Analysis: Where Does The Console Retail Biz Go From Here? 2

[Following weak U.S. video game retail sales for May, Gamasutra analyst Matt Matthews -- as part of his monthly NPD analysis -- says that the "video game industry is in a transitional state," and despite a slower Wii market, "one cannot simply lay the blame at Nintendo's feet."] There is palpable tension between the exuberance of the E3 2010 trade show held just weeks ago and the uncomfortable reality of May 2010 sales. We have seen above that hardware sales are declining and that software revenues and unit sales have not lived up to expectations. We've also seen that changes in the Wii market are driving much of the turmoil here, but when titles like Blur and Alan Wake fail to ignite robust sales, one cannot simply lay the blame at Nintendo's feet. That is, we have seen what internal figures have made 2008 different from 2009 and 2009 different from 2010, but there are still serious questions about what is driving consumer habits and how to attract those consumers in the near future. We won't pretend to have answers, but we can elaborate on the opinions we've seen and the ones we hold. The video game industry is in a transitional state. Consumers have more choices than ever before, and what used to be a relatively straightforward packaged software model has been supplemented (not necessarily supplanted) with mobile games on iPhone and smartphones, casual (web-driven) games, and even traditional consoles and handhelds with direct online distribution. For example, just last week Sony began PlayStation Store sales of LittleBigPlanet and inFamous, PlayStation 3 games that were previously available only on Blu-ray media. While distribution channels have changed, ideal timing in the packaged goods channel remains elusive. In 2008 a packed holiday season was blamed for lackluster sales of titles like Dead Space and Tomb Raider: Underworld. When publishers shuffled their launches to avoid Call of Duty: Modern Warfare 2 in late 2009, the release calendar for the first half of 2010 became similarly crowded. We expressed concern about this (belatedly) when we wrote that "we don't want a repeat of Fall 2008 situation, where even deserving games got passed over by overwhelmed consumers." Mediocre sales of games like Blur and Prince of Persia: The Forgotten Sands will have to have consequences. Watch what third parties like Activision Blizzard and Ubisoft do in the coming months; their actions will show what lessons they've drawn from the difficult first half of 2010. At some point, a first-party publisher -- and the third-party companies supplying the games -- may look at sales of an exclusive like Alan Wake or Heavy Rain and change their philosophy on what they are willing to do for exclusivity. In parallel to reconsidering what kind of games to make and how to make them, developers and publishers are also experimenting with ways to monetize a game sale far beyond the first week or even the first month. Activision Blizzard is clearly the example, with Modern Warfare 2 continuing to draw revenue from map packs half a year after release, and World of Warcraft continuously drawing on subscriptions and microtransactions. In fact, it is the Modern Warfare 2 effect that Wedbush's Pachter feels is a dominant effect on the market today, because its multiplayer component is occupying the time of the hardcore videogame consumers, going so far as to say that June 2010 sales could "slide into negative territory." Multiplayer and DLC also figures into the creation of EA's Online Pass, a $10 code that enables online features and bonus content in used games. The release of UFC 2010: Undisputed by THQ marks their entry into similar territory, as the game requires consumers who obtain the game secondhand to purchase of a $5 code to access all the game's content. These moves are also intended to cut off some product from entering the used game market. Doug Creutz of Cowen & Co. recently published research demonstrating that the used game market, especially GameStop, could be a key reason for what he saw as the underperformance of Xbox 360 and PlayStation 3 software in the past couple of years. And just on the horizon are Kinect and Move, the new motion sensing technologies from Microsoft and Sony, respectively. Into the mix we can also throw the 3D technologies put forth by both Nintendo (with its Nintendo 3DS handheld) and Sony (with 3D glasses technology, compatible with the PlayStation 3 and some televisions). Each of the factors above is itself a smaller part of the larger video game market: expanding distribution channels, underperforming AAA games, long-term monetization, conflict with the used game market, and untested new technologies. In our view, the path ahead is as unclear as it has been in a long while, and we look forward to studying whatever industry emerges from this transition period, even as we continue to ask what makes it work.