The popularity of cheap mobile games such as Angry Birds has led some analysts to wonder if $200 to $300 consoles like the Wii, Xbox, and PlayStation are destined for the Island of Misfit Toys. According to the market-research firm NPD Group, packaged game software sales in 2011 were 22 percent lower than in 2008, when revenue peaked at $11.7 billion. Game hardware sales are off 30 percent through the first 10 months of 2012 from the same period the year before. Peter Vesterbacka, the chief marketing officer of Finnish mobile game developer Rovio, creator of the Angry Birds franchise, called consoles a “dying breed.”
Nintendo, Microsoft, Sony, and their game developers aren’t giving up. Nintendo’s $300 Wii U console, which was launched in the U.S. on Nov. 18, sold 400,000 units in its first week, according to the company. Activision’s Call of Duty: Black Ops II grossed more than $500 million within 24 hours of its Nov. 13 launch. And Sony and Microsoft are expected to have new PlayStation and Xbox consoles ready in late 2013. “The console business isn’t dying,” says Michael Pachter, managing director of equity research at Wedbush Securities.
Some analysts say the game industry data showing declines in recent years don’t tell the whole story. Figures compiled by research firm NPD, which publishes the gaming industry’s most widely cited retail results, miss revenue from downloaded content such as online games and extra levels. If counted, content sales would add more than a billion dollars to industry revenue in 2012, according to Jesse Divnich, vice president for insights and analysis at Eedar, a video game research firm. “Once you factor in digital,” Divnich estimates, “you’re down to a single-digit decline” for 2012.
In hindsight, the runaway growth of console game sales in the past—of 29.6 percent in 2007 and 23.1 percent the following year, according to NPD—looks like a bubble. At their 2009 peak, the Guitar Hero and Rock Band franchises alone were responsible for 15 percent of software sales revenue, according to Divnich, but consumers lost interest in both soon after.
The success of Nintendo’s Wii, which expanded the market for game consoles when it launched in 2006 by introducing motion controllers that appealed to families, also drove sales—but some Wii owners seem to have stopped buying games. “Wii was a success story, since Nintendo sold a ton of hardware,” says Billy Pidgeon, a senior analyst at Inside Network Research. “But there are a lot of Wiis gathering dust in closets right now.”
Pachter says the more dedicated “core gamers” that the business depends on haven’t gone anywhere, which is why software sales for Sony’s PlayStation 3 and Microsoft’s Xbox 360 have fallen less than 10 percent. At least some of that decline is expected, the natural result of aging consoles. “It’s very important to keep in mind the length of the cycle, which went on for two years too long,” says Ubisoft North America President Laurent Detoc.
With new devices coming to market, the console gaming business could start to expand again. “Our objective is to continue to grow the universe of gamers,” says Nintendo of America President Reggie Fils-Aime. His company’s Wii U offers new technology, in the form of controllers that have their own touchscreens, which can be used for more complex games or to play games without a television. It also has a Web browser, a social network, and a video-chat program. And Fils-Aime says the console will let developers add features to games that mobile titles will not be able to match. For example, in Madden NFL 13, the Electronic Arts football game, one player can use the Wii U controller’s touchscreen to plan out plays so the other player can’t see them.
Microsoft will introduce its machine a year from now, and analysts expect the next-generation PlayStation from Sony around the same time. (Neither company would comment on its plans.) Pachter says that will get the game business growing again by 2014, although that doesn’t mean software companies will have it easy. Now that consumers can buy entertaining mobile games for a dollar or two, they won’t spend $60 for a console title unless it wows them. With development costs on some console games running between $20 million and $40 million, publishers are already releasing fewer games and concentrating on potential blockbusters. “This idea of ‘go big or go home’ is going to continue,” Divnich says.
That may not leave as much room in the portable market, which Nintendo dominates. Handheld devices can deliver a better gaming experience than smartphones, but only dedicated players seem to appreciate the difference. “The handhelds are getting devastated,” Pachter says. “If you’re a casual gamer, Angry Birds probably satisfies you, and now every kid wants an iPhone, so they’re not playing as much Nintendo DS anymore.”
Video game analyst Divnich believes consoles and casual mobile-based games will continue to coexist. “It’s normal for the market to get excited about new business models when Zynga and Angry Birds are in the news,” he says. “But there’s also a market for a deeper, richer experience, and that’s what consoles do well.”