In recent years, game sales have declined dramatically, with software and hardware making up only half of industry spending, according to NPD Group. The other half now goes toward downloadable content and microtransactions — in other words, digital content for consoles, smartphones and Facebook.

Because of this seismic shift in gamer behavior, many industry veterans are banking on the release of the new PlayStation, and a new Xbox coming later this year from Microsoft, to provide a jolt in traditional game sales.

On Wednesday, Sony is hosting an event in New York, where it is expected to unveil the PlayStation 4, as it has been nicknamed. Sony’s machine is expected to come in time for the holidays, along with the Xbox, although Microsoft declines to comment on its plans.

The good news is, that in the past, new hardware has always led to more software sales; as consumers bought one, they bought more of the other. But after a lackluster launch of the Wii U by Nintendo this holiday season, some wonder if a living-room-driven gaming experience has as much firepower as it once did.

“I feel like consumers are happy, and I’m not sure if there will ever be the right time to release a console again,” said Jerry Holkins, co-founder of Penny Arcade, a company that produces provides commentary on the industry through Web comics. “I think the spend is elsewhere. I don’t think they are waiting for the next generation; they are happy with where they are playing today.”

Electronic Arts’ John Riccitiello is more optimistic about the prospects of the next-generation devices. But then, as one of the industry’s biggest publishers, he has to be. During the company’s last conference call, he said that the December quarter was disappointing, but “that often happens when the consumer carries the expectation of a console transition.”

In January, Nintendo slashed its sales outlook after holiday sales of the Wii U failed to hit expectations. The poor turnout does not provide a lot of support for the theory that consumers were just holding back spending for the release of the new hardware.

The Japanese game company was hoping to rekindle consumer excitement by launching the Wii U with a controller that had a six-inch touchscreen display and acted much like Apple’s iPad. It also enabled consumers to interact with their TVs, by allowing owners to comment on programming within a closed social network. But the console was mostly trying to extend the life of the traditional videogame business, which relies on selling packaged software at $60 apiece.

Again, Riccitiello is hopeful that Nintendo’s performance is not an indication of the other two launches.

“I wouldn’t say that we see much correlation between the results that Nintendo has shown with their console debut of the Wii U, and what we see coming,” he said. “We see a pretty sharp distinction and, unfortunately, I am unable to go any further than that.”

But there’s no way to discount what has happened in the games industry since the last generation of devices launched. Social and mobile platforms have led to the rise of the 99-cent game and the free-to-play business model. Gamers have grown to enjoy playing a game without having to pay a dime. Then, if they want to, they can invest as much as they want.

If Sony or Microsoft are to be successful, adopting new business models may be the key.

There are already some signs of Sony’s willingness to change. According to The Wall Street Journal, Sony will provide a new streaming game service that will allow users to play games delivered over the Internet. The service is designed to use current PlayStation 3 titles on the new console. While cloud gaming hasn’t really taken off on other platforms, the technology does enable other pricing models, like subscriptions.

Another development since the last generation of consoles hit store shelves is how much the definition of a gamer has changed. With the massive popularity of Rovio’s Angry Birds and Zynga’s FarmVille, gamers aren’t just “hard-core” players but also housewives and touchscreen-savvy children.

To be sure, Microsoft has been aggressive in reaching out to a broader audience. Last week, it said that 38 percent of Xbox users are women, and more than 51 percent of owners are people who have kids. Overall, it said non-gaming usage has soared by 57 percent year over year.

Despite interest in other platforms, many also believe that there’s still a time and a place for the highest-fidelity experience possible. The console, with its high computing power, is often the perfect delivery mechanism for a gunshot to the face, or a perfectly depicted battle scenes — a fact that Activision proves year after year with its title Call of Duty, which defies industry trends. This year, for instance, the title under the name of Black Ops 2 crossed $1 billion in sales in just 15 days.

Anil Dharni, an SVP of Gree, has focused on publishing hard-core titles like Crime City for tablets, but still believes that consoles “serve an audience, who wants a high-fidelity experience that mobile devices can’t deliver today.” He thinks the traditional gaming market will decline, “but it’s not going anywhere anytime soon.”

Penny Arcade’s Holkins says he will continue buying consoles even if that makes him look old. “I liked having a console,” he said. “I enjoyed that, and I’ll still do that.”

The Santa Monica, Calif., company said Call of Duty: Black Ops II was the top-selling game in the calendar year across all game consoles, recording $1 billion in sales within its first 15 days on the market — 24 hours faster than its predecessor and two days quicker than “Avatar,” the highest-grossing feature film of all time.

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As most know, the San Francisco gaming company has struggled to find the right balance as consumer behavior has shifted from playing social games on Facebook to playing games on their phones.

In the third quarter, 60 million people played Zynga’s games on a daily basis, up 11 percent from the year-ago period. But those gains were only possible due to mobile offsetting declines on Facebook. The worry of Wall Street investors over the situation is apparent in the price of its stock, now at $2.66, which remains 72 percent below its initial public offering price at the end of 2011.

But Zynga management believes it knows how to turn things around, including expanding beyond its classic Ville-style titles, like FarmVille, to more genres that appeal to a wider audience, including casino and more hardcore titles.

In a story earlier today, I wrote about the three executives that CEO Mark Pincus has appointed to help turn things around. One of them is Steve Chiang, the company’s new president of games.

Here are some highlights from an interview I recently did with Chiang:

Tell me a little bit about your background.

Chiang: I got into computers early, when I was six or seven, and I was really into videogames and playing games on my computer. And then I got into programming. First, I got into the industry when I graduated from school as a programmer, by creating games for Super Nintendo. That’s when making a game included one programmer and two artists, or two programmers and five artists, so they were really small teams, so you really had to know all aspects of game development.

