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NPD: Behind the Numbers, July 2010
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  NPD: Behind the Numbers, July 2010
by Matt Matthews [Business]
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August 16, 2010 Article Start Previous Page 3 of 5 Next

All in the Family

While the Xbox 360 is the current star of the hardware scene, we would do well to keep a focus on how the other systems are performing. Year-to-date, only the Xbox 360 and PlayStation 3 have demonstrated both hardware and software sales increases. Below we break down the figures for each system and then make a rather unique comparison to hardware sales from February of this year.

Nintendo Wii – System sales for Nintendo's flagship console are down 17% year-to-date, although sales for just July were practically flat year-over-year. The average price of the system has declined from just under $220 in September 2009 to just over $200 in February 2010 and has finally settled in just under $200 as of July.

Even more alarming for Nintendo, however, is that software sales for the system have declined more than 20% so far this year compared to the same seven month period in 2009. As we saw last month, almost all of the decline has come from third-party Wii software.

To address this point more directly, we note that Michael Pachter of Wedbush Securities highlighted comments made by Electronic Arts during its latest earnings call with investors. The publisher lauded its gains in the overall market, attributing this strength to its larger relation position in the “high definition console” market. Pachter added that he expects “to hear similar statements from virtually all third party publishers in the coming months, as the weakness in Wii software is likely to spook all but the most fearless.”

Certainly Nintendo's own release schedule in the back half of 2010 will help bolster its console's software position overall, but that won't necessarily address the woes of third-party publishers. In fact, big first-party titles will likely drain dollars that Wii owners would otherwise spend on third-party software.

The figure below shows the decline in the Wii's YTD hardware sales in 2010.

Nintendo DS – This platform now consists of three systems: the Nintendo DS Lite, the Nintendo DSi, and the Nintendo DSi XL. According to pricing data provided exclusively to Gamasutra, the system's price has risen yet again.

Six months ago the system had an average price of just over $150, indicating that the Lite and original DSi model were selling approximately the same units each month. The average price now stands at over $165, more than $15 more than the launch price of the original Nintendo DS back in November 2004.

We believe that this dramatic rise in the average price can be attributed directly to the introduction of the $190 DSi XL and a sharp decline in the popularity of the Lite model.

(The figure below shows the decline in the system's YTD hardware sales.)

While the system's unit sales are off by more than 25% year-to-date, its software dollar sales have shown a rather modest 6% decline so far in 2010, which compares favorably with the 8% drop across the entire industry.

PlayStation 3 – Sony's lead console is just finishing up a full 12-month of year-over-year increases, and its year-to-date sales are up 45%, the best showing of any system. In September 2009, the average price of the system was right at $300, the price of the PS3 Slim 120GB system then available. (The figure below shows the growth of the system's YTD sales.)

As the $350 model (with a 250GB hard drive) came along, the average price rose to just over $315 in February of this year. In July, however, that average price had fallen to right around $308.

These figures suggest to us that Sony may have reached its full growth potential with its current hardware and pricing. If it falls into year-over-year declines as its runs headfirst into comparisons with last year's PS3 Slim launch, it will need to renew its pitch to consumers to accelerate hardware sales. If this last year is the best that Sony's console can do, then it will never even reach the rate the Wii achieved in its first year.

As for software, Sony's year-to-date software dollar sales are up around 40% compared to sales for the first seven months of 2009. This is roughly in line with the increase in hardware sales, but significantly behind the 61% increase in the installed base since July 2009.

PlayStation Portable – Sony continues to put a good face on the PSP's situation, relying mostly on exclusive software/hardware bundles to drive sales. Even so, it cannot hide the 35% decline in system sales so far this year, nor the corresponding 33% drop in software revenue. (The figure below shows the decline in YTD hardware sales.)

What to say of this disaster? Nothing, truly, except that until Sony itself presents a coherent plan for its system we think it will continue to lose not only consumer interest at an alarming rate, but more fatally, developer and publisher confidence – if it hasn't already lost that confidence already.

Unless fortunes change dramatically in a very short time, key titles like Square-Enix's Kingdom Hearts: Birth by Sleep (due the first week in September) and Sony's own God of War: Ghost of Sparta (November) will create headlines like those seen last month when IGN revealed that Konami's Metal Gear Solid: Peace Walker had sold only 52,000 units during its launch month.

Article Start Previous Page 3 of 5 Next

David Wesley
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The most significant factors impacting current sales trends are often ignored in analyst briefings, despite the fact that they follow fundamental technology adoption patterns.

First, and foremost, we are seeing the effect of late adopter purchases. Late adopters, as we have previously mentioned, have a lower economic status, are less educated about the products they are purchasing, and are much more price sensitive. The launch of the new Xbox 360 slim attracted two types of customers, early adopters (and close followers) who purchased the new slim units, and late adopters who purchased older arcade units at a significant discount as retailers like Walmart and Target cleared out old stock. That latter provided a temporary hit that will not be repeated. As a result, one should expect a decline in August and September until sales pick up again in the run-up to the holiday season.

