Five million. That's the number of traditional consoles and handhelds that were sold in the U.S. during December 2012, based on the latest retail estimates released by the NPD Group, a sales tracking firm. I have accumulated reports of their estimates running back through 2000, and this is the first time in those 13 years that December hardware sales were so weak. If you accept the idea that the hardware sales of the present are a harbinger of software sales in the future, these figures are surely an ominous sign. But measurements of software sales have become a much thornier problem, and I'm devoting an entire column to them later this week. So for now, just hardware, starting with the best-selling platform of the year...

First Place: Microsoft's Xbox 360

When Microsoft introduced the Xbox 360 S Model hardware revision in the summer of 2010 and followed it up in November of that year with the Kinect peripheral, the company bought itself not only an extra two years of life on the console market, but put itself in the driver's seat through at least the end of 2013. That's how the Xbox 360 ended up not only the best-selling platform of 2011 but also 2012. And unless something shifts dramatically, it could end up the best-selling console in 2013. The figure below shows the platform's annual hardware sales since 2006, and it demonstrates just how the Xbox 360 was languishing under 5 million units per year prior to the S Model and Kinect. Now, a full three years later, it still managed to shift 5.3 million systems in a year. The system's life-to-date (LTD) total in the U.S. now stands at 38 million units. For a sense of just how far Microsoft has come since its first console, the original Xbox maxed out at under 15 million units in the U.S. The Xbox 360 has at least another year before it is deprecated, and could pass 40 million units in August of this year. In December, the average price of the Xbox 360 fell to $246, an increase from the $227 in November, but still lower than every other month in 2012. Could this be evidence that consumers are opting for Microsoft's $100 and $150 models, which require a two-year Xbox Live commitment at $15 per month? It's certainly suggestive but we're not there yet. We really need to see a non-holiday month with an average price below $250, and maybe even closer to $240 to begin to talk seriously about what effect the hardware-service bundles might have on the market. As of 5 January 2013, Microsoft has ended its $50-off promotion and I eagerly await their next pricing move. They've dabbled with lowering the price by bundling it with a service and, at the same time, temporarily lowing the price of unsubsidized hardware by $50. I would love to know what they learned from that experiment. Hopefully it means they'll make some dramatic move on pricing in early 2013, but as long-time readers know I'm consistently pushing for price cuts sooner than the manufacturers are willing to make them happen.

Second Place: Nintendo's 3DS

At 3.6 million units for the year, Nintendo's 3DS was the number two hardware platform in the U.S. during 2012. Unfortunately, that figure is over 400,000 units behind the 10-month Nintendo 3DS total for 2011, the platform's launch year. Compared to the first 22 months that the Nintendo DS was on the U.S. market, the Nintendo 3DS is still well ahead in terms of installed base. The 3DS just passed 7.7 million units LTD and in the comparable period the Nintendo DS hit 5.85 million. But that comparison is going to get more strained for the 3DS throughout the coming year. You see, throughout 2012 but prior to the holiday season, the Nintendo 3DS was moving around 43,000 units per week at retail. After 20 months on the market, the original Nintendo DS model was replaced with the wildly popular Nintendo DS Lite and during the first 10 months (44 weeks) of 2007, that platform was averaging over 100,000 units per week. If the Nintendo 3DS doesn't see its sales improve over the comparable figures it had in 2012, the platform will have an installed U.S. base of 8.8 million units in July after 28 months on the market. During its first 28 months on the market, the Nintendo DS was at 9.9 million units. This isn't a perfect comparison (the 3DS will have had only two holiday periods, compared to three for the DS), but it is suggestive. I've said before that the Nintendo DS was a magnificent success, and one that would be difficult to repeat, even if the market were precisely the same today as it was back in 2006, when the two-screened handheld began to take off. So even though comparing the Nintendo 3DS to the Nintendo DS is ultimately going to be unfair, it is precisely the standard Nintendo will have to address. Nintendo will have to focus on profitability to keep investors happy. How much room does it have, then, to fiddle with pricing? According to official NPD Group data, the average price of the Nintendo 3DS, across the base and XL models, was $169. That's nearly $10 lower than the average going into the holidays, and even lower than the MSRP for the base model. That means Nintendo and retailers offered significant bundles and discounts during the holidays to entice consumers to pick up the latest handheld. If Nintendo's business is still profitable at those levels, then perhaps it has some wiggle room with pricing after its current fiscal year ends in March. I would consider getting a model of the 3DS down as close to $100 as soon as possible, and mimicking Apple's annual hardware revisions to keep the system's image as up-to-date as possible. Once the anniversary of the Nintendo 3DS XL arrives around mid-year, Nintendo could launch an updated model of the system at $200 (hopefully with a fat margin) and move the two older models down by $30 each. At $130, I would expect the base model to sell exceptionally well and give software demand a boost along the way. I have suggested this idea before, back when the Nintendo 3DS XL came out. This year we'll find out if it's something Nintendo is considering.