And then, in 1994, myself and some guys I went to high school with, and John Schappert, started Tiburon. We started making Super Nintendo games, and then we started working on Madden when the contract came up after the other company didn’t ship the game on time. It was the best-selling game on PlayStation that year, which led to the acquisition by [Electronic Arts].

I stopped programming in 1998 or 1999. When I left EA, I was overseeing all sports development for Peter Moore, who was heading up the sports label, and I headed up development across Vancouver and Orlando.

What was the attraction to Zynga?

Chiang: In 2009, when I was thinking of joining Zynga, we had FIFA Ultimate Team, which was a card-based microtransaction mode. It was a $10 mode you paid for, and then you had $1.50 card packs. We quickly saw the microtransaction part of it surpass the $10 for the mode. So you reduce the $10 to free to reduce the friction.

Microtransactions and free-to-play seemed like the future, for sure. The second aspect was time. Having an hour to sit down and play a game is not easy to come by when you have a family, so, as a person who loves games, the idea of playing games for five to 10 minutes with friends was really appealing. I saw myself reconnecting with people from high school, and I saw my parents playing with my kids. The only game my ex-wife will play is Words With Friends, except for SingStar, a karaoke game on PlayStation.

When you are creating a place where women, children and older parents are all playing, it’s an incredible feeling and experience. It’s like the first time I saw “Star Wars” in the movie theatre — that’s what we are creating for people. That’s what we are trying to create on a day-in and day-out basis.

I’ve spoken to people before about the initial draw of Zynga being that so many people end up playing your game, unlike a console title that has a limited audience.

Chiang: Absolutely, in entertainment, you want to make hits. When you are working on sports games year after year, it’s not super appealing. But the idea you get to work on a game played by millions of people? That’s great.

I mean, I always tell people, you spend the same amount of time on a game that gets canceled as one that is seen by millions of people.

Do you believe the definition of a social game is changing?

I do. It’s a moniker, like casual gaming. We label stuff, but essentially the business model is free-to-play, and gaming has always been social. I look at us as doing free-to-play games on multiplatform.

For a while, social equaled Facebook.

Yeah, that’s how I interpreted it, as well. But when you look at Words With Friends, that’s what a social game looks like, where you are interacting with a friend on a daily basis.

Zynga and Facebook just changed their contract language, which is less restrictive and will free you up to do more things, right?

Chiang: I think Facebook is a really valuable partner. We struck a new agreement, which enhances our partnership in some ways, and allows you to invest more in our platform and mobile.

Everyone talks about gaming as a hits-driven business. Is it possible to sustain that over the long term?

Chiang: I think we’ve seen companies like EA and Activision be able to sustain [that]. There’s aways peaks and valleys.

With social, it’s more about gaming as a service — it’s a TV model, if you will. We continue to put out new content every week, and on Facebook every single day. That keeps our players engaged. There’s games like Poker that have been around forever. There are certainly franchises. It’s not that different from a Call of Duty or a Madden Football, which has been going on for 15 years now. We have some of the same characteristics in Poker and Words With Friends.

Tell me about the story arc for Zynga’s Villes. How come some are not as successful as the ones in the past?

What we’ve seen is a few different things. We are seeing consumer tastes changing, and there’s a player movement toward mobile gaming. If you look at just a single platform, you’ll see a peak or a leveling-off of gaming on Facebook. But we are seeing growth on mobile. As we go multiplatform, we may have peaks and valleys on a single platform, but we’ll see overall growth.

That seems to be a platform issue, but is there something about Villes in particular that is no longer popular?

Chiang: When I look at FarmVille 2, it’s reengaging a lot of players, and is off to a great start. There’s an aspect of something new, and so players are saying, “Let’s try that.”

A game like Pokemon peaked at a $1 billion business, but over time, it’s still a big business and it has sustained. Traditionally, you’ll see a massive pop and then it will sustain. It’s a great business, and when we put out great content like FarmVille 2, our players respond and they engage.

Let’s go back to the cross-platform approach. Zynga is going after both Facebook and mobile, and has restructured its leadership team around that. How has your job changed?

Chiang: I took over all of the games business, so I have every game on mobile and Web, and just recently I reorganized around our players and genres.

We have some great leaders, and some of the most experienced in social gaming in the western world. We are going to run our “Invest and Express,” which are our Ville games. We have a new group in PVP (player versus player), which is focused on men 18 to 34.

Then we have our casino group, which is poker and male-skewing, and we have slots and bingo, which is focused on women. And then we have our mobile casual group, which is focused around some of our big franchises, like Draw Something and Words With Friends.

Some critics say that Zynga’s games are not fun. What do you say to that?

Chiang: I think when you look at a game like FarmVille 2 or Elite Slots, we are driving new innovation, and we are continuing to push innovation. At the same time, if we change too much, players complain. We saw it in sports games, and you see it in social gaming, you want a consistent feel and familiarity. You don’t want to redo everything.

Zynga is such a data-driven company, I’m curious what metrics do you look at every day, and which ones are most important?

Chiang: We look at the net promoter score, where we ask players to rate the game from one to 10. A nine to 10 is a promoter, and below a six is a detractor. We certainly look at overall how many people are playing and what our retention is, especially after launch, to check out retention after seven days to see which way it’s headed.

Why didn’t The Ville do well? Zynga announced it was cutting back on it as soon as it went live.

Chiang: I think with The Ville, the team made a great effort. But we did not deliver.

Our players didn’t respond to it as we would have expected. We hit a high DAU (daily active user), but they did not retain as well as some of our other games. We looked at all of that, and applied that to our future games. When you are going for hits, we’ll also have some failures.

Do you have a mantra, or a way to rally the troops right now that makes everyone believe you can create another hit? Something to inspire them? How do you manage the turnaround process?

