Laurie Krohn, consumer retail analyst at Kantar Worldpanel, outlines pressures on the boxed games industry and looks at what the future might hold..
It's fair to say that things are pretty tough in the world of boxed games – the value of the market has declined by 12.1 per cent in the past year (year ending April 15th) with 1.7m buyers leaving the category – the equivalent of one in ten shoppers.
This is something we are seeing across all home entertainment categories as squeezed household budgets prevent many shoppers from splashing out on non-essentials.
However, the situation is noticeably worse in the games market than in video and music, which declined by 7.8 per cent and 5.7 per cent respectively.
So, why are we seeing such high levels of decline within the boxed games market?
Diminishing buyer numbers have been the biggest factor in market loss, accounting for 126m out of a total drop of 153m; this equates to over 80 per cent of the category's total losses in the past year.
Some of these lost buyers can be put down to the Wii. When it was first launched, the Wii brought a lot of new shoppers into the market. However, as the novelty has begun to fade, these buyers have left in dribs and drabs.
At the same time many consumers are using new formats that allow them to play games more casually for example through mobile phones and other devices. Smart devices accounted for six per cent of games sales volume last year.
However, it's not just the loss of gamers that is causing decline in boxed games.
The increasing popularity of digital games has played a huge part. It is typically gamers who buy into the category more regularly, who pay for downloads and losing a slice of their custom is having a clear effect on the boxed market.
Alongside this we have seen a shift in the market model – from ‘games as a product' to ‘games as a service'. This sees buyers purchasing fewer games but playing them for longer – paying for extra downloaded content and online subscriptions.
The shift in models has meant that spend is becoming more concentrated on a smaller number of titles – in the 52 weeks to April 18th, 2010 the Top Ten boxed games accounted for 24 per cent of annual spend, but in the past year this has risen to 31 per cent.
As a result, publishers are eager to bag one of the top slots and a lot more money goes into making a modern game than ever – meaning that fewer, less risky and higher-budget games are developed.
Furthermore, it is likely that GAME's recent closures will take its toll. Last year, 11 per cent of spend at GAME was from customers who hadn't planned to purchase a game, but without the ability to browse, these sales are potentially lost.
While the above suggests an uncertain future for the boxed market, it shows that for games as a whole there is light at the end of the tunnel: the digital format.
In music, growth in digital buyers have gone some way to counteract the decline in CD sales. Digital has brought more than 1m new buyers to the market in the last year and, while the market is still in decline, this is at a lower rate than video and games and is largely as a result of the market adjusting to the cheaper digital mix. Adding revenues from streaming services was enough to push the American market back into growth last year.
The example set by the likes of Zynga show that the digital format also has the potential to deliver growth back into games.
However, with manufacturing and distribution costs largely removed from the equation, the doors are opened to a swathe of smaller developers and retailers who previously would have found these fixed costs problematic. The competition is therefore fiercer and the traditional games publishers are no longer dominant.
This is not to say that boxed games are a lost cause. All signs point toward physical games remaining the dominant format in terms of value for some time. The earlier example of the Wii shows the huge effect that new consoles can have on the market. The next generation of consoles could have a similar impact, giving retailers an opportunity to convince some lost buyers to come back.