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Game industry to grow 6% in 2010 - Analyst

Pacific Crest Securities' Evan Wilson believes 34 percent digital sales growth will buoy stagnant packaged goods; PS3-only console predicted to see sales increase.

The sky began to fall for the global economy in late 2008, but many analysts maintained during the first part of 2009 that the gaming sector was, if nothing else, recession-resilient. Of course, the tenor of that conversation had changed by the end of 2009, when The Great Recession helped sink US retail sales by 8 percent on the year. Overseas markets saw similar declines, as the Japanese industry fell 6.9 percent and the UK market dropped off by 18 percent in 2009.

Dante's Inferno will apparently be EA's template going forward.

Dante's Inferno will apparently be EA's template going forward.

This week, Pacific Crest Securities' Evan Wilson predicted that the packaged goods portion of the game industry will remain flat in 2010. However, he expects the industry as a whole to grow by 6 percent, thanks to a 34 percent surge in digital sales.

Wilson predicated much of his analysis for how 2010 will play out on lessons learned from last year. To begin, Wilson explained that software sales fell in 2009 due to a combination of factors. However, he said those same factors are only part of a problem that could turn 2010 into a worse year economically than 2009.

"We believe that fairly obvious factors...such as game delays, the economy, and the fall of the music genre, have simply added to the one main issue that we have faced all cycle: growth of development costs has outstripped sales growth," he said.

To counter this, Wilson notes that many publishers and developers took the painful step of headcount reduction and studio closures in 2009.

"The reductions were directly correlated to elimination of unprofitable games," he said. "The industry mourned the loss of promising new intellectual property, the closure of once-famous studios and the departures of marquee developers; over and over, the output looked high-quality and was well loved, but at the end of the day was unprofitable. Publishers came to the realization that certain IP would never be profitable, and thus began to hack away at themselves."

Wilson also said that third-party publishers are put in the difficult position of having to produce games on par with first-party-funded efforts such as God of War III and Halo Reach. Still, third-party publishers will try by the aforementioned cuts as well as streamlining their development pipeline.

"Electronic Arts commented to us at a recent investor meeting that it expected its game costs to stabilize based on the investments in IP and engines that it has made this cycle," Wilson said. "It pointed to Dante's Inferno, a title that took only 24 months from conception to launch, as its template going forward. This may be a good attempt to compete at a lower price, but it is unlikely, in our view, that this type of title will really be able to compete and produce a meaningful profit."

As for digital sales, Wilson said that while a 34 percent sales climb is significant, it is well behind the 45 percent growth in 2009 and 40 percent rise in 2008. "Several pieces of digital revenue are growing significantly faster, but with declines in mobile gaming excluding the App Store and the relatively flat nature of World of Warcraft, which accounts for the majority of subscription revenue, overall digital revenue should end up growing at a more modest pace," he said.

Moving to hardware, Wilson believes that the PlayStation 3 will sell 5 million units, up from 4.3 million in 2009. Xbox 360 sales will remain flat year-over-year at 4.8 million, he predicted. The analyst went on to say that dwindling Wii sales will result in a decline in total hardware figures, with the console expected to sell 8.6 million units on the year.

Slipping console sales aren't the only problem facing Nintendo in 2010, however. Wilson also said that many third-party publishers have largely abandoned the hope of turning a profit on games produced for the Wii.

"Third parties to a certain extent have given up hope that they will be able to wrest share from Nintendo and make significantly more profit on the platform. We think it is likely that aggregate Wii development and releases from the big Western publishers will decline versus last year. For publishers, this means lower costs in the near term but also less opportunity to make money on very significant portion of the video game business."

As for the implications for Nintendo, Wilson said that it will have to keep Wii owners coming back by itself. The analyst also believes that waning third-party support will influence the way Nintendo designs its next console. "Because Nintendo would like to see sales of third-party Wii games increase, and because third parties have been disappointed when attempting to develop for the Wii, we believe it is likely that Nintendo may support more 'traditional' controls for its next console, alongside motion controls," he said.

