NPD For July 2007: The Gamasutra Analysis

The numbers for 2007 so far have been very strong, and July was no exception. Total sales were up 37% over July 2006. Below the surface are some fascinating details about the software and hardware which are driving the market. And before we're done we'll explain just how the year could end with a total of $18 billion in revenue. Xbox 360 overtakes PS2 in NCAA Football During July only two new games broke into the top ten, NCAA Football 08 from Electronic Arts and Guitar Hero Encore: Rocks the 80s from Activision. Let's begin with a closer look at NCAA Football. The Xbox 360 version of NCAA Football 08 sold 397,000 units, making it the best-selling game during July 2007. Coming in fourth with 236,000 units was the PlayStation 2 version of the same game. Last year the roles were reversed: the PlayStation 2 version of NCAA Football 07 sold 490,000 copies while the Xbox 360 version moved 330,000. As the influence of the PlayStation 2 wanes, the Xbox 360 appears to be taking off as the dominant EA Sports platform. Consider first-month sales of NCAA Football over the past four years, as shown below:

The PlayStation 2 peaked in 2005 with NCAA Football 06, and first-month sales have diminished each year since. The Xbox 360 version has seen a 20% increase in first-month sales since NCAA Football debuted on that platform last year. Ominously for Sony, the combined sales of PlayStation 2 and PlayStation 3 versions of NCAA Football 08 were still behind the sales of just the Xbox 360 version. It is worth examining how well the Xbox 360 version did in its first year compared to this first year on the PlayStation 2. During July 2006, about 1 in 7 Xbox 360 owners bought a copy of NCAA Football 07. For the comparable period this year, only 1 in 10 PlayStation 3 owners bought a copy of NCAA Football 08. A similar story will probably play out with EA's Madden NFL 08 when August 2007 sales results are released. Red Octane Purchase Pays Off Since April of this year both the PlayStation 2 and Xbox 360 versions of Guitar Hero II (with bundled guitar) have ranked in the top ten. This month, Activision claimed yet another spot with Guitar Hero Encore: Rocks the 80s (for the PlayStation 2), which came in second overall for the month of July. While the Encore package is interesting in itself, a bigger question is how well is the Xbox 360 version of Guitar Hero II tracking relative to the PlayStation 2 version. For an explanation we turn to this graphic which shows life-to-date (LTD) sales of both versions.

Note that Guitar Hero II launched on the Xbox 360 at $90 in March 2007 and on the PlayStation 2 at $80 in November 2006. The graphic above aligns both systems so that we can see the growth of each relative to its time on the market. Except for the bump the PS2 version got from the Holiday 2006 season, the two are tracking closely -- that is, the slopes of their respective sales curves are approximately equal. The really striking thing is that nearly one in six Xbox 360 owners also own the Xbox 360 version of Guitar Hero II. By comparison, only 1 in every 18 PlayStation 2 owners have purchased that version. It's not that the PlayStation 2 market isn't still making money for publishers, but the buying habits of Xbox 360 owners may make them a more lucrative target in the coming months. If we accept that the PlayStation 2 is a mass-market device (it has sold about 40 million systems in the United States alone), then this disparity may signal that Guitar Hero is a popular, but not necessarily mass-market property. In particular, so many Xbox 360 owners have bought Guitar Hero II precisely because they are predominantly hardcore video game consumers. Interestingly, it would appear that Activision's purchase of Red Octane for $100 million has already paid for itself. If we make the conservative estimate that Activision makes $40 off each copy of Guitar Hero II (for either platform), then they've made $90 million from the PlayStation 2 version alone. The Xbox 360 version has brought in at least an additional $38 million. That doesn't count at least $10 million from sales of the Rock the 80s package, extra guitar peripherals, and Xbox Live Marketplace downloads. November and December of this year will be very interesting to watch, as Activision's Guitar Hero III faces the competition of EA's Rock Band (developed by Harmonix, creators of the original Guitar Hero). Software Fortunes for the Big Three Nintendo was the only hardware manufacturer whose own titles appeared in the top ten this month. This has become the norm for Wii and Nintendo DS software: the top-selling software is always published by Nintendo of America while third parties scramble for whatever money Nintendo fans have left over. If we further restrict our focus to the Wii's top ten list, we see that Capcom's Resident Evil 4 is still selling well. Take Two's The Bigs, EA's Harry Potter and the Order of the Phoenix, and Activision's Transformers: The Game barely make the Wii-specific list at positions 8, 9, and 10, respectively. Keep in mind that all three of those games sold for two full weeks in June and only The Bigs made June's top ten Wii games. After this appearance at the bottom of the list, all three games will probably disappear completely from the charts. We can safely assume that each of the third party games sold fewer than 100,000 copies during July, which means their final sales numbers will be dismal. Third parties are currently talking about shifting resources to take advantage of the Wii's success, but the Wii market has yet to prove itself a goldmine for anyone but Nintendo. None of the top twenty games this month were published by Microsoft, but four Xbox 360 titles by three other publishers did. Xbox 360 system sales might still be behind expectations, but the existing base continues to make plenty of money for third parties. Halo 3 will certainly dominate sales in the coming months, and any push that the Xbox 360 receives should continue to benefit publishers like Electronic Arts and Activision. Two PlayStation 3 games -- NCAA Football 08 (EA) and Ninja Gaiden Sigma (Tecmo) -- made the top twenty this month, which makes July a good month for Sony's new system. On the other hand, the PlayStation 3 hasn't ever had three or more games make it into the top twenty, so things could certainly be better. (The Wii had six titles in the top 20 last month.) Sony has previously indicated it will use the PlayStation 2's success to ease the transition to its new system, but time could be running out. Last July's top twenty list included 11 PlayStation 2 games, yet it only managed four titles this July. With almost no big PlayStation 2 software on the schedule for Fall 2007, Sony will have to move quickly to encourage its existing base of users to upgrade. Sony Still Third after Price Drop Sony adjusted its PlayStation 3 pricing strategy on 9 July, dropping the 60Gb model to $500 and adding a 80Gb model bundled with Motorstorm at the premium $600 price. Sales doubled from 20,000 to 40,000 systems per week. Even with that bump in sales, Sony still came in under the Xbox 360's 43,000 units per week. Still, Microsoft's system is not reaching its potential, perhaps due in part to ongoing issues with Xbox 360 failure rates. Microsoft's extended warranties and upcoming shift to a 65nm chips should help ease any downward pressure on their sales. Even though sales of both systems were up, Nintendo's Wii still handily outsold both the Xbox 360 and PlayStation 3. Wii sales jumped to 100,000 systems per week, its best showing since Holiday 2006.

