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 year, Electronic 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.

Based on Nintendo’s previous sales figures, it shows that demand has been on the decline for the hardware since the beginning of the year.

Here’s the math:

If Nintendo said in January that it sold four million 3DS devices in the U.S. last year, that means it has sold only one million devices so far this year. Since the device didn’t go on sale until April 2011, it sold about 500,000 units every month for eight months last year. In contrast, it has sold one million units, at an average of 167,000 a month, for the past six months.

In June, it disclosed that it sold 155,000 Nintendo 3DS systems and 150,000 of its original DS systems. It sold 95,000 Wii consoles.

The data was released jointly today by the NPD Group and Nintendo, and spells bad news for the Japanese game company, which is struggling as the world shifts to social and mobile games.

But Nintendo is no stranger to the cyclical nature of the games business, and continues to bank on upcoming hardware releases to spur additional sales.

Last month, the company announced the Nintendo 3DS XL, which will be available on Aug. 19 for $199.99. The handheld gaming device features screens that are 90 percent larger than the previous 3DS. Both devices allow users to view images in 3-D without the goofy glasses. It will also launch the New Super Mario Bros. 2 on Aug. 19, and says its holiday lineup will include hand-held debuts for both Luigi’s Mansion and Paper Mario.

Later this year it will release the Wii U, the company’s next-generation console.

The good news to take away from today’s announcement is that there are now five million 3DS owners in the wild, and they will likely continue to purchase new games. In addition, there are still many people who own the original DS. In October, Nintendo said it had sold a total of 50 million portable gaming systems in the U.S.

Today, the company introduced the Nintendo 3DS XL, which will be available on August 19 for $199.99. The handheld gaming device features screens that are 90 percent larger than the previous 3DS, with the top display measuring 4.88 inches and the bottom screen coming in at 4.18 inches. The regular 3DS has 3.53- and 3.02-inch screens. The upper display of the XL still offers 3-D capabilities.

“With the launch of Nintendo 3DS XL on Aug. 19, consumers will be able to enjoy the great lineup of current and upcoming games on an even grander scale. Plus, Nintendo 3DS XL gives owners even more real estate on their screens to enjoy entertainment applications like Nintendo Video and Netflix,” said Reggie Fils-Aime, president and COO of Nintendo of America, in a statement.

The 3DS XL comes bundled with a 4GB SD card, so users can store other games and videos from the Nintendo eShop. Nintendo also says the 3DS XL has better battery life than the original model, though the company didn’t provide any specific numbers today.

The Nintendo 3DS XL will be available in red or blue. Also launching on August 19 is the New Super Mario Bros. 2 video game.

Yesterday, Nintendo reported an annual loss — its first in more than three decades — after revenues fell 36 percent. Hours later, five-year-old upstart Zynga reported nearly the opposite results, saying that first-quarter revenues jumped 32 percent year over year.

“Social, accessible and free are changing things,” said Zynga’s COO John Schappert in an interview. “We were built for this market; we live on free and in-app purchases. We never grew up on $60 games and consoles. It’s a different world, and it’s hard for some companies as they make the transition.”

For more than a year, the game industry has worried about the shift toward social and mobile from more traditional platforms like the home console. And now, after yesterday’s two drastically different financial reports, there is more than anecdotal evidence for concern.

Zynga continues to gain momentum and attract larger audiences with titles like FarmVille and CastleVille on Facebook and Words With Friends on mobile. On the flipside, Nintendo is facing yet another hardware cycle, with consumers waiting for its newest console, the Wii U, coming later this year.

Generally, experts believe that social and mobile games are expanding the overall games market. But yesterday it was hard not to see Nintendo’s first loss in three decades — totaling $531.1 million — as a hint of where things are headed.

Michael Pachter, an analyst with Wedbush Securities, is bullish on Zynga’s prospects but is not optimistic about the future of console games.

“Nintendo is living in the past, repeating what got them to where they are, and hoping that the recent downturn is a fad,” he said. “They aren’t adapting to the times, and it’s hurting them.”

To be fair, the companies approach the market completely differently, so it’s hard to compare the two.

Nintendo sells proprietary portable and home gaming units as well as the games that work on top of them. Meanwhile, Zynga gives away its games for free and lets them work across most computers and mobile phones. It makes money on advertising and microtransactions.

