Exclusive Analysis: Console Tie Ratios Reveal Market Dynamics

[In his Gamasutra-exclusive analysis, Matt Matthews uses new NPD data to reveal the U.S. tie ratios for PS3, Xbox 360, and Wii as of March 2009, with the PS3's tie ratio sneaking above the Wii's into second place overall.] It has been several months since we looked at tie ratios for the three main consoles – the Nintendo Wii, the Microsoft Xbox 360, and the Sony PlayStation 3. Our last major look was in November 2008, where we were able to pick up on first- and third-party software sales in the United States for each of those platforms. The NPD Group, which tracks U.S. retail video game sales, has provided us with exclusive data on the tie ratios for these three major platforms as of the end of March 2009. In these figures we see launch-to-date Wii software sales catching up (but not quite surpassing) those of the Xbox 360, effects of the revitalized Xbox 360 hardware sales, and an uptick in the PlayStation 3's tie ratio. Tie Ratios Defined First, let us recall that a tie ratio is the number of software units sold for a system divided by the total number of systems sold. This ratio is an average number of units of software per console owner. The term attach rate is often confused with tie ratio, although we believe they are different. (See the note at the end of this article for an elaboration on this point.) It is worth recalling the words of Anita Frazier, analyst for the NPD Group, who spoke to the issue of tie ratios and how they “can be an indication of the health of a system”, but can also be used in misleading ways. She expanded, saying that “as a system gets further along in its lifecycle and perhaps hardware sales start to diminish, the tie ratio tends to go up because software sales are the bigger draw. If a hardware system is doing gangbuster sales, then the tie ratio can go down even if there are lots of overall sales.” We'll need that last point in particular for the figures below. Tie Ratio Trends The launch-to-date (LTD) tie ratio trends for the three key consoles are shown below. In the first figure we consider the launch-aligned tie ratios for the first 29 months of each system's lifetime. This does not show the entire lifetime of the Xbox 360. First, we believe there is a high margin of error in the first month data point, so it is there simply as an acceptable starting point for each system. The data along each curve is taken from the set of publicly available tie ratio data available in press releases and various news articles, along with the latest March 2009 data. As the figure above shows, Xbox 360 owners have traditionally purchased more software than their Wii or PS3 counterparts. The Wii's tie ratio does not include Wii Sports, which is packaged with the system, so one might very well consider Wii owners as having more software on average than the numbers show. Furthermore, the Wii's tie ratio does include Wii Play, which some consider as much a peripheral as a unit of software (since it is a Wii remote packaged with a set of games). For most of its lifetime, the Wii has had a slightly higher tie ratio (i.e. more software per owner) than has the PlayStation 3. Recently that situation has reversed itself. As of March 2009 the PlayStation 3 had a tie ratio of 6.5, just above the 6.2 tie ratio of the Wii. For comparison, at the same point in its lifetime, its 29th month on the market, the Xbox 360 had a tie ratio of 7.5, or one full game more per owner on average. There are a couple of reasons which may explain why the PlayStation 3 has pulled ahead. First, the Wii had an extraordinary run of hardware sales through the second half of 2008. As Ms. Frazier noted, exceptionally high hardware sales while software remains strong can slow or even drop a system's tie ratio. Moreover, the PlayStation 3 has experienced five straight months of diminishing year-on-year hardware sales rates. The existing owners certainly haven't stopped buying software, but the slowing PS3 hardware market has probably contributed to the increase in that system's tie ratio. The figure below extends the data above to show the Xbox 360's entire 41 months on the market. At the beginning of 2008 the Xbox 360 tie ratio stood right at 7.0, and over the course of eight months it grew to 8.0 in August 2008. Yet from that point through March 2009 the Xbox 360 tie ratio climbed a mere 0.3, from 8.0 to 8.3. The difference here is probably the resurgent Xbox 360 hardware sales that Microsoft has seen since it dropped the price of the system in September 2008. Hardware sales are up 10% during September 2008 to March 2009 from the same period a year earlier. And, even in the face of strong hardware sales during the first quarter of 2009, that system's tie ratio has risen from 8.1 to 8.3. Total Software Sales While the tie ratios above tell us that Wii owners have purchased two fewer games per system than have Xbox 360 owners, that isn't the full story. Remember that Nintendo has sold 19.6 million Wii systems in the United States while Microsoft has sold 14.9 million Xbox 360 systems. The PlayStation 3 lags both systems significantly at only 7.5 million systems, according to the latest NPD Group figures. Using this data and the tie ratio data available to us, we can see how much software has been sold for each system over time. The Wii and the Xbox 360 software unit sales figures are extremely close: 121 million and 124 million, respectively. However, the Xbox 360 had an entire year of sales prior to the launch of the Wii. With the smaller installed base, the PlayStation 3 has sold about 49 million units of software since it launched. Here is one way to view those figures. At the end of November 2006, when the PlayStation 3 and Wii launched, the Xbox 360 had sold just over 23 million units of software. Since that time, the Wii has moved over 120 million units of software, the Xbox 360 has sold just over 100 million units, and the PlayStation 3 just under 50 million. Tie Ratio vs. Attach Rate The term tie ratio is generally used by analysts like Ms. Frazier of the NPD Group and Mr. Michael Pachter of Wedbush Morgan Securities as it has been used in this article: a ratio of software to hardware units. Those numbers are, naturally, numbers larger than 1. However, comments by those analysts (and others) leads us to believe that the term attach rate is more commonly used to show the number of software units (or accessory units) there are per hardware unit. These are numbers between 0.0 and 1.00, interpreted as percentages. So, for example, Sony recently gave Gamasutra data showing that Grand Theft Auto IV had a 26.9 percent attach rate versus 23 percent on the Xbox 360. In brief, a console has a tie ratio while a game (or accessory) has an attach rate. [Thanks, as always, to the NPD Group for graciously providing its data about the video game industry.]