Second, the increase in HDTV adoption means that more people are upgrading to high definition consoles such as the PS3 and Xbox 360. They include existing Wii owners as well as previous generation console owners who are only now upgrading.

Finally, the decline in software revenue is normal in this stage of the product cycle. This is simply due to the wider availability of budget titles and used games. One will still see short term surges with the launch of highly anticipated titles like Halo Reach, but one should expect the trend to continue until the next generation of consoles is launched. Longer term, the decline in software revenue will be mitigated by the larger install base of console owners.

David Galindo
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Thanks Matt, always love these NPD breakdown articles!

Kevin Jones
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@ David Wesley

:"That latter provided a temporary hit that will not be repeated. As a result, one should expect a decline in August and September until sales pick up again in the run-up to the holiday season. "
If you actually read through the article, you would have noticed that the new $300 360 S accounted for 60 % (close to 300,000) of the 360's sales for July. Just the 360 S alone outsold the Wii. In addition, we have had the launch of the 360 S Arcade at $ 200 since August the 4th, which will give another boost to 360 sales. The 360 should register solid sales for August.
For Sepetmber, the Halo Reach 360 bundle, plus momentum from the 2 360 S versions, should give us even higher sales figures than for July. I am not expecting much in the way of sales declines for the 360 for August or September.
The Wii on the other hand..... I expect Wii sales in August to be even lower than in July. The 360 should easily be ahead of the Wii/PS3 for both August and September.

David Wesley
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I understand that. The "hit" that I was referring to was "late adopter" purchases that likely accounted for a large portion of legacy unit sales. It will not be repeated and will account for much of the decline in August and September (Sales among early adopter and close followers will continue to be strong). Also, to clarify, the decline will be in month to month, not year-over-year. Year over year should still be up.

I don't feel that the $200 Arcade will be as appealing to late adopters in the short term, but the Halo Reach bundle and Arcade will help give Microsoft a boost during the important holiday season, as will Kinect.

Jonathan Gilmore
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Always thoughtful bias-free analysis. I agree with your "late-adopter" analysis, and I think going forward that MS will benefit the most from this, as they have a lot more room to lower the price than Sony, and they are already at a point where they can offer a console with percieved better "value" than the Wii at $200.

Sony ran into the problem of very, very slow Blue Ray adoption, cheap standalone players and a perception that digital media and/or another format will probably replce Blue Ray anyway. I think the built in Blue Ray player's value has been very overstated this generation. It is clearly not DVD and the PS2.

David Wesley
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Nintendo also has a lot of room to lower the price of the Wii. We have long advocated that Nintendo drop the price to $99 as a way to reach late adopters. The PS2 was the console of choice for late adopters until late last year when sales of PS2 units experienced a precipitous decline (mainly due to the availability of reasonably priced alternatives). Nintendo's low manufacturing costs placed the Wii in a strong position to enter this market. Instead, Microsoft has taken the lead by offering low priced Arcade units. Research has shown that price elasticity in video game hardware declines over time, so the longer Nintendo waits to drop the price of the Wii, the harder it will be to attract late adopters.

Finally, Blu-ray adoption has picked up, but I agree that its importance in game console purchasing decisions is declining as inexpensive alternatives become widely available.

Evan Combs
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Jonathan I strongly believe that the idea that the PS2 sold more because it was also a DVD player is a complete myth. People who bought the PS2 bought it because they wanted a PS2, not because they wanted a DVD player. Yes it may have pushed people to buy a PS2 now instead of later, but when all is said and done it wasn't the DVD player that sold PS2's, but the PS2 itself that sold the PS2.

Jonathan Gilmore
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@David-I agree with you on all fronts, but I think that Nintendo has already waited too long. I think they will continue to sell systems and could still get a boost with a price drop, but unless they go to $99 like you said, I think they have lost their dominance-going forward.

As far as Blue Ray versus DVD, I think that DVD did intitially help the PS2, and that it helped significantly more than Blue Ray "helped" the PS3.

@Evan-Obviously Sony thought that the media capabilities/disc format was a big selling point, or else there is no way in heck they would have initially launched the PS3 at $600. The problem was at that time very few people had an HDTV and it wasn't even clear if Blue Ray would take off-it still really hasn't "taken off."

DanielThomas MacInnes
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Nintendo is fine. They have nothing to worry about, and they certainly shouldn't drop the price of the Wii. Heck, neither should Sony or Microsoft - that's lost money. Dropping the retail price only gives you a short bump in sales, but it fades quickly.

I'm getting the impression that everybody here thinks we're at the end of the console cycle. Is that true? I certainly don't see Sony or Microsoft arriving with an 8th Generation system anytime soon. What, exactly, would a Playstation 4 and Xbox 3 look like? They can't go any further in the hardware direction. Horsepower and graphics aren't nearly as important today as they were in the past. I'm not just thinking of Nintendo, but Apple, smartphones, Facebook, flash games, Youtube...HD graphics are overshooting the market.

