NPD: Behind the Numbers, May 2011

[Gamasutra analyst Matt Matthews examines hardware, software and accessory trends for U.S. video game retail sales in May -- a month what NPD Group called "the lowest month of sales for the industry since October 2006."]

After a stunning April the retail video game industry saw revenue decline 13 percent in May, with revenue declining across all segments according to the latest estimates released by the NPD Group on Monday. Only Nintendo's Wii saw its hardware sales increase month-over-month, and that system had the benefit of a price drop.

Even the accessory segment, which had seen year-to-date revenue up by 15 percent buoyed by Xbox Kinect sales, suffered a six percent drop in revenue compared to May 2010.

Along with a quick look at the top-line sales figures, we will dig into the many changes in the industry over the past month, including the effect that the PlayStation Network outage may have had on Sony's retail sales, the historical context for May's revenue figures, and the prospects for the Nintendo Wii and 3DS in the coming months.

Industry At a Glance

One could be forgiven for thinking the physical retail industry had turned a corner a month ago when we were considering April's sales estimates. In terms of dollars, total sales were up nearly 22 percent and software was up over 26 percent.

Compare that, now, with the dismal 13 percent decline overall and 19 percent decline in software for the month of May.

Despite the fall in monthly revenue, the year-to-date figures give room for cheer. Total industry revenue is actually flat, compared with the same period last year, and software is down a much more modest 6 percent in terms of dollars. In terms of units, software is down only 3 percent, showing that software prices have generally declined in 2011.

The table below summarizes the key figures.

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.

May Is Just One Month

In comments accompanying the release of the latest data, NPD Group analyst Anita Frazier noted that “May 2011 was the lowest month of sales for the industry since October 2006,” a striking observation which neatly encapsulated the dire figures.

In October 2006, neither the PlayStation 3 nor Nintendo Wii had yet launched and the Xbox 360 was less than a year old. The golden age for Nintendo's DS platform, marked by the release of the Nintendo DS Lite model, was a mere five months old. The explosion of music games and plastic instruments had not yet begun, with Guitar Hero II for the PlayStation 2 arriving on store shelves the next month.

The present data shows total sales were a mere $179.7 million per week during the May 2011 period measured by the NPD Group. According our collection of historical data, the last time sales for a month were that low was indeed October 2006 when NPD estimated total sales of $160.8 million per week. In April 2011, just a month before the current figures, the weekly revenue average was $232.7 million.

What contributed to the $53 million differential between April's to May's weekly revenues? First, hardware declines contributed about $12.5 million of the drop in weekly revenue. Specifically, every platform except the Wii saw a decline in hardware unit sales from April to May, and average selling prices for the main consoles (Wii, PlayStation 3, and Xbox 360) all fell too. Alternatively, given that Nintendo 3DS sales dropped by around 90,000 units, we can surmise that that platform alone drove weekly hardware revenue down by at least $5 million.

Second, the accessory segment contributed another $8.4 million to the decline in weekly revenue from April to May. According to NPD Group analyst Liam Callahan, Xbox 360 and PlayStation 3 accessory sales were strong, but did not offset declines in Wii accessories and accessories for portable platforms. According to Callahan, the weakness in accessories was “likely related to declines in hardware sales.”

That leaves software as the main culprit in the decline in revenue. According to Wedbush Securities analyst Michael Pachter, every platform saw a month-over-month decline in software revenue and (except for the 3DS) a year-over-year decline as well. Total software units also fell 12 percent, averaging around 2.5 million units per week.

NPD's Frazier rightly noted that the light release schedule for May contributed to this decline, since fewer new titles does generally correspond to a lower overall sales. Callahan provided additional context on the number of releases, noting that the total number of SKUs released so far in 2011 is down only 5 percent but that “these declines were not seen consistently through 2011 as March and April had a larger number of new releases compared to the year prior.”

Given that three major platforms (Nintendo Wii and DS as well as the Sony PSP) have seen major contraction in their software markets over the past year, a YTD 5 percent decline in the number of titles and 6 percent decline in software revenue doesn't seem as serious a contraction as the May 2011 figure alone might otherwise suggest. Consider that in May 2011 the Wii alone generated $10 million less software revenue each week, on average, than it did in May 2010.

Finally, at the risk of diminishing the importance of the latest revenue figures, we note that May is often one of the weaker months each year. According to our records, May has been one of the three worst months for revenue in each year going back to at least 2005. As the figure below shows, the total revenue generated by the retail video industry is still greater than it was in 2007 and very close to the level of May 2010.

That lays the foundation for total growth in the retail market for the first time since the contraction began in 2009, although we still consider this a remote possibility given present trends.

Nintendo's Next Generation

Now that Nintendo has officially released details on the Wii U, a tablet and console combination, the days are numbered for the original Wii. While the final release date for the Wii U is still unknown, we believe that Nintendo will consider releasing it as soon as March or April of 2012.