The two approaches lead to drastically different audience sizes.

Zynga said the number of monthly active users playing its games increased to 292 million in the first quarter, up 24 percent. The game company, which got its start on Facebook, is also expanding rapidly to mobile, reporting that it had 22 million monthly users on mobile, up from only 12 million one quarter ago.

Nintendo does not break out quarterly figures, but the number of new customers it reached during its fiscal year pales in comparison. Over the past year, it sold 13.53 million 3DS units, and expects to sell 18.5 million this year. Nintendo sold 9.84 million Wiis over the past year, down 35 percent.

This year, Nintendo is banking on the Wii U to revive the company and to better position itself against mobile devices like the iPad. The new console will come with a 6.2-inch touchscreen that will allow users to interact in a new way with games on TV screens. It plans to sell 10.5 million Wii units this year, including the Wii U.

Last year, Nintendo Global President Satoru Iwata told AllThingsD in an interview that he is not willing to gamble on free-to-play games, because consumers are willing to pay for Nintendo’s superior experiences and brands.

“If we were simply going to say okay, the only the way we could sell more products is by decreasing the price, then there wouldn’t be a bright future, and the entire industry will fold,” he said.

His point is not entirely lost.

Zynga makes far less money per user than Nintendo. In fact, the gap between them is enormous.

Each console or portable game unit Nintendo sells has the opportunity to generate hundreds of dollars in income, since console games cost $60 and portable games cost around $40 (not to mention the initial cost of the hardware).

Meanwhile, Zynga makes very little on each player. It reports a metric called average daily bookings per average daily active users (ABPU). Yesterday, Zynga said ABPU increased to $0.055 in the first quarter from $0.051 in the same period a year earlier.

For Nintendo to switch from one model to the other would be like giving up the farm.

And to be entirely fair, Zynga wasn’t profitable, either. In the first quarter it lost $85 million, primarily due to stock-based compensation.

While competing with online social games and less-expensive titles on smartphones and tablet computers, Nintendo also is revamping its portable and home machines to keep pace with Sony Corp. and Microsoft Corp. Nintendo plans to debut a new home console, the Wii U, this year.

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The Kyoto-based videogame maker also offered an even bleaker outlook for its full-year earnings for the year to March, saying Thursday that net losses will be three times greater than its projections in October as valuation losses on foreign-currency holdings from the strong yen continued to swell.

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According to NPD data released today, about $6.7 billion, or 40 percent of consumer retail spending, was spent on the Xbox, breaking down into two categories: $2.1 billion on consoles and $4.6 billion on games.

The figures take into account U.S. retail sales of new physical videogame content, including portable and console hardware, games and accessories.

In all, those sectors generated revenue of $17.02 billion in 2011, an 8 percent decline over the $18.6 billion generated last year. (Yes, I repeat, Microsoft got 40 percent of that in 2011.)

The initial report does not take into account sales from digital formats such as downloadable content on the console, social and mobile games, or other categories, including used and rentals.

Those so-called “newer” categories generated $7.24 billion in revenues last year, an increase of 7 percent over the prior year.

The increase in spending on alternative formats, however, wasn’t enough to offset declines in physical retail. All told, consumer spending across both categories totaled between $16.3 billion and $16.6 billion, falling 2 percent over last year.

Separating physical and digital sales is quickly becoming an outdated concept, since the two are so intertwined. Consumers have the choice of purchasing many of the games over the Internet via a digital download versus buying them at Wal-Mart or Target.

NPD acknowledged today that it needs “deeper visibility” into digital distribution to get a complete picture of the industry, which will be its focus in 2012.

Still, the report can still be used as a litmus test to see what is performing well.

Overall, a surprisingly disappointing December is what dragged down results for the whole year, NPD discovered.

“Because of the great slate of content that came to market during the fourth quarter, I had expected December sales to represent a larger portion of total year sales than what occurred,” said NPD Group analyst Anita Frazier, in a release.

Frazier added that December sales accounted for just 23 percent of the annual total, compared to the past 10 years, when December, on average, represented 28 percent of the total.

In addition to Microsoft’s Xbox, Sony’s PlayStation also performed well, with both witnessing a 5 percent increase across all game categories for 2011. Meanwhile, the Nintendo Wii, which cannot display HD content, saw a decline year over year.

