Despite the Rise of Digital, the Videogames Business Is Not All Fun and Games

Never mind Zynga’s problems. Even legacy game companies like Electronic Arts, Activision, Take-Two Interactive and THQ are taking their lumps.

And here’s the simple reason why: Despite all the new categories being built over the past two years — like social and phone and tablet gaming — consumers are still spending less than they used to on videogames.

Anita Frazier at the NPD Group said the gains that digital gaming formats are realizing were not quite enough to offset a 16 percent drop in consumer spending during the second quarter.

Right now, the industry is close to a break-even point, with half of its sales coming from digital and half coming from software. It’s just enough to make the argument that companies should be investing in digital, but basically not enough for them to be rewarded for it, especially with standalone entities like Zynga eating up most of the profits in one category.

In the second quarter, $1.39 billion was spent by U.S. consumers on videogame software for consoles and PCs, including new, rental and used sales. In the other category, which includes digital downloads, subscriptions, mobile and social, sales in the second quarter totaled $1.47 billion, NPD Group said.

In June, those trends continued, with consumers spending a total of $1.1 billion, of which $439 million came from digital sales.

Based on how history tells it, the industry is fueled by cycles, with new hardware resulting in a jump in software sales. But the current generation of consoles are hitting their seventh year, which means that consumers have started to get tired of their ancient systems, and have started to slow their spending. Only one console maker, Nintendo, has plans to launch new hardware — the Wii U — in time for Christmas.

After two straight weeks of earnings reports, this trend is obvious.

Last week, Take-Two Interactive disappointed analysts with a wider than expected loss, Activision was down compared to the prior yearElectronic Arts’ results showed signs of weakness, and the week before, Zynga shocked investors after wildly missing expectations.

Frazier said in July that there was only one hardware platform that experienced an increase in sales compared to last year: Nintendo’s portable game unit, the 3DS. This month, we can look forward to a potential lift from the release of Nintendo’s 3DS XL, which boasts a bigger screen.

Otherwise, it’s Microsoft’s Xbox that is sweeping up the remnants in the space. But increasingly, the console is being used to stream video and other content to users’ TVs — not to play games.

Microsoft said that, based on the NPD results, it sold 203,000 units in July, which was more units than any gaming hardware. It currently holds 49 percent market share of current-generation consoles, and total spending on platform in July (including hardware, software and accessories) reached $218 million. At that rate, consumers spent more on Xbox 360 products in July than they spent on the Nintendo Wii and the Sony PlayStation 3 combined.


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