For us, it’s about focus and getting back to basics. Our team across the board has delivered hits. We’ve had a number of great game makers who have been tied up with games, and now they are focused on new projects. We are reducing the number of games we are making, and focusing on a fewer with the highest potential in Invest and Express, player versus player and casino.

With many departures over the past few months, does Zynga still have the talent to make good games?

Chiang: Absolutely. We had a lot of people joining before the IPO, and some of those folks have opted out, but the bench is still really deep. We are also still attracting a lot of folks. Social is not for everyone, so some people came here to try something, but the future is really bright. We have a strong network of players on Facebook and mobile, and a number of great games in the pipeline that should be — and we’ll see how they do — but are going to be really fun and social.

Is there a message that you’d like to get out to people on Zynga’s game creation? Do you think there is an impression people have that you’d like to correct?

Chiang: I never thought about that. I firmly believe that we have a huge bright future and have the best position for talent, and in terms of our network and in terms of mobile and Facebook players to drive the biggest and best entertainment in the world. We are well-positioned that way, and hopefully you’ll see things in the future that will surprise and delight a lot of people.

That beats box office releases this year like “Harry Potter and the Deathly Hallows: Part 2” and the “The Avengers” — based on day-one sales in the U.S.

It has been five years since the release of the wildly popular Halo 3 and 11 since the first Halo game exploded on the scene. Microsoft says that, in all, the franchise has now generated more than $3.38 billion, making it “one of the most popular entertainment franchises in the world.” Halo 4, which is sold exclusively on Microsoft’s Xbox, went on sale last week for $60.

Another videogame that can claim blockbuster status is Activision’s Call of Duty franchise. Its latest release, Black Ops II, comes out tomorrow and is shaping up to be “the biggest Call of Duty game ever.” Its last release, Modern Warfare 3, surpassed $1 billion in sales faster than the blockbuster movie “Avatar.” The game, of course, runs across all three of the major consoles, giving it substantially greater reach.

Metacritic, which aggregates videogame reviews from various game publications, gave Microsoft’s Halo an impressively high score of 91 based on 37 reviews. Metacritic has not yet rated the new Call of Duty.

Based on the first 24 hours of sales, Microsoft says Halo 4 is on track to reach $300 million in global sales during week one, making it the biggest Halo launch in history. It also said the game shattered the record for the largest number of players in history, with more than four million players in the first five days. Users spent a total of 31.4 million hours playing Halo 4, pushing the total number of gameplay hours across the franchise past the five billion mark.

The results easily beat the Santa Monica company’s outlook, which was hoping to achieve six cents a share on revenue of $740 million. The results also beat analyst expectations, which are better to compare against the company’s non-GAAP earnings. Based on those calculations, which exclude some results, Activision reported 15 cents per share in profit on revenue of $751 million. That literally blows away analyst expectations, which were projecting eight cents per share in profit on revenue of $708 million.

The company’s forecasts are typically conservative, but in the release, CEO Bobby Kotick attributed the strong results to subscription sales of Blizzard’s World of Warcraft: Mists of Pandaria, Diablo II; Skylanders Spryro’s Adventure; and sales for its Call of Duty franchise.

Thanks to today’s strong performance, the company is raising its full-year guidance for the third time in 2012. The new revision calls for GAAP earnings of 88 cents a share on revenue of $4.57 billion. Previously, it was expecting a profit of 69 cents a share on revenue of $4.3 billion.

Kotick still cautioned investors about next year, warning that it continues to be a challenging global economy and that it will be extremely hard to beat this year’s performance given record-shattering sales of Diablo III. “We expect that over the long-term, we will maintain our leadership position as the world’s leading interactive entertainment company and continue to provide strong returns to our shareholders by delivering great games to audiences around the world,” he said.

And generally it does this without the help of celebrities. But here’s one exception: The videogame’s trailer, which started appearing tonight during Monday Night Football, features cameo appearances from Robert Downey Jr. and French comedian Omar Sy. In the 60-second clip, titled “Surprise,” the actors appear as though they are playing in the game. Of course, the emphasis of Call of Duty is on blowing people to smithereens, but the lines are pretty funny. Downey, for instance, says with Iron-Man-like delivery: “Guess who brought a jet to a gunfight?”

The grenade-packing, bomb-dropping action was directed by Guy Ritchie (a.k.a. Madonna’s ex-husband). Can’t get more mainstream than that, right? That’s exactly what Activision is hoping for, since it wants to deliver another megahit for investors. Call of Duty: Black Ops II costs $60, and will come out Nov. 13. You can watch the entertaining trailer now, for free:

Many game makers are preparing for an opportunity to create edgier games as players begin to move upstream after cutting their teeth on simple mechanics, like slingshots.

To that end, a new crop of companies are forming to bring some of the classic first-person or role-playing elements found in console games to the phone and tablet market. The trend is not just happening on mobile, but Facebook, too, where new players were first introduced to gaming with farm-like mechanics, but now want something more.

SkyVu, which is announcing today that it has raised a first round of funding, is just one of those companies going after the so-called mid-core market.

The company’s games tend to attract a smaller user base, so they don’t reach the top of the charts and are not as well known, and being based in Omaha, Neb., has kept it off the radar of Silicon Valley. But SkyVu has been true to its target.

“We were one of the first to make mid-core action games on iOS. We stuck to our guns — no pun intended — and it has gone well for us,” said Ben Vu, the company’s co-founder, who was an animator for the movie ”Coraline.”

“We do not compete with Angry Birds,” Vu added.

For instance, one of its games, Battle Bears Royale, is a cross between Activision’s Call of Duty and the Teenage Mutant Ninja Turtles. In the game, bears slice off heads and shoot guns, but there’s never any blood. Instead, the funny action shooter — targeting boys age 9-15 — relies on rainbows and other wacky elements to entertain. To add to the Ninja Turtle vibe, the bears talk a bit like California surfers. In the words of Michelangelo, “Cowabunga, dude!”