In a separate statement, Microsoft said that it outsold the PlayStation, the second-place console, by 2.7 million units, and that in all, it has now sold 66 million Xboxes and 18 million Kinect accessories. On a global basis, Sony said in a statement that it sold more than 6.5 million units worldwide this holiday season.

Here are the Top 10 best-selling games in December, according to NPD:

1. Call of Duty: Modern Warfare 3 by Activision Blizzard
2. Just Dance 3 by Ubisoft
3. Elder Scrolls V: Skyrim by Bethesda Softworks
4. Mario Kart 7 for 3DS by Nintendo
5. Battlefield 3 by Electronic Arts
6. Madden NFL by Electronic Arts
7. Assassin’s Creed: Revelations by Ubisoft
8. NBA 2k12 by Take Two Interactive
9. Super Mario 3D Land for 3DS by Nintendo
10. Batman: Arkham City by Warner Bros. Interactive

Well, it may be glasses-free 3-D on the 3DS screen, but it’s not going to look right on most Web sites, as pointed out by the Consumerist.

Fortunately, Nerd Mentality spent some time over the holidays making two comprehensive video tutorials on how to upload and view Nintendo 3DS video on YouTube. There’s a Quick Guide for users who might already be pretty comfortable transcoding video into different formats and sharing it online; there are also two lengthy videos for watching your 3DS video on both Windows and Mac computers.

In short, the recommended specs for 3-D video on YouTube are H.264 1920×1080 Side by Side L/R, though Nerd Mentality points out that YouTube can only display 3-D video at a maximum resolution of 720p, even if it’s uploaded at a higher resolution. YouTube does support glasses-free 3-D, but you may still want to try viewing it with glasses.

That’s in spite of Zynga, the rising star of social gaming, garnering much of the media’s attention last week, when it raised $1 billion in its initial public offering.

In November, Nintendo’s portable handheld, the 3DS, had its biggest single month of sales, representing an increase of more than 215 percent over the previous month; it has now sold nearly 2.5 million units since launch.

The Wii had its biggest Black Friday ever, with more than 520,000 units sold — six years into the console’s life.

The Japanese company also set a software record. Super Mario 3D Land, which was released Nov. 11, is now the fastest-selling portable Super Mario title in U.S. history, and Mario Kart 7 was the fastest-selling Mario Kart game.

In an interview with AllThingsD at the company’s U.S. headquarters in Redmond, Wash., Nintendo’s North America President Reggie Fils-Aime explained what’s driving strong holiday U.S. sales this year, and what’s on the horizon for the maker of games and hardware.

He also left the door wide open for Nintendo to experiment with new business models, including free-to-play or subscription, although he questioned the long-term prospects of social gaming companies, like Zynga.

Here’s an abbreviated version of our chat:

AllThingsD: It seems videogame sales this holiday kicked off with a bang.

Reggie Fils-Aime: We had a strong Black Friday for both our Wii and 3DS business.

The time frame from mid-November until the end of the year is critically important to us, and is driven by a number of software and hardware initiatives.

For the 3DS, we launched Super Mario 3D Land in November. It had the fastest sell-through for a handheld Super Mario game. That gave us a lot of momentum going into Black Friday, and right after Black Friday, we launched Mario Kart 7, which ended up being the fastest-selling Mario Kart, as well.

Together, that propelled our 3DS business. We’ve sold through more 3DS’s in eight months time than the original DS sold in the first 12 months. Our handheld business has a lot of momentum right now.

But it took awhile to get there?

What’s interesting is that we had a very good launch. The first week sales [of the 3DS] were fantastic. The initial rush of sales was really strong. But what happened after that in the spring and early summer time frame is — that’s when sales slowed down a little bit.

It was driven by not having great first-party software, and we were late in bringing some of the online functionality to the 3DS, and that’s when sales began to fall.

That’s when we took drastic action to reduce the price, right after the launch of The Legend of Zelda: Ocarina of Time 3D. Our bet was to regain momentum and make the holidays strong. We are having a strong holiday.

A lot of retailers were concerned that we would see a Black Friday rush and then things would trail off after that. Is that what you are seeing?

We haven’t seen that. We have seen things accelerate as we’ve gotten closer to Christmas Day itself. We are anticipating this week, across all of our businesses, will be the strongest sell-through week of the year.

What about the Wii?

