Video Game Industry Suffers First Decline Since March 2006

Following August’s surprise shortfall, September was set to be a litmus test for measuring the health of the gaming industry in the U.S; a chance to spot test if softness in consumer spending would have an impact or if the industry’s record setting pace would resume. Thursday, the data came out. NPD released the results of their retail sales survey for the month of September. The results were, well, mixed.

Overall, sales fell seven percent year over year to $1.27b in September. It was the second month in a row, after a streak of 27 months, that sales failed to yield a double digit growth rate. It was also the first decline since March 2006.

On the face of it, that decline may look troublesome. Beneath the surface, however, it’s a little more complex. In September of 2007, Microsoft released (MSFT) Halo 3. It was one of the fastest selling titles of all time, driving both software results and hardware so high for the month (the Xbox 360 took the top slot for console sales) that the total combined tally was up nearly 75% over 2006 (and hardware sales were up 124 percent year over year). This year, without a comparable major release, the numbers don’t match up and the comparison is skewed. Additionally, in September (of this year), Microsoft cut prices on the entry level Xbox 360. While that fueled a significant jump in unit sales, the per-console discount reduced its top line contribution.

NPD’s analyst, Anita Frazier, seems to think the results are nothing to worry about. “Overall,” she said, “the health of the video games industry remains quite strong despite the rocky economic conditions. Tracking against typical seasonality, the U.S. video games industry is positioned to realize $22b or more in revenues for the year.”

Breaking out the results, with a look at hardware first: the month belonged to Nintendo (OTCPK:NTDOY). The Wii and the DS captured the top two slots for overall sales with more than 1.2m units sold, combined. The Xbox 360 jumped to number three with 347,200 units sold, a significant jump from last month’s 195,200 (no doubt largely influenced by the price cut.). The PS3 finished fourth. All of the current generation consoles and portables saw month to month sequential unit sales growth except the PlayStation Portable.

In software, Rock Band 2 may have been the month's top-seller. It finished third in the “official” top ten list but it was on sale for only half the month. Adjusted to reflect a full month of availability, if sales maintained the same pace, 363k units probably would have expanded enough to hit number one. Instead, that honor went to Lucas Arts' Star Wars title.

Nintendo’s accessory-attached game packs (Wii Fit, Mario Kart with Wheel and Wii Play) showed their continued strength with three more top ten slots (two, four and seven respectively). Last month’s winner, Madden ’09, dropped to eighth (Xbox 360) and tenth (PS2).

As is routine, and fitting the phrase “numbers don’t lie but they can tell many different stories,” each of the three hardware manufacturers gave the results their own customary spin. For Microsoft, the story was the attach rate (8.1) and total spending on the platform ($326m). The marketing message was “affordability,” “momentum” and the “Xbox Experience.” The company also noted the Xbox edition of Rock Band 2 generated $167m in sales during the month and that their Xbox Live platform is responsible for the delivery of more than 80% of downloadable songs for music games (averaging 3.8m per month).

For Sony (SNE), the spin was the strength of the combined PS3 brand (PS2, 3 and PSP). Together, the company reported, they earned $379m in September, and year to date, they have generated $4.03b in sales.

Sony‘s message also emphasized momentum. Software sales in September, the company pointed out, were up 130% year over year (when measured in units sold). Hardware, by the same “units sold” measurement (and not revenue), was up 94%. In revenue, total hardware revenue was up 11% y/y for Sony. Software revenue was up 17%.

For Nintendo, with another banner month, there wasn’t need for much added color.

Here are the rest of the September results, by the numbers:

THE SEPTEMBER NUMBERS
September Hardware Sales (in units sold) (August Result)
• Wii: 687,000 (453,000)
• Nintendo DS: 536,800 (518,300)
• Xbox 360: 347,200 (195,200)
• PlayStation Portable: 238,000 (253,000)
• PlayStation 3: 232,400 (185,400)

September Software - Title (Platform) –Publisher -Units
1. Star Wars: The Force Unleashed (Xbox 360) – Lucas Arts - 610,000
2. Wii Fit w/ Balance Board (WII) - Nintendo - 518,000
3. Rock Band 2 (Xbox 360) - MTV Games & Electronic Arts (ERTS) - 363,000
4. Mario Kart Wii w/ Wheel (WII) - Nintendo - 353,000
5. Star Wars: The Force Unleashed (Xbox 360) – Lucas Arts - 325,000
6. Mercenaries 2: World in Flames (Xbox 360) - Electronic Arts - 297,000
7. Wii Play w/ Remote (WII) - Nintendo - 243,000
8. Madden NFL 09 (Xbox 360) - Electronic Arts - 224,000
9. Star Wars: The Force Unleashed (WII) – Lucas Arts - 223,000
10. Madden NFL 09 (PS2) - Electronic Arts - 158,000

Overall Industry Totals - Total (% Change Y/Y) (August Result))
Video Games: $1.27B (-7%) ($1.08B)
Video Games Hardware: $498.0M (-9%) $394.5M)
Video Games Software: $ $616.1M (-6%) ($550.7M)
Video Game Accessories: $$152.6M (-3%) ($137.3M)
For comparative data, NPD’s data from each month for the past year can be found by clicking the names of the month as follows:
2008: •January •February •March •April •May •June•July•August
2007: •February•March•April•May•June•July•August •September•October •November •December