Terms of the round were not disclosed, but investors include Lightbank, which is known for its investment in Groupon; Nextview Ventures; Great Oaks Venture Capital; Michael Chang, former CEO of Greystripe; and the Nebraska Angels. Vu noted that the company was profitable before it received today’s investment.

Battle Bears is a free-to-play game that is monetized through in-app purchases. So far, the company’s games have been downloaded 18 million times. That’s far fewer than Angry Birds, but because they draw in a more dedicated audience, Lightbank’s Paul Lee said, they still monetize well because the average user spends about three times more money than in other games.

According to AppData, which tracks the performance of apps across both Facebook and iOS, Battle Bear Royale’s top three in-app purchases were a small gas can ($2.99), a medium gas can ($9.99) and a gas tanker ($19.99). The game, which has more than 4,000 reviews and a rating of 4.5 stars, is currently the 329th top grossing iPad app in the U.S.

Higher engagement and better monetization are just two traits of a mid-core game, which may not attract as many players but can end up doing just as well or better as tamer titles.

The round of funding will be used to help launch the company’s two upcoming games and to open an office in the San Francisco area. The company, which has 22 employees, also has plans to extend the brand beyond games to merchandise, such as plush toys and T-shirts, and film and television deals. Updates will be announced soon on both of those fronts.

“These guys have done a good job of creating a cult brand,” said Lee, who reviewed 80 to 100 games before deciding to make SkyVu Lightbank’s first game investment. “This is like Rockstar Games (the maker of Grand Theft Auto) crossed with Angry Birds. We really like that.”

The company  recorded a profit of 20 cents a share on revenues of $1.05 billion, easily beating analyst expectations of a profit of 12 cents a share on revenues of $834.8 million, according to First Call.

But when you factor in official accounting methods, Activision’s results are down compared to the year-ago period.

In the second quarter, the company recorded a GAAP profit of 16 cents a share, down from 29 cents a share, and revenue of $1.08 billion, down from $1.15 billion.

That may be why the company’s stock is trading down 5.2 percent in after-hours trading, to $11.16 a share.

Still, Activision Blizzard remains one of the brighter spots in the videogame industry.

This week, Take-Two Interactive disappointed analysts with a wider than expected loss, and last week, Zynga shocked investors after wildly missing expectations. On Tuesday, Electronic Arts’ results were in line with expectations, although some areas showed signs of weakness.

Some of Activision’s highlights from the quarter include digital revenues of $343 million, representing 32 percent of the company’s GAAP revenues.

The company also had three of the top best-selling games in North America and Europe. They are Skylanders Spyro’s Adventures, Call of Duty: Modern Warfare 3 and Blizzard Entertainment’s Diablo III.

Because Activision was able to report such strong results in the second quarter, it is revising its full-year guidance for the second time. The company said it is now expecting non-GAAP revenues of $4.53 billion and non-GAAP earnings per share of 99 cents. In the second quarter, the company is forecasting earnings of 7 cents a share on revenues of $690 million.

The Santa Monica, Calif., company is responding to the peculiarities of the fast-growing Chinese market, where game consoles barely have a presence and people typically gather in PC-laden Internet cafes to play free games that are supported by sales of virtual goods.

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Now the videogame maker is gunning for much smaller screens, including smartphones and tablets.

In an interview with All Things D, Activision Blizzard’s VP of Mobile Greg Canessa said to expect several mobile announcements as it invests more heavily in the space.

For starters, the Santa Monica, Calif., company is announcing today that it is creating a publishing arm that will bring third-party mobile games to market. Through the program, it will assist independent game makers with funding, development, distribution and promotion of their titles across both iPhone and iOS.

As part of the deal, developers will get the benefit of publishing their game under the Activision brand, while continuing to own the game’s intellectual property.

The shift to digital has been hard for many game companies to swallow, as it typically means shifting away from selling $60 games at retail to giving away free games that are monetized through advertising and virtual goods.

As part of today’s announcement, Activision said it is partnering with Flurry, a mobile analytics and advertising platform that works closely with thousands of mobile developers to help with this transition. Flurry will provide tools to Activision’s developers to help understand mobile development and distribution, while Activision will lend its expertise in making great videogames.

“Flurry can scout and find those indie developers that we should partner with,” Canessa said.

Flurry President and CEO Simon Khalaf said his company also will be able to help promote Activision’s first- or third-party titles, by cross-promoting the apps in its advertising platform, which reaches more than 250 million consumers a day.

To date, Activision has developed some of its own game titles for mobile, including Crash Bandicoot Nitro Cart 2; Call of Duty: Black Ops Zombies, which is a rendition of the console version of the game; and Skylanders Cloud Patrol. The games cost, respectively, $6.99, $2.99 and 99 cents on the iPhone.

In the future, Canessa said Activision will experiment with releasing games for free, to be monetized through advertising and virtual goods.

There are a number of reasons why Activision decided that now was the right time to invest in mobile, Canessa said, including increased smartphone and tablet penetration and the capability of the devices.

“It made a company like us, that’s focused on mid-core and hardcore gaming, take a second look at the platform,” he said. “Two or three years ago, you couldn’t envision a world where you could put mid- or hardcore games on mobile.”

To date, Activision hasn’t talked about the importance of mobile very much, but it may not really be late to the game, after all.

Last week, Activision’s close competitor Electronic Arts said that a majority of its mobile game titles will become free by the end of the year, representing a shift away from the premium games market. Unlike Activision, Electronic Arts has been one of the largest mobile games developers on both Android and iOS, but it also represents one of the biggest holdouts when it comes to shifting to free.