Though far from confirmed, Wilson believes Nintendo will launch a successor to the Wii next year, sticking to a five-year console cycle. "In the next generation, we believe Nintendo's growth opportunity will be to focus on core-audience features like better visuals and a traditional controller, in an attempt to both cater to the core gamer and reinvigorate third-party software support. It will also likely extend its development of nontraditional control schemes."

41 Comments

  • dlihcraw

    Posted Feb 12, 2010 2:46 pm GMT

    @Pink_Troglodyte

    Two last points:

    1) Nintendo has not enjoyed strong third-party support since the N64, but they have remained competitive in the home console market. 2) Microsoft has never enjoyed the same degree of first-party talent and success as Nintendo and it is unlikely to ever enjoy such talent and success. Therefore, it would be a lot different if the original XBOX lost third-party support than the Wii or even NES.

  • Pink_Troglodyte

    Posted Feb 11, 2010 9:38 pm GMT

    @dlihcraw
    I will agree with you that having a flood of crappy games from third parties on the wii does not help out nintendo, but I don't think that a major shift of developer focus away from nintendo will be beneficial to them. I should also concede that the first party games do sell more and are preferred, but again, as a wii owner myself, I really want to see third party developers also making quality games on the wii.

    Hypothetically, if third party developer support had been drawn away from the original xbox in its day, I don't think that the fans of the original xbox would have thought something like "because I prefer the halo series to other third party games, I would like there to be less games on the shelves." That would not have been beneficial to microsoft in the short term.

    Even in the long term, I think nintendo needs to re-establish itself as a maker of quality consoles *as well as* games. They do not currently have a good reputation merely on the basis of the quality of their consoles as far as I can tell.

    Edit: although the wii is the highest selling system in this generation, and one could therefore argue that their consoles have a good reputation, I'm starting to wonder if nintendo is developing a bad reputation. That is probably a safer thing to say.

  • dlihcraw

    Posted Feb 11, 2010 4:00 pm GMT

    @Pink_Troglodyte

    Good point about the ten year cycles, but I still don't see Sony or Microsoft shipping out new systems anytime soon.

    We know Wii owners buy significantly more first-party games in comparison to third-party games so we can say that they prefer first-party games. No one said that all third-parties would stop producing games for the Wii or that there are no forthcoming third-party games worthy of purchase. The point was simply that fewer games on the shelf means more attention will be paid to those that are available. As we already know consumers tend to prefer Nintendo-made games, it is fair to assume that Nintendo would benefit in the short-term and possibly long-term from a drop in third-party games.

  • LosDaddie

    Posted Feb 11, 2010 5:29 am GMT

    great news. hopefully no layoffs this year

  • Pink_Troglodyte

    Posted Feb 10, 2010 11:31 pm GMT

    @dlihcraw
    Also, I don't think it's correct to say that wii owners prefer first party games to third. The fact is that there are not many good games that are produced by third party publishers for the wii, but that does not mean that gamers do not desire third party publishers to publish good games. I believe gamers like No More Heroes 1 and 2 and probably Resident Evil 4 sold well, and I expect Epic Mickey will sell well. Also the Monster Hunter series sells like crazy in Japan and I bet Dragon Quest X will as well. I also think Megaman 9 sold very well on the wii but I could be wrong. Metroid: Other M is also being co-developed by Team Ninja. Regardless, losing all your third party support is a recipe for disaster.

  • Pink_Troglodyte

    Posted Feb 10, 2010 11:20 pm GMT

    @dlihcraw
    Sony has said that their 10 year cycles do not actually mean they won't release another console for 10 years. It means they will support development for software on that system for 10 years (or something like that). The ps2 came out in 2000 and the ps3 came out in 2006, but the ps2 is only now nearing the end of its 10 year cycle. I don't necessarily think sony or microsoft will make a new console for 2011, but I don't think nintendo would be jumping the gun if they did.

  • Triton

    Posted Feb 10, 2010 6:25 pm GMT

    These Anal-list must be the same ones from Washington DC with the unemployment numbers...

