Video games have been in the doldrums since 2008, at least as far as brick-and-mortar retail is concerned. However, if you drill down a little further, you will see that not all was bad. Yes, brick-and-mortar sales went into freefall for two reasons - one was the fact that there had not been any new major console releases [not counting the disappointing Wii U] since 2006; the other were the very quiet but also very rapid inroads made by digital games. If you include these, this is how the video games really did over the past six years:
- Digital Game sales in the U.S. in 2012 amounted to an estimated $5.92 billion. This compares to 2012 brick-and-mortar retail sales of $6.74 billion.
- In the second quarter of 2013, digital sales in the U.S. are estimated at $1.77 billion, up 15% from 2/2012.
- On this basis, total 2013 sales online will amount to an estimated $6.8 billion versus brick-and-mortar sales of $7.4 billion.
The end result is that the online portion put the U.S. video game sales in their totality over the top for every year since 2007 except for the decline last year.
The first question that arises is who is doing all this online playing. The answer is simple - teens between 14 and 19 years of age. Two-thirds of all U.S. teens, about 16.6 million, spend an average of $16.50 per month on online games on Facebook or mobile devices. This means a yearly spending in 2013 of $3,286 million or 44% of all online games played in the U.S. Today, teens only represent about a quarter of the total gaming population of the U.S. and this tells us two things. One is that their game involvement is very considerably higher than that of the other age groups. The other is that the online gaming population will continue to grow exponentially at the expense of the traditional gaming universe.
The second question is - who is winning in this change? Undoubtedly the leading publishers, Activision (ATVI) and Electronic Arts (EA). Both have very good reasons for pushing for this transition from consoles to online. One is that it very effectively stymies their two main competitors - pirated games and used games. Another is that games sold by them online straight to the consumer gives them a much higher profit margin than if they sold these via retailers because retailers want some profit, too. The last is that selling promote new titles which they cannot if they sell via retailers.
This is how the four leading publishers have developed their online business over the past few years:
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In the case of Electronic Arts, digital sales now represent about 59% of the total whereas Activision's is 49.6%. The other two - Take-Two (TTWO) and Ubisoft (OTCPK:UBSFY) - have started the transition much later but are also moving in the right direction.
The second group of winners is smartphone manufacturers given the fact that gaming has become an important part of smartphone usage. This is how this breaks out in terms of daily usage according to a recent study:
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Hence the smartphone that promises the best gaming experience has a clear competitive advantage over those that do not.
ReviewGist, a highly respected discovery and research site for consumer electronics, recently ranked smartphones in terms of their gaming performance. This is how the main players showed up [ranking out of 271 models and rating out of a total of 100 points]:
Nokia Lumina 925
Samsung Galaxy S4
Samsung Galaxy S4 Active
Samsung Galaxy S4 Mini
Blackberry Torch 9850
What is surprising is the poor performance of the iPhone, particularly that of the iPhone 5. Apple (AAPL) in this particular respect is soundly beaten by its most formidable competitor, Samsung (GM:SSNLF) and its latest Galaxy S4 models. This may be one of the reasons why Samsung has overtaken Apple in all major markets other than the U.S.
Whilst there are winners, there are also losers.
One group of losers are those that have seen their consumers migrate to video gaming, mainly online. According to recent research done by Source Entertainment Software Association, the consumers now playing more video games than they did three years ago are also spending today less time on other pursuits than they did before.
Board Games are the most affected - the gamers as defined are spending 58% less time playing board games as a result of their increasing focus on video games. In the case of TV, it is less is 49% and going to the movies is less 47%.
This may explain why the U.S. retail sales of the Games and Puzzles toy category declined from $2,32 billion in 2010 to $2,01 billion in 2012. In terms of TV viewership, MC Marketing Charts tell us that the time spent watching TV by 12 - 17 year olds declined from 24.21 hours per week in Quarter 1 of 2011 to 20.39 hours in Quarter 2 of 2013 - a 15% decline. On the positive side, there is no statistical evidence that increased video game usage has resulted in a decline in movie audience numbers.
The second group of losers are brick-and-mortar retailers. All major retailers report a sharp decline in their video game store sales. GameStop (GME), the largest retailer of video games, demonstrates just how devastating the impact of online gaming has been.
GameStop's total sales, including online, have stagnated since 2009 and declined since 2011. This is in fact not too bad a performance given the much sharper decline experienced by the market overall. Its sales now promise to recover slightly during the second half of 2013 - coinciding with the release of the next generation consoles and their tail of new games associated with them.
On the surface, this looks like a good performance. However, if you drill down further, you will find two major problems. One is its their brick-and-mortar sales without the online portion have consistently declined since 2009 and there is no end in sight. The second is that whilst its online sales have grown, its performance is way lower and slower than that of the market place overall. In short, whilst the market is moving to online in no uncertain manner, GameStop is simply not keeping pace.
Source: GameStop SEC filings; Klosters Retailer Panel
However, there is another major negative impact on GameStop, specifically. I pointed out further above that online sales are being pushed by the publishers because of their effect on used games. This is not only a benefit for the publishers, it is also a major challenge for GameStop, which derived last year a quarter of its sales and more than 40% of its gross profit from used game sales. In fact, its used game sales have been in decline for the past two years and this quite possibly is due to the increase in online sales by the publishers.
What is the outlook for online gaming and the retail industry going forward? This is how DigiCapital - an investment bank specialized in video games, apps, digital media and services covering North America, Asia and Europe - sees the global future until 2016:
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In other words, online and mobile sales of video games are expected to sharply increase whilst Console and PC will at best stagnate.
In fact, the leading publishers expect that they can move the needle for online sales to a degree that these will represent more than 90% of the video game market place by 2020. If they succeed, this is likely to mean that traditional brick-and-mortar retailers of games will go the way of the mom-and-pop bookstore - still existing in out of the way places, totally insignificant and hanging in there at the edge of their teeth.
This article was first published by TDmonthly on October 1, 2013