At the Microsoft Xbox press event at E3 today, the software maker said all new, downloadable expansion content from Activision’s Call of Duty: Black Ops 2 will launch exclusively on Microsoft’s Xbox 360 to start.

Xbox 360 is already listed as a console partner on the game’s official Web site, alongside Sony’s PlayStation 3, and the game will be playable on the PC, as well. But Xbox owners will get an early jump on the extra game content.

Call of Duty: Black Ops 2 is the next and highly-anticipated installment in the record-breaking franchise. It was first announced on May 1 of this year; the game’s official Web site says the game will be released on November 13, 2012.

One thing that sets this version of the popular first-person shooter game apart from its earlier software counterparts: This one is set in the future, around a 21st Century Cold War, while the others have focused on historical battles and wars.

The franchise has been a bright spot in the softening hardcore game industry. Late last year, Call of Duty: Modern Warfare, surpassed $1 billion in sales in just two weeks and two days.

Call of Duty: Black Ops 2 will cost $60, and is available for preorder now.

Over the past 12 months, the gaming giant’s stock has been cut in half, falling to $13.12 a share, down from a high of $26.13. At those levels, its market cap has shrunk to $4.2 billion, making the company potentially tasty acquisition bait for larger fish.

That valuation puts it slightly below its key digital competitor, Zynga, which continues to dominate the Facebook platform in spite of several failed attempts by EA to topple it.

EA has also lost a number of high-level executives to Zynga. And its big releases of Battlefield 3 and Star Wars: The Old Republic have struggled against rival Activision’s comparable titles, Call of Duty and Diablo 3.

Still, in an interview with Riccitiello this week ahead of gaming’s biggest annual gathering — E3, kicking off tomorrow in Los Angeles — he was sounding like it’s all high scores for EA.

“We are in a spectacular position. The stock is oversold, but they [investors] are waiting for a catalyst,” he said. “They don’t know what it is yet; maybe it’s the next mobile hit or social hit? But it will probably be E3. We will make their eyeballs peel.”

What that unusual image means exactly is unclear, but one assumes he hopes to impress at least some of the 45,000 attendees converging on Los Angeles Convention Center like zombies staggering toward fresh brains.

Once there, they will be overstimulated by ear-splitting music booming from a space — dotted with massive booths — about the size of eight football fields.

But for EA and the other companies showing off their wares, it’s an ever dicier situation. That’s because the show continues to celebrate blockbuster console hits over clear consumer trends focused on an increasing number of devices and platforms, as one-time purchases of $60 games are giving way to free-to-play models that make a few pennies per user every month.

In fact, about 90 percent of EA’s business used to come from the console arena, and now it’s closer to 60 percent. In the fiscal year 2012, EA generated $1.2 billion in digital revenues, representing a 47 percent increase year over year.

But in the build-up to E3, Riccitiello contended that, like so many other cycles in the past, the industry will get out of this lull too, and he’s pinning his hopes on new console hardware coming out from Sony, Nintendo and Microsoft this holiday season.

“I’m not saying Moses will part the water for us, but it will damn near be close when the consoles come out,” he said. “For the past few years, we’ve had a challenging console environment, but we are about to enter an era of double tailwinds.”

We’ll see about that, but here are highlights from my interview with Riccitiello:

On the next generation of consoles:

Each generation has built a software business that is 50 percent bigger than the one before, and that was entirely made up of a packaged goods business.

I don’t think console and packaged goods are synonymous, like how music and CDs aren’t synonymous. The delivery system has changed from a disc to a more digital model. It’s shifted to a service, like iTunes and Spotify.

Consoles are super-powered PCs that are connected to the biggest screen in the house. There’s no doubt in the mind that the TV set is going to remain as the principle display device for entertainment going forward.

On EA pulling off the transition from packaged goods to digital:

At some point they [investors] are going to have to wake up. When you are on the podium at the end of the Olympics, you obviously know how to swim. But they are still saying that we need water wings. I get it, I understand the cynicism that prevails.

On the worth of EA’s $400 million acquisition of Playfish, the social games developer, in late 2009:

If you read our fillings, you would see that they earned a significant portion of their earnout, so they must have done something right. If you go to E3, you will see a major introduction that will usher in a long train of products, which was only made possible by Playfish investment.

We are three years out from [realizing the full value of the deal], but the vision we have — and the direction we are going — has been made possible by a platform and culture and technology shift. And a gigantic part of that had to do with an infusion of Playfish’s DNA.

On shifting to an always-on model versus shipping software:

We used to peak on usage a week after we shipped. But all of our games have an ongoing business now, and Playfish was the model for all of that.

On the Sims Social on Facebook not knocking Zynga off the top of the charts as had been expected:

Maybe I wish the Sims Social had sustained longer, but relative to the impact it [Playfish] has made on our company, I can’t say enough about it.

On executive departures — such as Barry Cottle, the EVP of EA’s interactive division, and its COO John Schappert — to Zynga:

It says that people pay are willing to pay a lot of money for EA talent, but we had lower attrition than Google last year. … There were a notable number of high-profile executives who left for 300-600 percent more money. … Even at depressed stock prices, they got $12-$13 million to show up on day one. I take it as a compliment that someone is willing to spend $20 to $40 million dollars on my employees. Those are staggering sums.

On getting that talent back:

I just guided 30 percent income growth, which is better than any of my competition, and delivered a great fiscal 2012 with 40 percent growth on digital. I don’t think my team is missing a beat. Would I want them back? Not now, but I do understand it from a money perspective. I get it.

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Now there’s some additional information on timing, thanks to a lawsuit between Activision and some former employees.

According to confidential agreements unsealed in the court case, Microsoft’s next game console, which is referred to as the “Xbox 720,” could be released in time for the 2013 holiday season.