  • farnham

    Posted Feb 10, 2010 5:09 pm GMT

    so what he suggests is that nintendo should abandon their most successful console and go make a gamecube 2..

    seriously.. if nintendo goes back to the PS3, 360 crowd they will probably have less sales overall (like on the gamecube) and the third parties will shun them for their lacking sales and jump ship..

    so if thirdparties jump ship anyways.. why not owning half of the industry for yourself rather then being dead last..?

  • ColonelX24

    Posted Feb 10, 2010 3:24 pm GMT

    Wait. I thought Nintendo wasn't releasing a new Wii. They even said so.

  • mazongo

    Posted Feb 10, 2010 3:20 pm GMT

    I dont think theres going to be a new nintendo console for a while, what i really think they need is to focus more on the hardcore gamers to regain their faith on the little white box. With that said there are plenty on great wii games even from third parties, but most people cant see them just because of the bad reputation of crappy shovelware and waggle controls which are only present in the bad ones. I can think of many games that are not in the same league of uncharted and halo, but they are definitively more original, make great use of motion controls and deserve more respect from people that only know to speak of waggle and crappy minigames, people that i bet they only play shooters and call themselves hardcore. Dont get me wrong i really like games like gears and metal gear, but if you do some research, you can see that theres plenty of great games on the wii too.

  • ricardo-sene

    Posted Feb 10, 2010 2:18 pm GMT

    If that talk about Nintendo is true.. then the industry in 2011 will have one more time tree rivals competing for the same market... I have my doubts if the game's industry can absorb one more system competing for the same market...

  • oscar_mateo

    Posted Feb 10, 2010 2:15 pm GMT

    A successor to the wii next year? Its too soon.

  • guitardude1243

    Posted Feb 10, 2010 1:32 pm GMT

    I can see the digital increase especially on downloadable content for all systems. Hopefully Nintendo has a plan to start releasing some stellar titles considering Mass Effect 2 that just came out and the impending God of War III for the PS3.

  • Tornado_Volcano

    Posted Feb 10, 2010 1:06 pm GMT

    For some reason, my country was against the "rule" of sales decrease.The game industry actually increased 30 %! Sometimes, I don't know if I live on Planet Earth...

  • enoslives7

    Posted Feb 10, 2010 12:34 pm GMT

    I'm surprised the 360 sales are not falling further. Nobody outside the US will touch one.

  • falcOWNS

    Posted Feb 10, 2010 12:06 pm GMT

    well if nintendo is gonna send out a new system it better be with a traditional controller

  • Waldkrieger

    Posted Feb 10, 2010 11:33 am GMT

    One day they say sales are down, the next up. One day they say profits are down, the next day up. I really wish these annalists would make up their minds. I personally own a PS3 and X360 Elite and both get used nearly every day. I also fail to comprehend why anyone wants a Wii. Everyone I know that has one let's it set there to collect dust because there really are no good "games" on it. Seriously, its just a gimmick with nothing of value for true gamers. Nintendo needs a reboot.

  • zMd113

    Posted Feb 10, 2010 11:05 am GMT

    NINTENDO seems like their setting themselves up like SEGA did with the Dreamcast. I also think it's waaaay to early for a new console, I got my Wii in mid 2007 and I got my PS3 in late 2008. Gran Turismo & God of War haven't even made their PS3 debut yet! However I'm always ready for a new PSP2 & GameBoy.(or DS2)

  • Ramtin_LA

    Posted Feb 10, 2010 10:32 am GMT

    What about Project Natal?