The Wii had a strong Black Friday, too, driven by strong retailer promotions. This was our sixth Black Friday, and it was the best Black Friday week we’ve seen to date, so we’ve had very positive results.

It’s driven by software, and in this case, a new Legend of Zelda: Skyward Sword. It’s a game that’s been recognized by the gaming press to be one of the best games of the year.

The momentum continues for our Wii business, and sales are right on objective.

How does it continue to break records six years in? That’s baffling.

It’s because, even today, the Wii provides a family experience that you can’t get anywhere else. I love the stories I hear of grandparents playing with parents and with the grandkids.

Those are experiences that you can’t get elsewhere. That’s why we continue to break records. Plus, this holiday is the first holiday that it’s available for $149 or below. It’s reaching a whole new demographic that’s wanted to buy in, but couldn’t do it before.

And for consumers, there’s over 1,000 games that have been published, so the breadth of the gaming experience is extremely wide. The Wii continues to be the fastest-selling home console ever in the history of the gaming industry in the U.S.

Does that change as we get closer to the next-generation console, the Wii U?

The market is going to continue to differentiate based on the types of experiences that consumers want. As an example, if I’m the head of a household of a family of four, and my disposable income is $50,000 to $60,000, I’m going to continue to look at the Wii because of the software, and it’s a great entertainment device. For consumers who want to have the latest gadgets and have a higher disposable income, that’s for the Wii U.

We haven’t announced pricing or availability or any other details, but given the current pricing of the Wii, it’s not going to be there.

We’ve been very clear, the market is going to decide how long these products will coexist side by side. Our goal is to launch the Wii U and drive it into the marketplace, but it will speak to a different consumer than the one that is buying the Wii today during the holidays.

What about the other consoles? Both Sony’s PlayStation and Microsoft’s Xbox are about the same age.

All of the competitors haven’t talked about what’s next for them, and given the investments they’ve made in their technologies, for them to move to new systems — at least on the same timing we want to move at — would probably be pretty challenging. But in terms of what they are going to do, when they are going to do it, you’ll have to talk to them.

What do you think of Microsoft’s move to make the Xbox the entertainment hub of the living room?

In the end, the consumer decides what equipment to have in the living room. The interesting thing we’ve found — because of the family entertainment we provide, and the inclusion of Netflix — the vast majority of Wiis are set up on the main TV in the living room.

Are you considering adding more content like live TV or movies?

If the consumer wants live TV, they can get it through the options they have today. We always ask the question, ‘What can we do that’s new and provocative?’ And we will continue to think of new and provocative experiences for the user.

I’ve spent the past week covering Zynga’s IPO. What’s your perspective on social gaming?

What’s the share price? It will be interesting when it breaks below $9 … I have a couple of thoughts on social gaming.

Consumers want to be entertained in a variety of ways, like watching TV or reading a book. The thing about entertainment — as consumers have a range of experiences — their desires for what’s new continues to be pushed out. So delivering the same experience all the time … consumers will move on.

So when I look at gaming experiences on social networks, there’s a variety of entertainment value. Some are strong, some are not. But in the end, how will they evolve? Doing the same thing over and over again is no longer fine.

Is that really fair when you have Mario Kart 7 coming out?

We continue to evolve the experience by providing a level of customization that’s new, or different ways to race with a sail and a propeller that allows you to drift under water. What we’ve done with Mario Kart 7, for some of the tracks, you can actually win when you go off the track, which never existed before. We’ve continued to make it more fun and add more enjoyment for the consumer.

You don’t see that innovation happening in social gaming?

The companies that will win in the social gaming space need to show an ability to provide the new and different experiences, and a way to monetize it. In the end, these are businesses that need to make money.

Is that your comment on the free-to-play model? Will you experiment with free-to-play?

I have two comments on that.

First, we make games for Nintendo devices, and that is a competitive advantage for us. You can only play Mario on a Nintendo device, so from that standpoint, I wouldn’t expect to see our franchises on other platforms, and I would argue Facebook is a platform.

My second point, on whether we will experiment with other forms of monetization?

Certainly.

How that comes about, or which ones we do first, that’s all experimentation that’s going on right now in our various studios.

When Nintendo first announced a big 3DS price drop this past summer due to sluggish sales, it promised early buyers of the device — Nintendo 3DS “Ambassadors” — that they would be able to download new NES Virtual Console games at no charge before the games became available in the Nintendo eShop to the general public.