The Los Angeles Times originally posted the documents on Monday, but it was Brier Dudley of the Seattle Times who came up with the theory on the timing.

The lawsuit is a complicated tale, involving Activision’s insanely successful first-person shooter Call of Duty. Former Activision developers are claiming they are owed hundreds of millions of dollars in royalties and bonus payments. Activision is claiming breach of contract.

The documents, revealed last week, detail a high-profile deal between Bungie and Activision in 2010.

The 27-page agreement calls for Bungie to develop four “sci-fantasy, action shooter games,” code-named “Destiny,” released every other year, beginning in the fall of 2013, according to the Los Angeles Times. Additionally, Bungie agreed to put out four downloadable expansion packs code-named “Comet.”

Bungie is the developer behind the successful Halo franchise, but is not the developer behind Halo 4, which Microsoft is developing and releasing in November.

Here’s what Dudley is suggesting based on the contract language:

Microsoft hasn’t said when the next version of the Xbox will go on sale, but the Bungie contract suggests that it could happen in the 2013 holiday season, with “Destiny” as a key launch title. That would be similar to the way Halo was a cornerstone of the first Xbox launch in November 2001.

An Xbox spokesman declined to comment on this theory, and referred questions to Activision and Bungie.

The document also says the game is expected to be released for the PlayStation 3 successor in the fall of 2014.

The big caveat to all of this guesswork is that the document is now two years old, so timing could easily change. Additionally, the name “Xbox 720″ could just be a code name or placeholder. Of course, console makers keep the timing of their upcoming hardware close to their vests, so that consumers don’t hold off on making purchases.

In March, Microsoft’s Corporate Communications boss Frank Shaw told AllThingsD that consumers probably shouldn’t expect new hardware at the E3 game conference, or “anytime soon.”

“For us, 2012 is all about Xbox 360,” he added.

The Redmond, Wash.-based company said today that for the first time, Xbox Live users are now watching more movies and TV and listening to music than gamers are using it to play online games.

The recent shift is worth noting given the mind-boggling number of hours gamers are willing to spend online destroying opponents on the battlefield or football field.

Microsoft declined to break down the number of hours spent, but as an example, 3.3 million players logged seven million hours on Xbox Live on the first day alone that Activision’s Call of Duty was available back in November.

What’s more, the growth of entertainment is not at the expense of gaming. Online gaming on the Xbox is up over the past year, too. In fact, Xbox Live usage — spanning gaming and entertainment — is up 30 percent year-over-year.

The shift toward entertainment is not completely unexpected, since Microsoft has been investing heavily in turning the console into a more general entertainment device for the living room. Sony’s PlayStation has a similar emphasis and Nintendo’s upcoming console, the Wii U, is expected to support entertainment applications.

In December, Microsoft rolled out a massive software update to the Xbox that allowed users to control the console using the Kinect. As part of the update, it also began to add more than 40 content providers to the console to increase the catalog of live and streamed TV, movies and music.

As previously announced, Xbox today launched voice-controlled TV apps from Comcast and HBO Go in the U.S., and MLB.TV throughout North America. To access these apps, you must be a subscriber, meaning it is not meant as a cable subscription substitute.

Despite some industry gains from January to February, overall sales totaled $1.06 million last month, down from $1.33 billion year over year; software sales fell 23 percent to $464 million, and hardware sales dropped 18 percent to $381.4 million.

February’s best-selling software title was Call of Duty: Modern Warfare 3, from Activision Blizzard.

While most hardware platforms posted declines year over year, “all current-generation platforms improved sales over January 2012 by more than 50 percent,” NPD said in a note.

A consistent bright spot has been the Microsoft Xbox, which was the best-selling hardware platform for the seventh month in a row. Some 426,000 Xbox units were sold in February, marking the 12th consecutive month Xbox has held more than 40 percent of the current-generation console market share.

And all eyes were on the Sony PlayStation Vita handheld gaming device, which came to market in late February. Only four days of retail sales for the PS Vita were included in this reporting period, but the device gave overall hardware unit sales a month-over-month boost. Not including the PS Vita, hardware unit sales increased by 62 percent over January, NPD said; with PS Vita sales included, the increase was 87 percent.

“More than 1.2 million PS Vita units have been sold globally since launch,” Patrick Seybold, senior director of communications at Sony Computer Entertainment America, said in a statement. “Customer satisfaction rates are very high and momentum will continue as gamers get their hands on a deep lineup of blockbuster titles that take advantage of PS Vita’s unique features, including cross-platform play with the PlayStation 3.”

In January, the videogame industry saw a double-digit decline in physical software sales, as my colleague Tricia Duryee reports, following a number of noteworthy game launches ahead of the holiday season.

But he said Skylanders: Spyro’s Adventure, which attempts to bring physical toys to life through videogames, has been worth it.

“It was scary,” he said. “But if you truly have a breakthrough idea, then you have to have the confidence to treat it as one because they don’t come around very often.”

To be sure, the game was a major deviation from the company’s war-based roots.

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

In 2011, the game was the tenth-best seller after launching in October, and was the only title to make the list that wasn’t a sequel. Additionally, it was the only kids game.

Hirshberg appeared this morning as the keynote speaker at DICE, an annual videogame summit held in Las Vegas.

His speech, titled “The Eric Hirshberg Experiment,” addressed how he has a nontraditional background as a CEO, but that Activision Blizzard’s CEO Bobby Kotick saw the usefulness of his creative background. Rather than being a trained operations or finance manager, Hirshberg is a marketing type who is more likely found drawing and bringing a sketch pad to meetings.

“There are other creative CEOs, but they generally founded the companies, like Bill Gates or Steve Jobs,” he said. “But if creativity is at the core of your business, maybe it should be at the core of how they make decisions.”

