At this time last year the economy seemed to have jumped off a cliff. Everything was in free-fall. Jobs were vanishing, homes weren't selling, and cars weren't moving. It was chaos, and it all lead up to the most disappointing holiday sales seasons in recent memory. Unless you were in the games industry. While everyone else was running for cover, the games industry continued to see strong growth. The theory behind the upswing was based off the same reasoning used to explain the traditional up-swing in box office and rental profits during economic downturns. People need entertainment in hard times and tend to look for that entertainment close to home. Video games, then, seem a perfect fit.
Well, it seems the games industry forgot to knock on wood. The last few months have seen year-over-year sales plummet massively. June sales with off 29%. To give a perspective for how massive that is, auto sales for briefly-bankrupt auto maker General Motors were down 33% from the previous June. That's right - the games industry just barely outperformed General Motors.
But it is one thing to simply state the problem. It is another thing entirely to understand it. To that lofty end, let's look at some popular theories as to why the industry's sales are melting away faster than a snowman in hell.
Theory #1) A lack of big-name titles has killed sales
This one is being cited by just about everyone reporting the slump in video game sales. This is probably because NPD representatives themselves have stated that they believe some of the pain is coming from a lack of blockbuster titles. Last year saw the release of GTA IV and the latest Smash Bros. titles, both of which sold millions of copies in just a few months. This theory argues that the slump of sales is occurring because there have not been any similar super-high profile releases.
At the surface this explanation makes some sense, but I believe it is basically an excuse rather than a reason. If the industry is failing to create titles which command serious attention, then that is an obvious fault of the industry. Besides - the numbers don't pan out. GTA and Smash Bros. are big franchises, but we're not talking about a paltry drop. No franchise drives 29% of the industry. The fact that hardware sales are dropping more than game sales also indicates that the problem is more serious then a lack of a few franchises.
Theory #2) The prolonged console cycle is keeping consumers from spending
It is no secret that the consoles we have now are likely the consoles we're going to have for at least the next few years. There could be a Wii HD out next year, and Microsoft may re-launch the 360 once Natal is done, but otherwise the future looks to be more of the same. The fact that hardware sales seems to be the biggest loser adds credibility to the idea that a lack of compelling hardware is resulting in a reduction of spending. It also makes "common sense" - if a product is out for a long period of time without a significant refresh or a drop in price, consumer interest will be lost. It is this common occurrence which drives all those wacky flavors of Mountain Dew you see on the shelves. Pepsi does not want consumers to forget about their products.
I think this theory is the most credible, and it is also the most disturbing theory for the industry because it means two things. One, it means that industry growth is dependent on the release of expensive hardware which costs millions of dollars to research and produce. Second, it means that the industry will have a hard time quickly rectifying the issue because no new console is to be released for the next few years. Price cuts can, of course, introduced. But price cuts reduce profitability. More than a few people are starting to wonder if Microsoft and Sony's loss-leader business strategy is sustainable in the long term, and being forced to reduce prices would do nothing to ward off that skepticism.
3) The market is over-saturated
The last theory I'm going to cover here stems from a belief that the vast majority of games released are utter crap. It is a fairly common belief. Gamers, after all, are notorious whiners set off by the slightest problem.
But perhaps they're onto something. A quick browse of Metacritic seems to reaffirm the issue. Nintendo serves as the vanguard. With Nintendo's first-party titles hogging the attention, the third-party developers are left to pick over the scraps. The third-party developers know this, and so the majority of third-party games are scrap-worthy, The real risk which this possible over-saturation raises is the chance that new, casual gamers, brought in by the low prices of certain consoles and PC games during the period of growth, become confused and unhappy because chances are good that if they buy a game without consulting reviews before hand they're going to end up with something only slightly more pleasant than having a seagull shit on their head.
But the issue is not just due to a glut of bad games. The longevity of older titles is also becoming an issue. Good Old Games has banked on this trend by making an entire service devoted to selling older games, and they seem to be doing well. In addition, the lack of any new consoles means that games a few years old don't look significantly out of date. In fact, Crysis continues to be the game to beat (graphically) despite being released almost two years ago. Games like Civilizations 4 and Team Fortress 2 remain steady sellers despite being older titles. This means that new games are no longer competing only against other new games. They are also competing against games released two or three years before, something which has rarely happened in the games industry.
In Closing...
These are not the only theories about why game sales are slumping. There are many others, including piracy, digital distribution, and sales of used games. I believe those theories are less compelling and so did not discuss them, but that doesn't mean there aren't a few decent points behind them.
Of course, all that matters now is the holiday season. Price cuts are sure to come, including cuts to the PS3 and the Xbox 360, and maybe even the Wii. These price cuts should stimulate sales. That said, the main-street economy has yet to recover, and game consoles and new games remain expensive. And while growth annual sales growth for the industry is possible, it would be foolhardy to think that a few percent of growth will be good for the games industry. The games industry's constant double-digit growth resulted in game publishers and developers who planned for such an environment. If the disappointing sales trend continues through the holidays, the results will be very, very messy.