  • dlihcraw

    Posted Feb 10, 2010 10:05 am GMT

    I don't see a new Nintendo console appearing anytime soon. Sony has a ten-year plan for the PS3, and I assume Microsoft has a similar plan for the XBOX 360, so this scenario would represent a premature entry into the "next" generation of home consoles by Nintendo. To maximize its entry into the next generation of consoles (and minimize the appeal of newer, superior consoles from Sony and Microsoft), Nintendo should release its next system 1 to 1 1/2 years before the PS3’s predetermined end date. Even this has its own problems (see Dreamcast sales in lieu of the then-impending release of the PS2). Nonetheless, it would allow Nintendo to maximize its profit intake from the Wii, enter the next generation of consoles first, and reduce the technology gap between its console and the competition. I really think there's too much opportunity for Nintendo right now to justify consideration of a new home console. The departure of third-party publishers will benefit Nintendo in the short-term with the possibility of long-term benefit, too. If most Wii owners already prefer Nintendo-made titles, then fewer third-party options can really only add to this preference. In short, Nintendo is still profiting from low-end, cheap technology. Why change that model now?

  • Rottenwood

    Posted Feb 10, 2010 9:36 am GMT

    @Darkages04

    Ignoring reviews sounds quite noble and individualistic, but I'm not convinced. The gaming industry (hell, pretty much any industry) has made a killing off of bleeding money from the uniformed. Hence, a mediocre knock-off like Dante knocks something superior from the charts. Not good for gamers, short AND long-term.

  • VenomRitual

    Posted Feb 10, 2010 9:35 am GMT

    hi im a analyst! derp derp. i make vague predictions that nearly never come to fruition. derp derpy derp. when my predictions are wrong i blame the economy. dur duur dur

  • tehepicpwnzor

    Posted Feb 10, 2010 9:35 am GMT

    *Sniff sniff* I think I smell Glenn Beck's "analysts" again...

  • AnelZukic

    Posted Feb 10, 2010 9:07 am GMT

    I think the game industry may grow in this FY just because the fact it slipped in the last 2 year for good per cent's. I kinda also go about 5%, but I'm not saying that it may fall down for about 5% either.

    But the large amount of which are coming out this year it will probably grow. The music genre is full and it will take some more years before it comes back by full force again. PS3 sales will grow at most mostly because of the European region, that's for sure, getting in front of X360. I will agree with him when it comes to Nintendo that they will go through a fall, in software and hardware.

    I don't expect a Wii successor the next year, maybe only an update, a totally new hardware will come out not before 2012, I predict fall 2013. The same goes for X360 and PS3, but when it comes to handhelds I'll go with the year 2012. Well Microsoft might tease something on E3, but I don't expect the same from Nintendo and Sony, and update is OK, but nothing bigger, they will wait for TGS for that.

  • Darkages04

    Posted Feb 10, 2010 8:48 am GMT

    Everyone has their own oppinions on software and games, therefore id rather play a game for myself and judge it my way, not what people think of it or what score and review it gets........sorry Rottenwood

    On another note, this so called Wilson is now a psychic, he can see into the future of gaming and predict whats going to happen,,, hahahaha.

  • DoofeyF24

    Posted Feb 10, 2010 8:20 am GMT

    Oh wow predictions wow now I know everything is going to be allright in the game industry, wait a minute doesnt your local weatherman make these predictions? Oh thats great just great

  • Rottenwood

    Posted Feb 10, 2010 8:00 am GMT

    Dante's Inferno is the template going forward, eh? Good luck with that. The reviews are pretty brutal and the demo is not promising; rapid I.P. turnaround time isn't worth much if the end product is mediocre.

    Software development is a risky and brutal business, but there's no way you can impose arbitrary timetables to save money. Creative endeavors can't be forced. If publishers want to put something strong out, they have to be willing to endure some setbacks. (And if your staff is spending all day playing video games as 'research,' well, that's what management is for.)

    As for Nintendo, they definitely need to extend a bigger olive branch to longtime gamers. I have nothing against their 'casual' gamer blueprint - I support it, really, as it brings fresh blood and money into the hobby, and the more mainstream gaming becomes, the more the stigma and censorship goes away - but months go by where I don't buy a Wii game. There's a huge user base there; no reason not to codevelop some traditional games along with the lighter stuff. They just have to be unique titles, and not low-grade spinoffs of PS3/360 franchises.