Skylanders is just one case in point.

To make it the best experience possible, Hirshberg said they delayed the game’s launch by a year and spent the time getting the toys right, so they could compete side by side with characters developed by Pixar or Disney.

They also spent time making sure the game could work across platforms, so kids could play it at any of their friends’ houses regardless if they had a PC, Xbox, Sony PlayStation or Nintendo Wii.

As a result, every decision resulted in taking on more risk and spending more money.

Last night, Skylanders was voted as the most outstanding innovation in gaming as part of the 15th Annual Interactive Achievement Awards, which are decided on by members of the Academy of Interactive Arts & Sciences.

“We knew a lot of things had to go right — the core to that was bringing the toys to life. We knew that was magical, and if we got it right, it would have huge potential,” Hirshberg said. “We had the whole package. We had a great game and a great story and then pushed with all of our might with a big marketing plan.”

Yesterday, Activision reported fourth-quarter results, reporting well above its internal guidance and Wall Street analyst expectations, driven by extremely strong sales of Call of Duty, but also strong sales of Skylanders as well as, plus stable subscriber figures of its online game, World of Warcraft.

Additionally, the NPD Group said yesterday that the Skylanders toys were a top-selling accessory in January. It said that the toys were the highest-ranking item last month, and that collectively, Skylanders accessories represented 22 percent of all accessory sales.

For sure, Hirshberg has early successes to point to, but the experiment is ongoing.

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

But it also warned that Tom Clancy’s Ghost Recon Future Soldier, one of the Paris-based company’s big franchise hits, would be delayed by three months, or until its fiscal first quarter of 2012-13.

The game is expected to launch in North America on May 22, and in Europe on May 24, for the Xbox 360 and the PlayStation 3.

Ubisoft said it was expecting third-quarter sales of 650 million euros ($828 million), up 8 percent over the same period a year earlier. That exceeds its previous guidance of 620 million euros ($790 million), which was at the high end of its range.

Two of the games that Ubisoft said performed well during the holidays were Just Dance and Assassin’s Creed: Revelations. The latter faced steep competition from both Activision’s Call of Duty and Electronic Arts’ Battlefield 3. Ubisoft also said it continues to see growth from online sales, which would include social games.

“In continuation of the robust trends recorded for the first half of the fiscal year, Ubisoft reported record-high sales for the Christmas period, exceeding expectations,” said CEO Yves Guillemot, in a release.

Due to its strong third-quarter performance, Ubisoft said it was revising its full-year guidance to 1.08 billion euros ($1.4 billion) on the high end. Operating income before some expenses is estimated to be up to 65 million euros ($82 million), up from the previous estimate of up to 60 million euros ($76.5 million).

Final third-quarter results will be published on Feb. 15.

Wedbush Securities analyst Michael Pachter maintained his neutral rating on the stock, and his 7 euro price target, based on the unclear release schedule and recurring delays.

Ubisoft, which trades on the Paris stock exchange, is currently trading at 5.23 euro.

That designation comes from Web video tracker Visible Measures, which says the official upload from Apple, plus unofficial uploads and derivative clips (parodies, “responses,” etc.), generated 28 million views this year.

Runners-up for the “most viral” title, according to Visible Measures: Ads featuring Lady Gaga, the International Space Station, PlayStation 3 and YouTube gaming god Freddie W. (One of these things …)

It’s worth noting that Visible Measures’ methodology and classifications for this one are a bit particular. For instance, it includes ads for videogame platforms, but not the games themselves. There’s some logic to that, because while videogames have many, many more views, the bulk of them come from “game play” videos that players upload themselves.

Which is fine, but that also means that straight-up ads like Jonah Hill’s Call of Duty spot don’t make the list. And that one has racked up  a minimum of 17.7 million views this fall.

But at the very least we can say that these are five very, very popular Web videos from the past year.

Google Chrome’s “The Web is What You Make of It” Campaign: 22 million views

YouTube/Spacelab: 17 million views

Sony PS3 “Michael/Long Live Play” ad: 15.8 million views

YouTube star Freddie W’s Samsung “Gamer Commute” ad: 11.5 million views

The game, which was released today, is expected to be the videogame publisher’s top-selling title this year, even though it faces steep competition from Electronic Arts’ Battlefield 3 title.

The company also said today that other franchises, including a brand new game called Skylanders, enjoyed unexpectedly high adoption from users.

“Based on our third-quarter performance, stronger than expected consumer response to our new entertainment property, Skylanders: Spyro’s Adventures, and Call of Duty: Modern Warfare 3, we are raising our full-year financial outlook and expect once again to deliver record operating margins and the highest earnings per share in our company’s history,” said Activision’s CEO Robert Kotick, in a release.

Skylanders uses small miniature toys that come to life in the videogame across multiple platforms.

In the third quarter, the company reported Q3 revenues of $754 million, up from $745 million, and a profit of $148 million, or 13 cents a share, up from $51 million, or 4 cents a share in the year-ago period. On an adjusted basis, the company recorded a profit of 7 cents a share.

Results easily beat analyst expectations, who were expecting, on average, adjusted earnings of two cents a share on revenue of $564.8 million, according to a poll by FactSet.

The company was previously expecting revenues of $4.18 billion, or 68 cents a share. It has now upped those estimates to $4.33 billion, or 76 cents a share.

During regular trading today, shares of Activision Blizzard at one point rose nearly 3 percent to $14.11, which put the stock to a new three-year high. The stock ended up closing up 1.38 percent, but in after-hours trading the stock continued to jump, increasing more than 4 percent to $14.55.

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.

During the quarter, revenues from digital channels increased 27 percent year over year and accounted for 37 percent of the company’s total net revenues.

Strong digital revenues also contributed to record profits.