(Please note that NPD's reporting periods are often identified as four- or five-week months, a term which can be confusing. For the record, June 2007 was a five-week month, as NPD collected data from 3 June to 7 July. This month, July, was a four-week month with data collected from 8 July until 4 August.) Before moving on to handhelds, let us examine the installed base growth curves for each of the big three consoles:

The steeper the slope of a system's graph, the more quickly it is selling. Clearly the Wii has been doing well, and the Xbox 360 has a lead but is still holding its own. On the handheld side, the PSP's Spring 2007 price drop appears to have spurred a stable increase in sales. At the earlier $200 price the PSP was averaging 42,000 systems per week. Since dropping to $170, Sony has sold 56,000 systems per week, a 33% increase from the previous rate. The PSP software charts indicate that the increase in system sales has not driven an interest in newer PSP software: four of the top ten PSP games in July 2007 were originally published in November 2005 or earlier. The redesigned Nintendo DS Lite more than doubled sales of that system, and in September Sony will launch a redesigned PSP, the PSP 2000. Should sales continue at their current rate and perhaps even increase with the redesigned hardware, Sony should sell significantly more than 1 million PSPs during December 2007.

The Nintendo DS continues to be one of the most interesting systems for consumers but the least interesting to discuss in terms of sales. For the sixth month in a row the Nintendo DS sold more than 100,000 systems per week, although this was its lowest rate since supply constraint in January kept it below 50,000. The Biggest Year Ever Almost every analyst is predicting record video game industry sales this year. The key question is just how big will the final number be? Consider this graph showing industry revenues for the last two years up through July 2007:

You might recall that 2006 started out slowly, lagging behind 2005 revenue for a few months. As the year wore on, the Xbox 360 began to move more software, the Nintendo DS Lite took off, and the holiday season ended with robust sales for everyone. That momentum has carried over into 2007, with sales currently tracking at 40% above the 2006 levels. Total industry revenue for 2007 presently stands at $7.0 billion. If there is no year-on-year growth for any month until the end of 2007, then the industry will finish the year with $14.5 billion in revenue, an increase in 16% over 2006. That's a reasonably pessimistic scenario, denoted by the dotted magenta curve in the above graph. If we start with our current $7.0 billion as of the end of July and continue at a rate of 40% growth through the end of the year, then we arrive at a total of $17.5 billion for all of 2007. This is shown by the red curve in the above graph. If Wii supply constraints are eased, Halo 3 sells as well as expected, Sony's first-party software attracts more PS3 buyers, and Rock Band and Guitar Hero III are both hits, it seems likely that revenues may go above $18 billion. In this optimistic scenario, industry revenues during the single month of December 2007 would equal or surpass the total annual revenue from all of 1997. Historically, this kind of growth is nearly unprecedented. Consider following graphic showing annual industry revenues (excluding the Windows game market) for the past ten years.

The only comparable year-on-year increase in annual revenue was from 2000 to 2001, when the industry grew 42%. During those years the PlayStation 2 launched, followed by the Nintendo GameCube and the original Microsoft Xbox. One might compare that period to 2005-2006 when the Xbox 360 launched, followed by the PlayStation 3 and the Nintendo Wii. Yet during that generational transition the industry only experienced 19% growth. If leaps of revenue on the order of 40% are an indicator of a successful shift to a new generation of hardware, it would appear that the shift took place not in from 2005 to 2006 and the launch of the Xbox 360, but from 2006 to 2007 and the launch of the Nintendo Wii and the PlayStation 3. Next Month When the August NPD numbers are released, here are a few things we can be looking forward to: * Where will the following games appear on the charts: BioShock (X360), Boogie (Wii), Madden NFL 08 (X360, PS3, PS2, Wii), Blue Dragon (X360), and Metroid Prime 3: Corruption (Wii). * How will the drop in Xbox 360 hardware prices affect its weekly sales rate? Will the PlayStation 3 maintain its current sales rate? * Could strong sales push August over $1.2 billion in industry sales? If that happened it would be the first month outside of the November-December-January holiday season to break that barrier.