Maybe that's a good discussion topic. If there is a PS4 and Xbox 3, what should they be? Where should they evolve? And why do we need to throw our game consoles out every five years, anyway? Can't Sega just bring back the Dreamcast? :P

As for Nintendo, the Wii holiday lineup is the strongest I've seen since the 16-bit days. It's scary good. Heck, this console seems to sell forever on the strength of two or three key titles. If the coming games live up to the hype (always the BIG IF), Nintendo could probably coast through 2011 just on the sheer momentum...and with 3DS on the way, maybe that was their plan all along.

David Wesley
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The research on console pricing and durable goods product cycles support the conclusion that Microsoft's dynamic pricing model is more successful over the longer term than a myopic pricing model like the one employed by Nintendo, and that a price drop at the right points in the product cycle provides much more than a "short bump." Moreover, it is also well established that "short run profit maximization is not an appropriate criterion for many market situations" and that "lost money" should be viewed as a longer term investment. As a follow up, I have posted a more complete discussion along with references to supporting literature on my blog. See "Dynamic Pricing in Late Adopter Purchases of Video Game Consoles"

I don't think that we're near the end of the cycle by a long shot. One should not wait until the end of the product life cycle to respond to changes in consumer behavior, because by then price elasticity has declined and network effects have already run their course. Also, keep in mind that late adopters constitute about half the market for console purchases and therefore, they should not be ignored, even if they are not the most profitable.

Finally, I am sure that Nintendo could "coast through 2011," but "coasting through" is not exactly the best long term business strategy. I am also sure the 3DS will be a big hit, but the portable market is a completely different matter from what we have been discussing.

Bob Philhower
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@DanielThomas: I think that Microsoft & Sony would say that they have announced their next consoles & will start shipping in the next few months. They are fully back-compatible with the current generation (heck, they even still have a SKU that is back-compat-only :-) and offer primarily gameplay innovation.

DanielThomas MacInnes
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@Bob: Okay, that's an interesting scenario. But let me ask everybody a few questions.

1) Why would investors be willing to spend hundreds of millions on 8th Generation consoles after losing so much money on the current machines? Wouldn't Sony and Microsoft work to earn back the money they invested before diving in again?

2) What is the purpose of the Kinect and Move? Are these stop-gaps, short-term accessories? Or are these meant to be systems in their own right? Is Kinect the Xbox 2.5? What are their long-term plans for these machines? I know from my own experience that I need to see some steady software support. Launch games are one thing. What are the second wave of games? Those are always the crucial ones for me.

Just two examples: the Sega Genesis' second wave of games included Castle of Illusion, Strider, Super Monaco GP, Thunder Force 3, Gaiares and Fire Shark. The Atari Jaguar's second wave was....hmm, nope, nothing.

3) Why do we even need another round of game systems? I grew up with Atari and Intellivision and Colecovision. The power of the Xbox 360 and PS3 is staggering. I can barely wrap my head around it. When I was a kid, I think our imagined "perfect" video game would look like the movie Tron, or those early CGI shorts from Pixar. Today's games make those benchmarks look primitive. What more could anyone want?

And this is when I turn into Cranky Dad. You kids are spoiled rotten! You're already bored with these games? Back in my day, we played games on cassette tapes and pumped quarters into Pac-Man! And we had to walk through five feet of snow to get to school every day!

4) Between joypads and motion controllers, which path would a PS4 and Xbox 3 follow? How would their core gamers react if motion control was given greater emphasis? A lot of these guys slagged on Nintendo Wii for the last four years, and many of them just prefer the joypads. That's perfectly fair, of course. But we've seen from the first great videogame disruption that the NES joypad dislodged the Atari joystick as the standard controller.

This reminds me of something the Harvard professors have said regarding disruption. You must secure your core business and earn the right to innovate before you pursue the disruption path. If you haven't done this, then you will face a backlash from your core. A fire will break out and spread.

5) If Sony and Microsoft (and Nintendo, too) are concerned with gameplay innovation, what's stoping them now? Why can't they just make better video games? Hah, isn't that a simple request? I really am turning into Cranky Dad. I'll become Absent-Minded Grampa by the end of the month.

But, seriously, there's nothing on the Twins but FPS games. What's the deal with that? How many space marine shooters does one person need? It's overkill. I think of so many classic games that were written for 64K or less; today's designers have limitless resources. How much processing power is needed to create the next Ms. Pac-Man or M.U.L.E. or Civilization or Doom?

Could we then say that technology has, in a sense, become a hurdle? Are these machines too powerful? Nobody is willing to innovate when they're gambling tens of millions of dollars for a single title. That's why everyone is packed together in the same creative space, churning out sequel after sequel. We certainly can't blame them for being cautious. Maybe this issue is the one that ties everything together.

Anyway, those are my questions. What does everybody think?


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