Mixed Results For Game Industry

Retailers of game systems and software in the U.S. sold slightly more units for slightly less dollars in 2000, amid the early transition of consumers to next-generation consoles and titles like Sony Electronics' PlayStation2 (PS2) product line.

However, game sales continued to be an increasingly attractive source of revenue for music and video-game retailers, with leading merchants (including Musicland and Circuit City) expanding their game offerings over the last year. The outlook on sales remains bullish.

In game software—the primary game-related product line for music and video retailers—a record 218.4 million CD-ROM and DVD-ROM game discs and Nintendo/Game Boy Color cartridges were sold last year, up 1.7% from 1999. But on a dollar basis sales were down, slipping 1% to $6.051 billion from $6.123 billion in 1999.

Overall industry sales, which include hardware, were also mixed. The number of units sold increased 1% last year to 281.5 million, from 279.2 million in 1999. Revenue dropped 5% to $8.408 billion from $8.831 billion the year before.

All figures are sales projections from NPD Interactive Entertainment Services, a gaming industry research firm.

Shrinking profit margins are the primary culprit for the drop in revenue, according to the NPD study. The average price of video-game titles dipped to $33.84 from $36.01, while the price of a portable game fell to an average of $25.85 from $26.19. Personal computer game pricing slipped to an average of $22.16 from $22.39. The only increase in pricing was in computer "edutainment"—learning-oriented computer games—where the average cost rose to $20.39 from $18.55 in 1999, due to fewer titles.

But despite the shrinking margins, 2000 proved to be a big year for games sold at select music and video retailers.

At Musicland Group, one of more than a half-dozen music and video chains that sell game products, Scott Burtness, VP of hardlines, says the company rolled out PC and video-game titles in about 200 Sam Goody and 50 Suncoast Motion Picture Company outlets last year. The company previously sold games primarily through its 150 On Cue and 80 Media Play stores.

What's more, Burtness says, the company, which is being acquired by Best Buy, is expanding its product offering to include video-game console platforms as well in an effort to keep the attention of younger shoppers.

"The new formats and more PS2 hardware will all help boost traffic and business," he says. "We'll be adding video games to more Sam Goody and Suncoast outlets and consumer electronics in Sam Goody and On Cue."

Circuit City's 600-plus stores also reported strong game sales in 2000, as its previously announced exit from the major-appliance business in late summer cleared the way for, among other things, greatly expanded game offerings in its stores over the holidays.

A typical Circuit City store now has at least one demo kiosk for PlayStation, PS2, and Nintendo 64, plus two each for Sega Dreamcast and Game Boy Color.

"We do a significant PC [game] business, but we expanded our console offerings from only PlayStation to virtually all video-game platforms," says Bill Cimino, manager of communications and media relations.

Indeed, with Nintendo's Game Boy Advanced due in July, Microsoft's Xbox in late September, and Nintendo's GameCube before the year's end, music and video retailers are seeing increased opportunities in game-related sales as the number of high-tech systems and games proliferate.

But such opportunities are not without risk.

"Three new platforms sound almost a little too exciting," says Dan DeMatteo, president of 980-unit Babbage's Etc., a game-products retailer that also sells video-game soundtracks. "While we cater to early adopters, the risk is that consumers may get too stupefied."

What's more, the market is still struggling with the rollout of the first of the next-generation systems, PS2.

A crippling chip shortage that cut Sony's PS2 U.S. shipments to less than 500,000 from a projected 1 million in the fourth quarter was responsible for the bulk of a 5% drop in video-game revenue, which fell to $6.5 billion from $6.9 billion in 1999.

(Video games are a subset of the larger software category, which includes games for portable devices like the Game Boy and computer games. Both the computer game and Game Boy software categories posted higher revenue in 2000.)

Meanwhile, Sony reported an operating loss of $121 million for its games business in the third quarter ending Dec. 31, compared with operating income of $500 million for the same time period in the prior year. The company also revised total PS2 shipments for the fiscal year ending March 31 down 10% to 9 million units worldwide, still promising 3 million for the U.S. market.

And overall console game hardware—PS2, Nintendo 64, and Dreamcast—dropped in the process, with unit volume off 31% to 8.2 million from 11.8 million the prior year. Sales were off 20% to $1.1 billion from $1.4 billion in 1999.

As part of the bloodletting, Sega announced it would exit the Dreamcast console market. However, it continues to produce Dreamcast software as well as games for the PS2 and new Nintendo Game Boy Advanced platforms.

But despite the industry's growing pains, retailers and industry watchers say the future looks bright.

"The industry consensus is that having come through this transition year so well, we're poised for another period of ascendancy that should see double-digit increases over the next four to five years," says Doug Lowenstein, president of the Interactive Digital Software Assn., a trade group whose members account for close to 90% of total game sales.

Says Cimino, "All these innovative new platforms are defining the digital lifestyle. It's an exciting time to see these new games, and every retailer has to forget any preconceived notions and re-look at gaming."