Third Place: Sony's PlayStation 3

Behind the Nintendo 3DS and in third place for the year, the PlayStation 3 ended 2012 at approximately 3.4 million systems, down about 25 percent from its 2011 total. Of the six full calendar years that the PlayStation 3 has been on the market in the U.S., this is its second worst showing, just behind 2008. The figure below puts this year's sales in context. I went on record saying that I thought Sony should cut its prices in response to the Nintendo Wii U launching at $300. I was wrong, and spectacularly so. Sony actually increased its price by discontinuing its $250 PS3 Slim 160GB base system and replacing it with a more expensive $270 PS3 Super Slim 250GB system bundled with Uncharted 3. Then it gave retailers deep discounts during the Black Friday period sales, driving its average price down to $238 in November. In December, however, the average price of the PS3 was back up to $274, according to official NPD Group data. That's the highest average price for any PS3 in any month during 2012. Wedbush analyst Michael Pachter told me, "Sony will probably drop this month by $50, but I’m not sure they care if they sell an additional million PS3s. They’re focused on next generation." But even with all this discounting and bundling and revising, Sony still suffered that 25 percent drop in annual hardware sales. It isn't clear to me that it can sustain another year with declines like that, and the only lever it really has an option to pull right now is the price. It knows how well its business fared through the holiday season with those discounted bundles. We will see in the coming months whether that was enough to move the company toward a real price cut before it launches a new system in late 2013.

The New Kids: Nintendo Wii U and Sony PlayStation Vita

The Wii U had a somewhat disappointing launch, and did not reach 1 million units before the beginning of 2013. Total sales now stand at 890,000 units with 462,000 of those having been added in December. The fact is that the Wii U is the right now the most expensive console on the market, with an average price of $340 according to official NPD Group figures. In the absence of discounts and bundles, that suggests that consumers are largely buying the $350 Deluxe model over the base model by about 4-to-1. Until we begin to get some data outside of the holidays, I'm disinclined to begin extrapolating into 2013. We simply don't have enough information to draw strong conclusions, and the process of evangelizing to the public has just begun. Nintendo needs to get its message out, both to consumers and to developers. What does alarm me right now is the rate at which new software is arriving for the platform. If GameStop is any indication, there are only two titles scheduled for retail release between now and March: Rayman Legends during February and LEGO City: Undercover on the first of March. That's just astonishing. And even though Sony's PlayStation Vita hasn't been out for a year yet, I think it's safe to say that it's going nowhere fast. From my estimations, in the U.S. the system moved right around 250,000 units in December, putting its total sales in 11 months at 1.28 million units. What precedent do we have for this kind of anemic launch? The Nintendo DS hit 1.4 million units in three months in the U.S. The PSP hit 1.2 million in three months. The Nintendo 3DS hit 1.4 million in seven months. Even the PS3, which had a disastrous post-launch year, still hit 1.3 million in 6 months. Getting a system successfully launched requires priming the engine a bit, by getting lots of hardware out there and evangelizing to publishers to get software fed into the business. Sony appears to be failing at both, since its hardware results are dreadful and bundled software probably makes up a majority of the titles consumers have actually gotten from retail. Will the system be "Dreamcasted" in 2013? That would be unfortunate, but understandable.

The Retirees: Nintendo Wii and Nintendo DS

As for the Nintendo DS and Nintendo Wii, those systems are on their way to retirement after impressive, productive careers. The Nintendo DS sales curve since 2005 looks like the figure below. As you can see, the introduction of the Nintendo DS Lite in mid-2006 doubled annual sales and they had nearly doubled again by 2008, peaking at 11.2 million systems in 2009. In the three years since, Nintendo DS hardware sales have fallen over 82%. Once new software ceases and retailers clear their shelves later this year, its run will end quietly. The Nintendo Wii launched later, peaked sooner, and has declined more slowly than the Nintendo DS, as the figure below shows. I actually hope that Nintendo ends the retail presence for the Wii this year, since it really needs to focus its resources on the system's successor, the Wii U. However, Nintendo's bundles and price moves at the end of 2012 leave it an open question of whether the company is really done with this system.

The Long View: A Stable Core Market

My colleagues at Gamasutra rib me for writing articles filled with doom about the retail market. One man's realism is another man's doom, I suppose, but I do want to show an image that I think demonstrates just how robust part of the console market has been over the past decade. If we look at U.S. console sales in any contiguous 12 month period, we can view the figure as an annualized rate. I've also used the term trailing twelve month (TTM) rate before, for the same kind of data. Looking back into the middle of the last generation, when the only sales from the previous generation that might still exist were from the PS One, and then through the current day, the annualized rate of hardware sales looks like this: Viewed this way, I think we can characterize the current generation, the one that is widely expected to be fully superseded this year, in the following way: The Xbox 360 and PlayStation 3 alone were able to keep console hardware sales at approximately the same level that was previously achieved by three consoles. If we pick out just one point for comparison, the PS2, Xbox, and GameCube were selling at a rate of 12.6 million systems per year in January 2004. In January 2008, just the PS2, Xbox 360, and PS3 were selling at a rate of 11.1 million systems per year. Four years later, in January 2012, the PS3 and the Xbox 360 alone were selling at a rate of 11.1 million systems per year. At its peak, then, the Wii alone was adding over 10 million systems per year to the system. That was a true expansion of the market, adding millions of potential customers for future generations of hardware and software. Regardless, for over a decade the U.S. has had a core market of approximately 10 million new consoles per year. In the next year the Wii U and new consoles from Microsoft and Sony will hopefully begin to replace the declines that every older platform is experiencing. If that happens, and the publishers can continue to produce software that millions of consumers will want, then there is every reason to expect that the traditional industry will continue to exist in some form for many years to come. Gamers will get their games and someone will make money selling them those games. The catch, of course, is that the software won't be sold through retail, and retailers like GameStop are in for a very, very hard time. But that's a story for another column.