The $12.5 Billion Industry

As predicted, the U.S. gaming industry toppled its old record in 2006, growing 19% since last year

The NPD Group has just released its December and year-end totals for 2006, and it's truly stunning. The U.S. video game industry has reached an all-time high at $12.5 billion, easily eclipsing last year's record $10.5 billion. The final month really put the industry over the top, as December total sales hit a whopping $3.7 billion, an increase of 27.8 percent. Software sales for December totaled $1.7 billion, up just 5.4 percent.

It was hardware, however, that saved the day. During December hardware did incredibly well, totaling $1.6 billion (up 59.2 percent). And guess what system put up the highest numbers... that's right, the Nintendo DS. We say it every month, but it's mind boggling how successful the DS has become. The handheld sold 1.6 million units in December and life-to-date stands at 9.2 million. The PSP did fairly well also, selling 953.2 K units (6.7 million life-to-date). Nintendo's GBA came in third among portables with 850.7 K unit sales (35.1 million life-to-date). Overall, though, portable hardware sales were still down 5.7 percent year-over-year in December and essentially flat on an annual basis.

The big winner in the console space was the PS2. Sony's aging console is showing very resilient legs, as it posted 1.4 million units in sales for the month and stands at 37.1 million life-to-date. Following the PS2 was the Xbox 360 with 1.1 million units sold in December (4.5 million life-to-date). The two new systems, Wii and PS3, rounded out the charts with 604.2 K units and 490.7 K units, respectively. NPD's data shows that the Wii install base through December in the U.S. stands at 1.1 million while the PS3 total is just 687.3 K. Keep in mind that SCEA's 1 million shipped number was for all of North America, while NPD data refers to the U.S. only.

Annually, total hardware sales were $4.6 billion, up 42.8 percent. This was driven primarily by console hardware, which came in at $2.9 billion, an increase of 87.5 percent. On the software side, 2006 total sales amounted to $6.5 billion, a 6.4 percent increase. This was broken down into $4.8 billion in console software (up 2.6 percent) and $1.7 billion in portable software (18.8 percent rise). Accessory sales were up 18.9 percent in 2006 as well, totaling $1.5 billion.

Gears of War, which dominated November with 1 million units sold, took top honors in December as well, adding on another 815.7 K units (including the collector's edition). Microsoft's blockbuster for the 360 was closely followed by Guitar Hero II (including the standalone copy of the game with out guitar) and Madden 07 on the PS2. Not surprisingly, EA's Madden was also the best selling game of 2006 with 2.8 million units sold. Complete software and accessories charts are provided above.

As soon as we got word of the data, we tracked down NPD Entertainment Industry analyst Anita Frazier for some more insight into the holiday and year-end results for this record breaking 2006.

Frazier pointed out that the industry reached an all new high thanks to the DS, the Xbox 360 and the continued strength of the PS2. "There are a number of drivers. First, the Xbox 360 contributed the most dollar growth to the industry and the console hardware numbers reflect that. At a premium price point, as consumers acquired this new hardware, total industry revenue got a big boost," she explained. "Second, the DS. What a great job Nintendo did in establishing a new handheld system that attracts an older demographic without abandoning its core demographic. I have a lot of friends that purchased a DS for their kids, and are now picking up a second system for themselves. I was on a plane playing Sudoku on my DS sitting next to my son playing Pokemon Ranger on his. Third, when new hardware systems come out, sales of legacy platforms typically show a significant decline, but I can't say enough about the continued strength of the PS2. In terms of total dollar contribution to the industry, the PS2 continued to be the top performer, although the Xbox 360 is now on its heels."

Despite being six years old, the PS2 may be a viable contender for quite some time.

Frazier was thoroughly blown away by the numbers PS2 put up in December. "I literally said 'Oh My God' out loud when I saw the December PS2 numbers," she said. "History showed us that the PSone had legs long after the introduction of the PS2, and this time around, the PS2 is even stronger. For that platform to have sold as many units as it did in December up against two new systems in the market was amazing, regardless of the price point. Consumers aren't shying away from the platform, and I don't think the industry will either. With its install base now at 37 million, the PS2 can continue to be a contender for several more years."

In the battle of the new consoles, while the PS3 may be trailing the Wii by over 400 K units, it really means little at this stage in the game. "The race is really just beginning. We won't see this play out clearly until we're well into 2007," said Frazier. "That said, the lead that Microsoft had in establishing the 360 for this generation of systems cannot be discounted. Since Sony and Microsoft are similarly positioning their two systems in terms of the device being more than just a video game machine, the 360 lead is more impactful to Sony than it is to Nintendo whose strategy has been different all along. Microsoft's lead is multi-faceted. Not only is their install base solid at 4.5 million in the U.S., but their reported Live membership and greater third party support helps as well. Sony is understandably working through their supply issues, but coming out of the holiday and launch period where price wasn't as much as a factor, into 2007 it will be. And PS3 software sales have been soft as well. But with the launch of the PS2, we saw a similar situation and look what happened to that platform. Nintendo is on a roll with the Wii and the DS. With greater third party title success on the Wii than what we saw on the GameCube, the Wii will move to great heights."

Finally, we questioned Frazier about the other old systems, Xbox and GameCube. She agreed with us that Xbox is essentially dead at this point, but she still believes GameCube has some life left, although not a whole lot. "I think it's fair to say yes for the Xbox, and that GameCube is settling into its golden years," she remarked. "As evidenced by the success of Zelda: Twilight Princess on the GameCube platform in December, GameCube titles can still sell very well, and I would expect this to continue into 2007. But I see Nintendo fans quickly upgrading to the Wii, perhaps more so than PS2 fans will simply because of the price point and its reputation for being 100% backward compatible."

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