NPD Group: Even as digital business grows, the games industry is shrinking

The decline of the video game retail industry and the rise of the digital distribution business are not taking place in tandem according to the NPD Group. The industry is still in decline. What does this mean for the next generation of consoles?

In the past two months, we’ve looked at how the business of selling video games on discs and cartridges it fading fast. The digital revolution is picking up steam and quickly. In August alone, video game sales were down 20 percent from last year, and that’s on top of declines across the first half of the year. That’s just retail, though. How is the industry doing in full? If everyone’s downloading their games, are they still paying the same amounts? Data from the NPD Group says that there’s good news and there’s bad news.

First, the bad news: The video game industry in the US was down in the third quarter of 2012. Overall, Americans spent nearly $3.8 billion on video games, accessories, and hardware between July and September of this year, down 9 percent from the more than $4 billion spent during that period in 2011. This is primarily due to those aforementioned declines in retail sales.

Now the good news: Digital sales are indeed on the rise, to the tune of 22 percent year-on-year. Digital game sales totaled $1.4 billion for the period, down from the previous quarter, but still a sign of growth. Just not enough growth to bring the games industry back to the exorbitant earning potential of the pre-crash boom years like 2008.

The state of the industry in 2012 demonstrates one thing about the immediate future: People are going to spend less on making games. Astronomically expensive games like Star Wars: The Old Republic, which cost in excess of $150 million to develop, will fade into the background for some time.

Development cost, not hardware horsepower, seems to be a defining factor in the next generation of game consoles. While some developers like Gears of War studio Epic Games are expecting development costs to double when the Xbox 720 and PlayStation 4 roll around, others like 2K Games boss Strauss Zelnick see costs staying flat or even decreasing.

Realistically speaking, game development costs have to come down if the industry is going to start growing again. If retail is going to survive, those new consoles will have to be affordable and easy to make games for. It follows that development costs will have to be modest as well.

It’s a whole new world for video games.

Source: Gamasutra