Even if Nintendo makes a March 2012 launch, that leaves at least nine months during which Wii sales are likely to decline precipitously. The company has attempted to slow that descent by cutting the system's price to $150 as of May 15, 2011 and bundling Mario Kart Wii with the hardware instead of the Wii Sports Resort. The May figures reported by the NPD Group are the first measure of the effect of that price cut, although they do not yet reflect any effect from the Wii U announcement, which did not come until 7 June, well into the new month.

According to comments made by Wedbush's Pachter, approximately 236,000 Wii systems were sold during the May 2011 period. That's a rate of 59,000 units per week, up from 43,000 units per week in April. Naturally, we'd like to know how much of that increase is due to the price cut, and we'd ideally like an idea of how long that price cut may have a significant effect on sales. Both are tricky questions.

The figure below shows the average weekly sales rates of Wii systems so far in 2011. (Note that the NPD Group uses five week months for the months ending each quarter and four weeks for every other month.)

On the first question, about how much the price cut helped in May, there are a few points we can consider. First, according to figures provided to us by the NPD Group, we know that the average selling price (ASP) for the Wii coming out of April was around $180. Moreover, the ASP fell to $156 - $157 in May.

Let us presume that the Wii maintained its April ASP through the first two weeks of May and that it dropped to the new MSRP of $150 for the last two weeks. These are merely approximations of the situation, since some systems were sold prior to the price drop at or near $150, and after the price drop some systems were sold (and are still being sold) at a price lower than $150.

Regardless, under these simplifying assumptions we can estimate that approximately 55,000 Wii systems were sold during the first half of May and around 180,000 during the latter half. Because these are based on simplifying assumptions, they must be treated as rough approximations.

Still, it is entirely believable that the sales rate fell sharply during those first two weeks of May after the price drop was announced but before it was in effect, and then sales rose dramatically as retailers promoted the new price and new bundle.

However, as our diagram above shows, the rate of Wii sales in February of this year was already well over 100,000 systems per week. A rate of 180,000 units over two weeks does not suggest that Wii sales have rebounded even to that level. However, if it maintains that rate and sales of the Xbox 360 continue at their current level, the Wii should be the top-selling console for June.

Going forward, all the press surrounding the Wii U debut and launch will have a chilling effect on Wii sales. In fact, if we look for guidance to the PSP, another aging system with a successor on the horizon, the news is not good.

Sony announced in January that the PlayStation Vita (then code-named NGP) would succeed the PSP and about a month later dropped the price of the PSP to $130 from $170. During that first month after the price drop, sales of the PSP approximately doubled, but by the next month were back near the pre-cut rate.

As shown in the figure below, PSP sales are lower now than they were before the price cut just three months ago.

One cannot simply draw a one-to-one comparison between a price cut for the Wii and a price cut for the PSP. Among other points, we note that one is a wildly successful console from Nintendo and the other is a very successful handheld by Sony.

However, they are both older technology long priced under $200, with a limited lifetime on shelves and few key software titles on the horizon. In sum, the price cut will have an effect limited to at most the summer months, and certainly won't bring back the level of sales the system enjoyed from 2007 through 2009.

After June, when sales could near 400,000 units, we expect Wii sales to begin another downward slide with a modest bump around the holidays.

Nintendo 3DS Sales Lack Depth

While Nintendo is managing the end of the Wii and the beginning of the Wii U, they are also managing four different models of handhelds on the market. The Nintendo DS Lite is still available, but at $100 it appears to be on its way out. The Nintendo DSi ($150) and larger Nintendo DSi XL ($170) are still the dominant models for the DS platform, as indicated by the platform's $150 ASP in recent months. And the new Nintendo 3DS ($250) appears to be off to a somewhat rocky start, both in terms of hardware and software.

To get a feel for how the 3DS is doing, we've collected some historical data from two other system launches that were conveniently made during the same time of year. Specifically, we can compare the launch performances of the Nintendo DSi and Sony PSP to that of the Nintendo 3DS. For the PSP and 3DS, we are also in a position to discuss the performance of software unit sales, thanks to exclusive data provided by the NPD Group.

The PSP and 3DS both launched at the end of March (in 2005 and 2011, respectively), while the DSi was launched in early April. As of the end of the May reporting period, each platform had been out for approximately 60 days. (To be precise, the PSP was out for 66 days, the 3DS for 63 days, and the DSi for 56 days.)

The table below gives a comparison of the U.S. sales rates for each of these systems during the launch period. For the record, Nintendo publicized Nintendo DSi sales during that system's launch, but has declined to do so for the Nintendo 3DS.

The figures above reveal that the Nintendo 3DS is selling at about half the rate that the Nintendo DSi did during its launch, and well behind the launch rate for the PSP.

Just as the 3DS appears to be competing with the DSi today, we observe that the DSi itself launched in 2009 at a premium price against the Nintendo DS Lite, a strong, less-expensive, mostly-compatible competitor from within the same company.

Yet the DSi managed sales of nearly 1.3 million units in less time than it has taken the 3DS to reach sales of nearly 700,000 units. Surely, the $100 price differential between the 3DS and DSi is more significant than the $40 differential between the DSi and DS Lite back in 2009, and that certainly explains much of the difference in sales. As Wedbush's Pachter wrote to us, “the 3DS is too expensive for most young children, so [it is] still a luxury item for hardcore gamers.”

