Monday, January 15, 2007

2006 Was A Great Year For The Gaming Industry

Every player in the next generation video game console battle is claiming victory after an industry-wide record-setting sales performance in 2006.

A strong holiday season capped off a year that resulted in total revenues of $12.5 billion spent on games, new console systems, handhelds and accessories, according to the industry's market tracker The NPD Group. The 2006 total represents a 19% increase over 2005's $10.5 billion mark, another record.

"Everyone was fairly negative about the industry at the end of last year," says NPD analyst Anita Frazier. "And it started out rocky this year, but within a few months everything started to fall into place. It kind of breaks the conventional wisdom of what a console transition year is like in the industry."

The largest portion, $6.5 billion, went to game software, a slight increase over last year. Revenue from game console systems - including the new Nintendo Wii and Sony PlayStation 3 (both released in November) and Microsoft Xbox 360 - rose 87.5% to $2.9 billion from $1.6 billion last year.

Grabbing most of the attention in 2006 were new game systems - Sony's much-anticipated PlayStation 3 ($499-$599) and the lesser-regarded Nintendo Wii ($249). Consumers bought as many of each system as manufacturers could get to retail and demand drove the resale market on eBay and other online auction sites.

Sony, which earlier this week said that it had shipped 1 million PS3s to North America by year-end, sold 687,300 PS3s, according to the NPD Group's numbers. So far, the PS3 is selling at a faster pace than its predecessors, Sony's Jack Tretton said in a statement.

Meanwhile, the Wii became a hit, too, selling 1.1 million units. "Once you get people to try it, you see them light up," says Nintendo's Perrin Kaplan .

Microsoft's Xbox 360 overcame its own supply problems by spring and sold 3.9 million units, pushing its installed base to 4.5 million - in December outselling PS3 and Wii combined. "The story as we see it is we won the vote with consumers this holiday season, due in part to the quality of our games," says Microsoft's David Hufford.

November's Xbox 360 release Gears of War is expected to surpass the 3 million sold worldwide next week and is tracking to join the industry's top selling games ever, Hufford said. With the third installment in the hit Halo series arriving later this year, "we are really right where we want to be heading in to 2007."

But quietly, two older systems, the five-plus-year-old PlayStation 2 ($129) and two-year-old Nintendo DS handheld ($129) were plugging along successfully, selling 4.7 million and 5.3 million, respectively.

Overall, Sony hardware and games amounted to more than $1.6 billion in December alone - a record month for the industry. " "Not only did consumers drive records for PlayStation 3, they also validated the excellent value represented by PlayStation 2 and the entertainment versatility of PSP (PlayStation Portable, which reached an installed base of 6.7 million )," Tretton said.

Nintendo, Frazier says, "managed to make (the DS) appeal older without abandoning its core customer, the kids" landing New Super Mario Bros. and Brain Age: Train Your Brain in Minutes a Day among the year's top 10 selling games.

At Nintendo, supporters of the Wii and DS feel justified by the results, Kaplan says. "As a risk-taking, innovative company we thought long and hard about bringing these kids of products out. We watched very closely what looked to be happening with players. The glimmer in their eye was not quite as bright (as in the past) and the excitement level was starting to tap out," she says. "Once the Wii and DS were finalized, we all felt like we really shouldn't be doing what we were doing if this didn't have success. It just felt really right."

Leading up to the NPD's release of its annual report, many analysts expressed concern that the performance of the lackluster PS3 could have ramifications for the industry. American Tech Research analyst P.J. McNealy offered that the system did not have many hit titles, might be priced too high and had not been marketed properly as a cost-effective high-definition movie player.

With Sony announcing earlier in the week that it had met its goal of shipping 1 million PS3s to North America and NPD's report suggesting that it had actually sold less than 700,000, McNealy said that "there is headline risk" of doom and gloom media coverage.

Arcadia Investment's John Taylor assessment had a similar tone, too. "The Wii buzz factor completely trumped the PS3," he wrote in a Wednesday report - may contribute to the slowing of the industry's expected PS3 adoption rate.

But Wedbush Morgan Securities' managing director of research Michael Pachter says that "talk of Sony's demise is premature. … Microsoft is growing their lead, but the question now is whether now that we are getting more supply, if we see the PS3 and Wii outsell it on a monthly basis."

Regardless, the situation at the beginning of 2007 appears much more promising than 12 months ago, Frazier says. "There's just a lot of good things going on," she says. "It was just much less volatile going into the transition that expected."

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