  • Zerosumgame

    Posted Feb 10, 2010 7:44 am GMT

    those pethetic analysts again. F!

  • force_user1975

    Posted Feb 10, 2010 7:36 am GMT

    I think Microsoft will add a price drop, with Natal, and all the games they have coming out especially a new "Halo" game, how could they not see a increase in 360's sold? Every time a new Halo game comes out we see a huge spike in 360 sales. wait for the bundles. Now if we possibly get Gears of War 3 I think this will definitely be MS year and this guys "Predictions" will be worse then the local weather man.
    Also with the Wii being on top and on top of every game, console category...why in the world would they release a new console next year? People are not looking to spend hundreds on a console all over again in the middle of these tough times.
    This guy is as dumb as I look.
    Sheesh, post real gaming news not "Predictions"

  • get_bangd

    Posted Feb 10, 2010 6:55 am GMT

    woo hoo good thing for Sony if this guy is right but its only a "prediction"

  • maxsteel86

    Posted Feb 10, 2010 6:23 am GMT

    I sure hope development costs come down... If they just keep going up and up with more powerful hardware, will we be expecting to see games sell for £100 each by the next generation?? Or will the cost be reduced cos it'll all go digital? Both are bad in my opinion...

  • brian_13un

    Posted Feb 10, 2010 5:49 am GMT

    Great

  • Fumanchu2

    Posted Feb 10, 2010 5:48 am GMT

    I think Nintendo is swimming in too much money to refocus on core gamers. They aren't going to throw away all those casuals they gained and they aren't going to release a new hi-def console by next year. They won this gen economically by having all the casuals and low development costs. They'll try to do the same thing next gen.

  • OJdaLIONKing

    Posted Feb 10, 2010 5:33 am GMT

    Well, I really hope Nintendo refocuses on actual gamers as this guy posits. I notice a distinct lack of mention of the motion controls for either PS3 or 360 though, which is in line with my thought that these will make little to no impact on the sales of either system...I just hope not too many developers waste time and money on catering to these, as I can't help but be pessimistic that they will be any lasting fun or that they'll be embraced that widely.

  • Darkmoone1

    Posted Feb 10, 2010 5:16 am GMT

    The key word is "Could", and "Predict".

  • acer_062

    Posted Feb 10, 2010 1:47 am GMT

    Who the hell is Wilson???!!! and what console does he own???

  • papouse84

    Posted Feb 10, 2010 12:02 am GMT

    @ ffviiifreak

    While Natal is interesting, I really feel that it's a case of 'a little to late', as the current state of the Wii shows how short-lived gimmicky motion controls are. I hope I'm wrong, but I can't help feeling very skeptical...

  • ffviiifreak

    Posted Feb 9, 2010 11:19 pm GMT

    I suspect a rapid sale growth of 360's once they release natal in Q4

  • warbou

    Posted Feb 9, 2010 11:14 pm GMT

    @Pink_Troglodyte

    I concur with much vigor. Thank you for renewing my faith in intellect.

  • papouse84

    Posted Feb 9, 2010 11:11 pm GMT

    Thanks for some 'actual' input Pink_Troglodyte. I often find myself defending gamers as being a maturing, supportive community, as opposed to the way we're mostly portrayed in the media, and then I read these comments...

  • Pink_Troglodyte

    Posted Feb 9, 2010 9:17 pm GMT

    @the_two_below_me
    Actually, if your the kind of person that likes to read news, this is very pertinent information for an owner of any of the three consoles. You do realize, don't you, that the sales of consoles and whether or not developers think they can make a profit on a system directly affects whether or not any games *and also how many exclusives* are likely to come out?

    Here, maybe you didn't read this last bit either: "In the next generation, we believe Nintendo's growth opportunity will be to focus on core-audience features like better visuals and a traditional controller, in an attempt to both cater to the core gamer and re-invigorate third-party software support." Why are you not cheering right now?

    Thank you gentlemen and/or ladies for posting your comments; I actually felt some of my braincells die.

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