However, the PSP was also priced at $250 at a time when the Nintendo DS was priced at $150, although we certainly can't say that the Nintendo DS was a strong competitor to the PSP during that period. (In fact, the Nintendo DS had monthly sales well under 100,000 units several times during 2005.) During its comparable launch period, the PSP sold over 1.2 million systems in about the same time it has taken the Nintendo 3DS to reach sales of nearly 700,000 units.

Pachter has lamented the low tie ratio for the Nintendo 3DS, which he intimated to be approximately 2.0 (i.e. two units of software for each unit of hardware).

According to exclusive data provided to us by the NPD Group, the tie ratio for Sony's PSP during its comparable launch period is approximately 2.1. Moreover, the 3DS has the benefit of being backward-compatible with all previous DS and DSi software, while the PSP was the first in its line of systems and had nothing with which to be compatible.

While it may be disappointing that 3DS owners aren't buying more 3DS-specific software, it is by no means guaranteed that they aren't buying anything. Sales of 3DS-specific software will surely pick up as more titles are released, especially in the latter half of 2011 when Nintendo's Mario Bros. and Mario Kart titles arrive for the system.

Finally, third parties have certainly begun shifting development over to the 3DS from the DS, and we expect that the DS will be surviving on limited shovelware and licensed titles by the beginning of 2012. Once the DS becomes a less attractive platform, Nintendo consumers will likely move over to the 3DS, and that will accelerate once Nintendo drops the system's price to $200 sometime in February or March of next year, as we wrote last month.

Did the PSN Outage Hurt PS3 Sales?

In mid-April, Sony discovered traffic on its PlayStation Network that was eventually revealed to be an unauthorized intrusion that gave access to consumer data. Once the intrusion was detected, administrators took down the servers to avoid further damage.

The network, including online multiplayer gaming, was partially restored on May 14, 2011, and fully restored in many territories, including the U.S., by the first of June.

Sony's compromised, disabled network was widely reported on during this time and we wondered whether sales of the PlayStation 3 hardware, software, or accessories would suffer as a result. After all, free multiplayer gaming – a feature Sony has often touted as an important part of its product – was completely disabled for approximately one month.

Looking first at hardware, the simple fact is that Sony's hardware sales have been decreasing since they peaked briefly back in February. It would be difficult to discern without finer-grained data whether the network outage was responsible for PS3 sales declining in April and in May, since sales were already going down in March. The figure below demonstrates this.

Software is a different situation, since the release of key titles can skew the results from month to month. What we can say is that its software revenue dropped 28 percent from April, while the Xbox 360 saw only 16 percent decline, according to comments from Wedbush's Pachter. On the other hand, the PS3 continues to generate more software revenue per installed system than does the Xbox 360.

We asked the NPD Group for some insight into how recent cross-platform titles have performed on the Xbox 360 and PlayStation 3, to see if we could discern any shift in sales trends. As NPD Group analyst Liam Callahan commented to us, “it's a mixed bag.”

Data was provided to us for four key titles: Mortal Kombat, L.A. Noire, Brink, and Portal 2. For each title, we were provided with the ratio of unit sales of the Xbox 360 version to the PlayStation 3 version, for comparison to the ratio of the Xbox 360 hardware base to the PlayStation 3 hardware base, which is currently 1.6.

The table below summarizes the results.

Callahan noted: “Mortal Kombat and L.A. Noire performed better on the PS3, while Brink was favored by the 360. Portal 2 was inline with the current ratio of the 360 to PS3 install.”

The table also shows that Mortal Kombat is the only title for which the PS3 version sold better than the Xbox 360 version in terms of unit sales and not relative to the installed base. In that case, the PS3 version sold 11 percent more units than did the Xbox 360 version. On the other hand, Brink sold 160 percent more units on the Xbox 360 than it did on the PS3.

Of these four games, three of them performed at or better than the installed base ratio might have suggested.

Finally, when asked about accessories, Callahan elaborated that “PS3 accessory sales were positive in May 2011 versus May 2010.” That suggests to us that PSN card sales were up relative to last year, but by how much we cannot be sure. Last month we asked about April PSN card sales and were informed that, in terms of units, card sales were up 4 percent.

Outside of PS3 hardware sales, where the situation is unclear, it appears from these data points that the PSN outage did not seriously affect retail sales of software or accessories, and in particular card sales. We expect that sales will show improvement across all three segments in June, with the new Call of Duty: Black Ops hardware bundle possibly having a positive effect on system sales and the Call of Duty: Black Ops DLC driving PSN card sales as some consumers will be wary of trusting Sony with their credit card numbers again, at least for the present.

[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. Thank you in particular to NPD Group analyst Anita Frazier for her monthly analysis notes, and to Liam Callahan for his added insight. Additional credit is due to Michael Pachter, analyst for Wedbush Securities, for his perspective, instrucive conversations, and entertaining anecdotes.

Finally, many thanks to colleagues at Gamasutra and particularly regular commenters on NeoGAF for many helpful discussions.]