Research firm NPD Group has reported that digital PC games purchased via download have outpaced traditional retail in the first six months of 2010. You’d think this would mean the smartphone and tablet PC revolution that started with the iPad and iPhone would result in breakout video game sales for these mobile devices. However, sales revenues for PC games were off by -21% in the first half of 2010, and unit sales were down -14% over last year. That means PC game manufacturers have to figure out how to tap into the smartphone and tablet PC markets in a hurry to stop the slump
While the video game industry broadly saw major declines in 2009, PC sales were actually up, thanks in large part to the release of Electronic Arts (NASDAQ: ERTS) title The Sims 3, the popular virtual dollhouse and life simulator created by Maxis Studios. Now, the NPD Group is reporting that, finally, downloaded game sales have finally outpaced physical game sales. In the first half of 2010, 11.2 million games have been purchased for download while only 8.2 million physical games have been purchased. The grand arrival of the all-digital future, however, is coming at a serious price for the PC game industry. Despite the headline-making release of Activision Blizzard (NASDAQ: ATVI) game Starcraft II, PC games are down by -21% year-on-year, and while more games are being sold through purely digital transactions, it’s retail releases that are making the most money. Physical game sales account for 57% of PC game revenue.
The digital PC game market is dominated by a handful of major players. Steam, the online store and gaming network run by Valve, the privately owned game publisher and developer of titles like Team Fortress 2 and Half-Life, remains the leader in downloadable game sales. Steam is followed closely by Direct2Drive, a subsidiary of News Corp. (NYSE: NWS) IGN Entertainment. Both of these are outlets for multiple publishers however. After these outlets, Electronic Arts and Activision Blizzard control the other three of the most successful downloadable game portals online. This view is slightly misleading however as NPD Group separates these outlets from casual gaming websites like Electronic Arts’ Pogo.com and RealNetworks (NASDAQ: RNWK) GameHouse. Even with that distinction taken into consideration, however, it’s still difficult to get the clearest sense of just where money is being made in the non-console game market.
Over the course of the next five years, there will no longer be a way to distinguish between Steam and Direct2Drive’s PC game outlets and other similar services like the Apple Inc. (NASDAQ: AAPL) App Store on mobile devices. The iPad and similar technologies are going to, within a handful of hardware revisions, create a mobile market that will allow Activision Blizzard and Electronic Arts to offer the same World of Warcraft and The Sims software on both PCs and portables. The NPD Group’s latest data shouldn’t concern investors in so far as sales are finally shifting away from retail to purely digital distribution. Investors instead need to be concerned with the fall in revenue that is going to accompany that shift. ATVI shareholders, ERTS shareholders, and others need to prepare for a rocky period of adjustment as PC and mobile platforms converge into the same game market.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
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