Starting today, even more free games are available to 3DS buyers. This time, they’re Game Boy Advance titles — remember Game Boy? — including The Legend of Zelda: The Minish Cap, Wario Land 4, Mario vs. Donkey Kong, Mario Kart: Super Circuit and a handful of others, numbering 10 in total.

The games are available to customers in the U.S., Europe and Japan a day ahead of the highly anticipated Sony Vita handheld launch in Japan.

The Game Boy Advance is a handheld gaming console introduced by Nintendo in 2001, more than a decade after the original Game Boy was launched and a few years ahead of the popular Nintendo DS’s debut. The device had a 32-bit processor and was described at the time as Nintendo’s fastest-selling game system ever. The last new title for the Game Boy Advance was brought to market in 2008.

For the 3DS, Nintendo can’t give away games fast enough. The freebie games are part of an overall push to sell more of the handheld unit, which had struggled to gain traction since its launch in March of this year. Nintendo said the 3DS got a much-needed boost, driving hardware sales up 49 percent, when Nintendo’s Super Mario 3D Land game hit the market in late November as part of a bundle.

Also, to give credit where it’s due, 3DS is kind of a big deal in Australia, according to the Sydney Morning Herald!

But the 3-D handheld gaming device has gotten a boost from recent game releases, and the gaming giant hopes two more items will keep the hardware’s momentum going for the holiday season.

This Sunday, Nintendo will release Mario Kart 7 for 3DS. It’s the second game in the Mario franchise aimed at the portable device in the past two weeks. Retailing for $39.99, Mario Kart 7 includes new courses and kart abilities and supports the 3DS StreetPass feature, which allows users to wirelessly connect to other “Mii” characters as they pass each other on the street or are in the vicinity of each other.

The company also plans to release a pink version of the 3DS, bundled with one of its Nintendogs + Cats games. The pink 3DS will cost $169.99 in the U.S., the same price as the standard Nintendo 3DS system. Nintendo had previously said a pink version was aimed at girls (sigh, but they do like lots of other colors, too).

The Nintendo 3DS, the company’s first 3-D portable gaming handset, hit the U.S. in March, at a price of $249.99. The device has an autostereoscopic screen — which means glasses aren’t required to see the 3-D imagery — and a depth slider that adjusts the intensity of the 3-D.

Consumers were less than thrilled by the 3DS, with many citing vision problems and high game prices, forcing Nintendo to later reduce the price. The move resulted in a 260 percent sales jump, with Nintendo selling 235,000 units in August, ranking it the second-best-selling piece of gaming hardware in the U.S. that month.

The 3DS got another boost when Nintendo’s Super Mario 3D Land game became available Thanksgiving week, as part of a bundle with a red 3DS. Nintendo of America President and COO Reggie Fils-Aime said the game was the fastest-selling portable Mario game in Nintendo’s history, and that interest in the game drove hardware sales up 49 percent.

“We believe more and more that software drives hardware,” Fils-Aime said.

Fils-Aime said Nintendo continues to invest in 3-D technology in terms of content, but for now, consumers shouldn’t hold their breath for a next-generation 3DS.

“I wouldn’t expect a complete redesign of the hardware in the near-term,” he said.

In addition to the new pink model, Nintendo 3DS is available in the U.S. in blue, black and red. A white version of the device is sold in Japan, although Fils-Aime noted that Nintendo’s white handheld DS and DSi devices haven’t sold as well in the U.S. as other colors have.

In all, physical sales of both hardware and software totaled $1.08 billion, up from $1.07 billion year over year, according to NPD Group’s monthly U.S. game industry report.

The biggest console performer was the Xbox for the ninth month in a row. It sold 393,000 units, up 21 percent compared to October 2010 — resulting in a 44 percent industry share.

David Dennis, Group Product Manager of Microsoft’s Interactive Entertainment Business, told AllThingsD that sales were driven by blockbuster games that started to launch in September and grew in October.

During the month, six of the top 10 console games were available on the Xbox, including Battlefield 3, Batman, NBA 2K12, Rage, and exclusives including Forza Motorsport 4 and Gears of War 3.