Activision reported record earnings per share of 29 cents as compared with 17 cents in the second quarter 2010. Revenues were also up, totaling a new record of $1.1 billion compared to $967 million in the year-ago period.

In a release, Robert Kotick, Activision’s CEO said, “Today, there are more ways than ever for players to access entertainment online and play games which have truly become one of the most compelling forms of entertainment in the world.”

A majority of the company’s digital revenues come from subscriptions, downloadable content and full-digital downloads.

On a non-GAAP basis, the company reported diluted earnings per share of 10 cents on revenues of $699 million. This exceeded the analyst consensus of 5 cents a share on revenues of $599 million.

Activision is also raising its outlook for revenue and earnings per share for calendar year 2011.

It is now expecting non-GAAP revenues of $4.05 billion and 77 cents a share for the year, up from previous expectations of non-GAAP revenues of $3.95 billion and 73 cents a share.

The company’s stock is trading up in after-hours duty by about 3.64 percent or 43 cents to $12.25 a share.

Put on a pair of 3-D glasses, listen to the bombs exploding in the distance, or stand in line for hours to get a glimpse of Call of Duty Modern Warfare 3.

Traditionally, the event has been all about videogame makers outdoing one another to ensure shelf space at the major retailers, like Target, Wal-Mart and GameStop. But increasingly the conversation is also about something that takes up absolutely no space at all: digital games.

Maybe to the surprise of many of the 45,000 people in attendance this week at E3, it’s the intangible stuff that’s driving much of the industry’s future.

The Entertainment Software Association, which organized the 17th annual event, released results of a study saying that the format and demographic make-up of gaming are changing.

It said that purchases of digital full games, digital add-on content, mobile apps, subscriptions and social network gaming accounted for 24 percent of game sales in 2010, generating $5.9 billion in revenue.

Other findings:

• The average game player is 37 years old, while the average game purchaser is 41 years old;
• Sixty-five percent of gamers play games with other gamers in person;
• Fifty-five percent of gamers play games on their phones or handheld devices;
• Consumers spent $25.1 billion on game content, hardware and accessories in 2010.
• Forty-two percent of gamers are women, and women 18 or older make up more than one-third of gamers.

More From E3

• At E3, Xbox Lets Kinect Lead the Charge on Gaming, Live TV Ambitions
• Justin.tv Broadcasts Gamers’ Every Move on TwitchTV
• Who Needs War? Sparks Will Fly in EA’s New Sims Game for Facebook.
• Sony Unveils Vita Gaming Device at E3; Will Launch This Year for $249
• E3: Nintendo Unveils the Wii U With Tablet-Style Controller
• Three Key Takeaways From Nintendo’s Wii U (Plus Photos!)
• No Hacks to Report at Xbox, But Microsoft Isn’t Letting Its Guard Down
• Forget About 99 Cents, What If You Could Rent Mobile Games for 25 Cents?
• Digital Game Revenues Hit $5.9 Billion in 2010

One of the most anticipated launches of the year is EA’s Battlefield 3, which is expected to go head to head with the seemingly unstoppable Call of Duty franchise.

But at the company’s eardrum-splitting press conference in downtown Los Angeles, it also showed off The Sims, which is reflective of a wider trend in the industry to embrace other platforms.

In addition to Battlefield 3 and The Sims, EA screened the latest Mass Effect 3, the upcoming Need for Speed (including foot races for the first time!), and, of course, Star Wars, its highly anticipated massive online multi-player game.

For Xbox this morning, a wider audience meant announcing a ton of Kinect titles, and for EA this afternoon, it meant announcing the release of its very popular Sims franchise on Facebook.

Sims Social is building off a brand that’s played by 140 million fans in 22 languages in 60 countries around the world. To date, it has been available on the PC, PlayStation, Xbox, Wii and mobile. Now you can play with your friends on Facebook, too.

Players will be presented with challenges, such as forming romantic relationships, flirting, joking and getting married. In this case, they’ll have the chance to play with Facebook friends, causing all sorts of real-life sparks to fly. For example, players will have the chance at participating in a royal wedding, to build a dream home or take a shower with their lover. In addition, they will be able to play pranks or achieve goals, such as having 10 girls in the hot tub at the same time.

Who needs Battlefield 3 when you can begin World War 3 among your friends, right?

The game is expected to launch “soon” in five languages with a mobile companion app coming later. “It’s about playing with life and the unpredictability of life,” said Jeff Karp, Executive Vice President of the EA Play Label.

The game will be free to play and users will be given the option of paying for virtual goods, such as clothes for your avatar and items for your home.

More From E3

• At E3, Xbox Lets Kinect Lead the Charge on Gaming, Live TV Ambitions
• Justin.tv Broadcasts Gamers’ Every Move on TwitchTV
• Who Needs War? Sparks Will Fly in EA’s New Sims Game for Facebook.
• Sony Unveils Vita Gaming Device at E3; Will Launch This Year for $249
• E3: Nintendo Unveils the Wii U With Tablet-Style Controller
• Three Key Takeaways From Nintendo’s Wii U (Plus Photos!)
• No Hacks to Report at Xbox, But Microsoft Isn’t Letting Its Guard Down
• Forget About 99 Cents, What If You Could Rent Mobile Games for 25 Cents?
• Digital Game Revenues Hit $5.9 Billion in 2010

Activision Blizzard Inc. plans to launch an online service called Call of Duty Elite this fall that will work with the next major edition of the game, Call of Duty: Modern Warfare 3, and future installments of the hyper-realistic combat-simulation game. In a move industry executives describe as a first, Activision plans to charge a monthly subscription fee for the service, which will provide extra content that isn’t offered on game discs sold in stores, including downloadable map packs that give players new Call of Duty levels to play.

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