 360).

Before we leave the topic of software in general, we would like to draw attention to sales of dance software like Ubisoft's Just Dance 2 and Microsoft's Dance Central. Both of these titles owe much to the original Just Dance, which was one of the Wii's breakout hits in late 2009 and early 2010. In spite of a near-invisible launch, that title went on to hit 1 million units in the U.S. within five months of its release.

According to exclusive NPD Group data provided to Gamasutra, Just Dance 2 has reached a staggering 4.4 million units just in the U.S. alone, on a single platform – the Wii. To put that in context, approximately 1 in every 11 units of software sold on the Wii since the end of September 2010 has been a copy of Just Dance 2.

As Microsoft has pushed its new Kinect system for the Xbox 360, so have sales of Dance Central also continued to grow. According to the latest official NPD Group figures, that title has reached 1.5 million units. Given that the installed base for Kinect is still relatively small, that is a tremendous achievement.

While we do not have updated retail figures at this time, reports from Ubisoft indicate that its Michael Jackson: The Experience game has also seen very strong sales. That game has just been released on the Xbox 360 and PlayStation 3, and it is likely to collect many additional units on those platforms.

Could these dance games be the next boom in video game software?

We think that's precisely what's happening, and expect to hear more dance games announced throughout the year. All three major consoles have motion controls now, and Ubisoft and Harmonix (developer of Dance Central) have already done much to set the standard for the genre.

Unlike the Guitar Hero and Rock Band phase that the industry passed through recently, the dance genre doesn't seem as likely to overheat revenues through sales of accessories. In this case, the sales are almost all pure software, with some possible effects on accessory sales as players pick up additional standard controllers for multiplayer.

Sony's Future

We've had many recent discussions about Nintendo's platforms, both new and old, and Microsoft's success with Kinect, but we haven't had a proper discussion about Sony's situation. According to a recent press release, the company states that the PlayStation 3 platform has passed 50 million units sold worldwide to retailers. Approximately one third of those units have been sold in the United States.

To some extent, Sony appears to have put its head down, focused on its stated public goals, and limited any possible negative exposure as much as possible. In particular, Sony's regular comments to the press regarding each month's NPD Group data releases have focused on its 3D gaming initiative (games enhanced to use the new generation of 3D television sets), the Move controller, and its slate of first-party titles like LittleBigPlanet, Uncharted, Ratchet & Clank, Killzone, and Resistance.

This has left many to speculate about its hardware and software sales, and a possible price cut for the PlayStation 3. Moreover, the company has clearly moved on from the PlayStation 2, whose hardware sales are around 1 percent of the market each month, and the PlayStation Portable. The latter system already has a successor, the NGP, slated for release sometime in 2011, although we still consider the system unlikely to launch in the U.S. in any meaningful way this year.

For the remainder of 2011, we believe that Sony will essentially be a single-platform company, much like its key rival, Microsoft.

With that in mind, let us shed some light on Sony's fortunes. Sony appears to be sitting on details of a rather strong first quarter for the PlayStation 3. While we cannot provide specifics, it appears that the PlayStation 3 saw its sales increase by roughly 5-10 percent in the first quarter of 2011 compared to the same period in 2010.

Remember that during the first quarter of 2010 the PlayStation 3 was selling well as it came off a strong holiday and the August 2009 introduction of the $300 PlayStation 3 Slim model. While bundles have changed and new software titles have been released, any sustained increase in sales 18 months after the last price cut is an important development.

One might speculate that recent retailer discounting has helped promote the PlayStation 3, but according to NPD Group data provided to us, the average price for the system remains well above $300, at $318. (For the sake of comparison, the average price of the Xbox 360 has fallen to $287.)

Moreover, we know that software sales for the platform have been accelerating, and by our estimates the system should break 130 million units of software in April 2011. This has no doubt been helped by Sony's own LittleBigPlanet 2, which we know has sold better than the original, and Killzone 3.

According to exclusive data provided to Gamasutra, lifetime sales of Killzone 3 have now reached 500,000 units. During approximately the same length of release Killzone 2 sold around 620,000 units, but we should note that the Killzone 3 figure provided by the NPD Group does not include copies of the game sold bundled with PlayStation 3 hardware. Regardless, it does appear that Killzone 3 is tracking just behind its predecessor.

One additional point about Sony is that its $20 PlayStation Network card was the top-selling accessory for the month, according to the NPD Group's Anita Frazier. Since the launch of the PS3 in late 2006, Sony has been playing catch-up to Microsoft's Xbox Live service. While we hesitate to read too much into a single month's data, it is certainly a mark of Sony's progress that its cards are selling well enough to take the #1 spot in a segment in which Microsoft's 1600 Point Xbox Live card has been leading several times over the past year.

Given that software sales are increasing, hardware sales are up year-over-year, and it is making progress with its online services, it appears to us that Sony may be pleased with a longer, shallower sales curve for the PlayStation 3 and will therefore hold off on a price cut until at least the second half of 2011.

Remember that the previous times Sony had made changes to its pricing and hardware line were in November 2007 (introduction of $400 40GB model) and August 2009 (introduction of the $300 PS3 Slim). It's perfectly in character for the company to continue to accrue the benefits of its increasing margin on the system hardware and set its pricing by internal goals rather than what analysts, retailers, or third-party publishers might ask.

[As always, many thanks to the NPD Group for its monthly release of the video game industry data, with a special thanks to David Riley and Liam Callahan for their assistance. Thank you in particular to NPD Group analyst Anita Frazier for her monthly analysis notes. Additional credit is due to Michael Pachter, analyst for Wedbush Securities, for his perspective, instrucive conversations, and entertaining anecdotes.

We also wish to thank Doug Creutz of Cowen and Company for his insights. Finally, many thanks to colleagues at Gamasutra and particularly regular commenters on NeoGAF for many helpful discussions.]