After Flat 1st Qtr., Game Retailers Focus On Price

After a flat first quarter for most video game categories, retailers of games, consoles, and computer games say they are concerned about shrinking software margins. As a result, they will be looking closely at pricing for a host of pending releases: Nintendo's Game Boy Advance (GBA) in June and GameCube (GC) in November and Microsoft's Xbox in October.

Although the official January-March revenue for game-related products—console hardware, software and accessories, and computer software—was up 19% to $1.6 billion from a year ago on flat unit sales of 43 million, most retailers reported relatively flat first-quarter sales, with a pickup in the last two months. The bulk of the gains in the game market came from Sony filling the pipeline with delayed PlayStation 2 (PS2) consoles and related PS2 games from both Sony and third parties.

However, there were several positive signs. PC entertainment software revenue was up 4% to $363 million on sales of 18 million units. Portable hardware, software, and accessories—virtually all Game Boy Color (GBC) products—was up 13% in unit sales and 12% in dollars over comparable 2000 figures. Next-generation 128-bit software for PS2 and Sega Dreamcast (DC) was up 241% in unit sales and 193% in dollars, while 32/64-bit software for PlayStation (PSX) and PlayStation One and Nintendo 64 (N64) was up 2% in unit sales, but down 4% in dollars.

All figures are from NPD Interactive Entertainment Services, which tracks video game and portable hardware, software, and accessory sales at retail. Going forward, NPD Intelect, now a division of PC Data, will track computer software sales.

"Right now we have one viable new console moving the market," NPD account manager Richard Ow observes. "PS2 hardware has been catching up with demand through the first part of the year, and more titles are reaching retailers as well."

Doug Lowenstein, president of the Interactive Digital Software Assn. (IDSA), whose members represent about 90% of U.S. software sales, certainly agrees. "As we anticipated, except for PlayStation 2 filling the pipeline, the sense of our members is that the first half will continue to be sluggish during the transition to new technologies. The market has been showing signs of adding strength, and we see the trend to younger gamers continuing."

At more traditional music retailers like the Musicland Group, which is being acquired by Best Buy, a spokesman said that not only did all 150 On Cue and 80 Media Play stores carry PC and video games, but console games were rolled out in about 200 Sam Goody and 50 Suncoast Motion Picture outlets last year. Best Buy has been heavily promoting game software and peripherals in its weekly Sunday flyers.

Circuit City had completed the expansion of console and video game displays in its 600-plus stores before the holidays, with the phaseout of major appliances in late summer opening up space for significantly larger multimedia sites in all outlets by the holidays.

A spokesman said that the chain had been doing significant PC business and that it was able to expand its console offerings from PlayStation to virtually all video game platforms. A typical store now has at least one demo kiosk for PSX, PS2 and N64, plus two each for DC and GBC. Game software has been getting steady exposure in the chain's weekly brochures, and at the recent Electronic Entertainment Expo (E3), held May 16-19 in Los Angeles, the Circuit City buying group, headed by Dan Barzel for software and Clif Denney for hardware, were examining all the new formats coming to market.

Steven Lundeen, VP of interactive merchandising for the 3,800 Blockbuster video and game rental stores, had a different priority heading into the E3 show: software. "No matter how impressive a console's technical specifications are, it's still nothing more than a large paperweight if it doesn't have quality games," he says, noting that he was interested in seeing products lined up to support rentals of GBA, Xbox, and GC consoles and software later in the year.

Due to the economy and upcoming platform transitions, Lundeen believes the consumer is very price-conscious, with the rental channel continuing to be a good, inexpensive choice for sampling both new and older games before paying $40 or $50. The chain has offered Dreamcast consoles and games for rental since the September 1999 launch. It then added GBC and, most recently, PS2. "We have experience in managing the correct mix of older platforms vs. newer formats thanks to the previous transitions," Lundeen says.

A pre-E3 exhibitor survey conducted by IDSA showed that a substantial number of companies are targeting products to the family and kids. Dan DeMatteo, president of Babbage's Etc, notes that, if successful, the GBA—slated for release next month—could be like having two Christmases this year for video game sellers.

"Portables always do big at the holidays," he says. "And now this one is in June, with the kids out of school and families traveling on vacations."

Shrinking margins are his main concern, both for new titles and older games that become "greatest hits" markdowns. "In 1991 consumers paid $49 for new Sega Genesis games," he says. "Ten years later they are paying that same $49 for new PS2 titles with a lower-value dollar. There have to be some breaks for retailers with prices for new top-line games that make rational sense. Sooner or later consumers should have to pay more for the hot new games, just as they do for front-line music albums."

In total agreement is Electronics Boutique executive VP Jeff Griffiths. "Even though publishers are spending a lot more on development costs, software margins are at a historic low," he observes. "We haven't been able to raise prices over the last few years, and with all the new hardware launches, the software products are so much better that we don't see why prices shouldn't be higher."

Still, NPD's Ow is cautiously bullish for the market for the rest of the year. "Assuming that Nintendo's GBA and GC and Microsoft's Xbox will have enough hardware and good titles to meet demand, the second half of the year should be excellent."

IDSA's Lowenstein says, "We anticipate that Nintendo, Microsoft, and Sony—three marketing giants—will put a ton of money into the market to reach consumers of all types, gamers and non-gamers, to spark a tremendous amount of interest in the new games and gaming overall."

"Retail expectations are high," Ow adds, "and the key question is how much gamers will spend on the new platforms. We could well reach an all-time industry high with everyone getting their share, topping the $6.9 billion for retail video game sales in 1999 [$8.8 billion with computer game software]."