The other hardware platform that performed surprisingly well was Nintendo’s portable 3DS, which clearly has benefited from a steep price drop. After a poor reception in July, Nintendo slashed the price of the 3DS to $169.99 from $249.99.

The 3DS was the second-best-selling hardware platform, and when combined with the older DS model sales, Nintendo sold 25 percent more compared to last October.

In all, it sold 1.65 million units, Nintendo said, to put it on track to surpass the first-year total of the Nintendo DS, which sold 2.37 million in its first 12 months on market.

Nintendo’s home console system, the Wii, didn’t do as well. It sold 250,000 units.

On sale Oct. 16, the game, called Skylanders: Spyro’s Adventure, represents a major deviation from the company’s hugely successful war-based Call of Duty.

The game melds physical toys with videogames by using a “portal,” which is plugged into the console. Once an official Skylanders toy is placed on the portal, the character transports into the game and comes to life on the screen.

The game is similar to one announced recently by Disney that uses miniature toy cars and an iPad. In this case, kids place the physical toy on the iPad’s screen to interact with the game, which is based on the movie “Cars 2.”

Eric Hirshberg, CEO of Activision Publishing, told me in a phone interview that Skylanders has “got a couple real innovative stories to tell.”

Not only does the game enable physical toys to come to life inside of a virtual world, Hirshberg said, it also can be played cross-platform. “The toys travel from console to console and to the Web, and they remember everything that happens to them,” he said.

That means a child’s chosen character will remember what level it has attained and transfer that information from the player’s Nintendo Wii to an Xbox or Sony PlayStation at a friend’s house. Players will also be able to pick up where they left off on Android, iOS, Nintendo’s 3DS and online.

“If you play on your Wii and level up to 10 and then go to the Xbox, those all go with you,” Hirshberg said. “And then, on a road trip, you can log in to the iPhone version and the same thing happens.”

Skylanders: Spyro’s Adventure will have more than 30 different characters.

The plot is about a mysterious world that has been taken over by a sinister Portal Master known as Kaos, who has frozen the Skylanders as toys and banished them to Earth. The players are charged with helping to return these heroes back to their world.

In a release yesterday, Activision said the games would be on display in Toys“R”Us as soon as this weekend, to get the buzz started ahead of the holidays.

Toys“R”Us Chairman and CEO Jerry Storch said, “We believe that the product line will be one of this holiday’s hottest gifts, and we can’t wait to offer customers a one-of-a-kind way to discover Skylanders at our stores.”

A $70 starter pack includes a copy of the game (on PlayStation 3, Xbox or Nintendo Wii), three Skylanders characters, the portal of power, a character poster, trading cards, stickers, Web codes and batteries.

But never fear, better times await. The next four months will generate more than half of the industry’s sales that are made at retail, which could be more than enough to bring things back in line with last year’s performance.

The NPD Group today released its assessment of retail sales in August, which does not take into consideration electronic or other digital channels where games are sold.

NPD analyst Anita Frazier said almost everything related to games — software, hardware and accessories — declined in August, compared to the same month a year earlier. The one exception was portable game sales, which were driven by sales of Nintendo DS and 3DS software.

Price cuts benefited both Nintendo and Sony.

Sony trimmed the price of the five-year-old PlayStation 3 to $250 from a previously recommended price of $300, while Nintendo slashed the price of the struggling 3DS by $80, after the glasses-free 3-D handheld device had been on sale for only four months.

Nintendo said about 185,000 units were sold after the price reduction on Aug. 12, an increase of more than 260 percent during the comparable 19-day time period in July. During the entire month, the company sold 235,000 3DS game devices to outsell the original Nintendo DS, which still managed to sell 165,000 in August.

The PS3 price cut also allowed it to drive a notable uptick in sales year over year.

Xbox continues to maintain its lead over other consoles in the market, selling 308,000 units in August, which means it has outsold any other console maker for 14 of the past 15 months in the U.S.

In August, total U.S. game sales from retail, including all hardware and software, was $669.9 million, falling 23 percent from $873.8 million a year ago. Software sales in the period were hit the hardest, recording a 34 percent drop to $264.8 million from $403.5 million a year earlier.

Frazier attributed the bulk of the decline to Electronic Arts shifting the release of its latest Madden football title from August to September. The game launched on Aug. 30, which falls within NPD’s September 2011 reporting period.

