Game Over? Why Video-Game-Console Sales Are Plummeting

Sales of consoles in the U.S. dropped 21% in 2012 to just over $4 billion, and figures from the manufacturers of the three top systems were lackluster over the crucial holiday season

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At a quick glance, it looks like it could be “game over” for the video-game-console business. Sales of consoles in the U.S. dropped 21% in 2012 to just over $4 billion, and figures from the manufacturers of the three top systems were lackluster over the crucial holiday season. 

When announcing its quarterly earnings last month, Microsoft said its Xbox-division revenue dropped 29%. At Sony, lower PlayStation 3 and PSP sales were responsible for a 15% drop in revenue for its video-game division. Nintendo’s next-gen console Wii U also failed to generate as much interest as originally predicted. Last month, the company said it had sold only about 3 million consoles and that it would sell a million more through March, a sharp drop from the 5.5 million it initially anticipated selling.

There’s less demand for the physical games these days too. According to research company NPD Group, game sales fell from a little over $11 billion in 2011 to less than $9 billion last year. Retailer GameStop says sales of new video games over the holiday season dropped by about 5%, and sales of used games dropped by 16%. “It’s tracking to be the worst quarter the company’s ever had in the used business,” Sean McGowan, an analyst with Needham & Co., told the Wall Street Journal.

Analysts blame a lot of the slump on timing. “It is a cyclical market,” says Lewis Ward, research manager of gaming at IDC. “The usual lifespan is 10 to 12 years for a console, and we are in a trough right now.”

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But the Wii U’s underwhelming sales illustrate that even the market for new consoles will be challenging, leaving the industry pinning its hopes on Sony and Microsoft. Sony is expected to unveil the next version of the PlayStation as early as this month, according to the Wall Street Journal, and start selling it some time later this year. Microsoft is also supposed to introduce its new Xbox this year, and analysts say the serious enthusiasts will pull out their wallets once the new consoles become available.

“The hardcore gamers will come back,” says Edward Woo, a senior research analyst at Ascendiant Capital Markets. Woo blames “console fatigue” for falling numbers.

There are other, more secular factors chipping away at the era of the video-game console as we know it today. For one, there’s the segment of players the industry calls “casual gamers.” If you want to know who they are, look around; they’re the people playing Angry Birds on their phones. And that’s the problem.

The original Wii got these people waving controllers in droves. Nintendo wasn’t able to repeat the magic with Wii U, largely because this fickle group of users has moved on to mobile games played on smart phones and tablets. This will put a serious dent in sales, particularly of portable-game players. “In terms of long-term outlook, the real difficulty is in handhelds because people gravitate towards tablets and mobile phones,” Woo says.

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Analytics company Flurry estimates that we spent more than $8 billion on mobile-game apps last year. “When it comes to app consumption on iOS and Android smart devices, consumers spend over 40% of all their time using games,” the company writes on its blog.

One of the appeals of mobile-app games is that developers often make “lite” versions available for free, and this penny-pinching extends to hardware. Consumers are still spending more cautiously than they were the last time hardwaremakers refreshed their console lineups. “The other major factor that’s been weighing on console sales is the macro downturn,” Ward says. “It’s pulled back consumer spending across the board.”

At around $350 for the high-end version of the Wii U, some people think the Nintendo priced the console too high, even though the company is said to be losing money on every unit it sells. “The price point is probably another factor I would point to that has limited uptake,” Ward says.

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This is a mistake TIME Techland points out Sony will need to avoid when it puts its new device on sale: “If Sony launches higher (and doesn’t include something like a free iPad), especially in a weak economy, it may find it’s looking for dance partners all over again.”

“As consumers look more and more for deals over the holidays while purchasing hardware, bundles which include software grew by 26%, while hardware selling alone with no games declined by 37%,” NPD analyst Liam Callahan says in a report accompanying the company’s data. “Consumers are becoming more savvy.”

Ward also blames a lack of good games, especially for the Wii U. “Some folks might wait until they see their favorite titles before they buy it — a lot of people are attracted to the consoles because of the games themselves,” he says. Nintendo has been slow to address this, and comments from company President Satoru Iwata at a recent investor event indicate that this is probably going to remain the status quo at least through the first half of 2013.

More generally, NPD finds that nearly half of game sales were of the top 10 most popular games, a 12% jump over last year. People still buy the blockbusters, Callahan says, “but middle-tier games as well as catalog titles are suffering.”

Most important, the industry is in the nascent stages of a digital revolution. NPD says sales of digital games grew 16% over the past two years. If you compare the gaming industry to the music industry, right now it’s in a pre-iTunes, pre-Pandora era. Discs are still the primary way people consume this media. Ward says there are a host of technical reasons why people aren’t downloading games or playing them on a cloud-based service yet, but industry observers say it’s just a matter of time. Woo says the upcoming generation of consoles could very well be the last ones with drives, and Ward points to Sony’s $380 million purchase of cloud-streaming provider Gaikai last year as a sign that the company will put more emphasis on game streaming in the future.

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When players can download or stream games easily and affordably, the video-game console could shrink further to essentially become a handful of chips inside a next-generation smart TV. “In the future, I think that could become a significant challenge to the entrenched incumbents,” Ward says. Consoles might not die out completely, but they could be transformed into something hardly recognizable to today’s gamers.