Otherwise, the best-selling game in August was Square Enix’s Deus Ex, followed by EA’s NCAA Football 12 and Activision’s Call of Duty: Black Ops.

Frazier added that the rest of the year could more than make up for the softness seen in 2011.

“Even though year-to-date performance of the new physical portion of the industry is down 5 percent, more than half of industry sales in this channel are still to be realized in the back four months of the year,” she wrote. “Given the strong release schedule in the coming months, new physical retail sales could still be flat to slightly up once full-year sales are tallied.”

In June, the company said at E3 that the new device would be available before the end of the year.

Today, Bloomberg reports that the schedule has changed and that the product will now be introduced in Japan before the end of December, followed by launches in the U.S. and Europe early next year.

Kazuo Hirai, Chairman Howard Stringer’s top lieutenant, who talked to reporters in Tokyo today, also said the company has no plans to lower the price of the device.

The Vita, which represents a major update from the last PSP, will cost $249 for a Wi-Fi version, while the AT&T-connected 3G version will cost $299 (not including data plans). Two months ago, those prices seemed competitive, but since then, Nintendo has slashed the price of its struggling 3DS to $170, down from $250.

Both delays and a higher price point will make it difficult for Sony to compete against similar devices, as well as other multi-purpose consumer electronics, which are increasingly being used as game devices, such as phones, iPods and iPads.

The Vita is expected to stand out because of its brilliant 5-inch touchscreen, as well as other nice hardware features, such as front and rear touch pads and cameras that provide additional game control and augmented reality. Many of the games will also be stored in the cloud, so players can pick up on the PlayStation 3 where they left off on the Vita.

The device will now have a suggested price of $169.99, down from $249.99.

Initially, Nintendo was eager to report how well the game unit would sell, but even after its first month on sale, the older DS continued to outsell the newer device.

Clearly, Nintendo had to offer more incentives to buy it, despite more game releases and a major software update in June.

Since going on sale in the U.S. on March 27, Nintendo says it has sold 830,000 units.

While the device got off to a bumpy start after Nintendo warned viewing 3-D may be bad for some children, it’s more likely the overall game environment that is impacting sales.

Nintendo must compete against the iPod touch, which has access to countless free and 99 cent games. With this price drop, The 3DS now will now cost less than the 8 gigabyte iPod, which runs $229.

Additionally, if 3-D was the draw for consumers, now it is built into a handful of consumer electronics, including the EVO 3D smartphone.

The 3DS also tried to compete against the iPod and smartphones by integrating new features, such as providing a free Netflix application, which allows members to instantly watch TV episodes and movies on the device.

Additionally, starting on Sept. 1, Nintendo will begin giving away some games for free. 3DS Ambassadors will be able to download 10 virtual console games at no charge, games such as Super Mario Bros., Donkey Kong Jr., and The Legend of Zelda. Ambassadors are users who sign into the eShop at least once before midnight on Aug. 11.

The NPD Group reports today that in the first quarter of the year, digital revenues totaled $1.85 billion, coming in just below traditional sales of $2 billion.

The estimates were released today ahead of its monthly report coming out on Thursday, which is expected to show another weak period for traditional physical sales due to a lull in big game releases and the less than stellar demand for Nintendo’s new 3DS handheld, according to MarketWatch.

Unlike the estimates released today, the Thursday report only accounts for sales made at retail for hardware, software, and accessories — and not the digital format content distribution, which is currently seeing the most growth.

Zynga’s IPO may be the biggest example of this trend.

The San Francisco company, known for such games as CityVille on Facebook and Words With Friends on mobile, reported revenues of $235.4 million in the first quarter of this year. None of those revenues would be accounted for in the traditional physical channel because they come primarily from microtransactions inside online games.

“While the new physical retail channel still generates the majority of industry sales, our expanded research coverage allows us to assess the total consumer spend across the growing number of ways to acquire and experience gaming, including mobile apps and downloadable content,” said Anita Frazier, an analyst at the NPD Group.

MarketWatch reports that two analysts expect more declines in June after sales slid 19 percent in May compared to the same month the previous year. Doug Creutz of Cowen & Co. wrote in a note to clients that he believes sales will decline 12 percent; Michael Pachter of Wedbush Securities predicted a drop of six percent.

New game releases for June include Duke Nukem Forever from Take-Two Interactive, which received disappointing reviews.