Video Game Sales put the Hammer Down on DVDs

According to several reports, flagging DVD sales have been outpaced by video games sales so far during the fourth fiscal quarter (Q4) 2007.

• Video Business: Video games trumping DVDs in Q4
• Halo 3 sells more units first day than Shrek the Third
• Ars Technica: Video games score headshot against DVDs this season

Lead by titles such as Halo 3, Guitar Hero III, and Rock Band, video games sales have already exceeded 2005 sales as of October, according to analysts at NPD. Video games have been up the last several years according to 2006 Entertainment Software Association data. DVD sales growth, on the other hand, has been flagging for several years as indicated by a 2006 MPAA market report. While several other high profile titles are not out yet, the last of the $300 million grossing movies of 2007 has hit stores shelves with the release of Pirates of the Caribbean: at World’s End, all the big guns have been rolled out likely indicating that DVD sales have peaked for the year.

The market for gaming software has become a force to reckon with over the last decade. Movie box office receipts have been between $9-$9.5 billion dollars from 2002 to 2006 and year to date in 2007 are at $7.8 billion as of 12/11/07. Sales of software alone ranged from $7-$7.4 billion over the same period and if a sale of directly related hardware is included, the number exceeds $10.4 billion as of 2004.

Halo 3, with an estimated 2.5 million units sold the first day of release outsold top Hollywood titles including Shrek the Third. This despite Halo’s price tag of anywhere from $60 to $130 verses SD and HD video releases on DVD anywhere from $20 to $30, and considerably less when considering new DVD release sale prices that video games do not traditionally have. Sales results for Pirates of the Caribbean are not available yet, but so far the only movie release to best Halo 3 is Transformers, with an estimated 4.5 million units sold on release day.

The other titles, Rock Band and Guitar Hero, have not shown any sings of slowing sales in the subsequent weeks after their release. Strong post-launch sales strongly suggest an expanding consumer base for these games.

Retailers and the rental market will follow the money. With some of these traditional
DVD retailers reporting sales of Halo 3 exceeding that of any other offering, game or DVD, shelf space will start moving to games.

Entertainment markets have always been sensitive to the latest and greatest and trends for gaming and movies are going the opposite way.

So where is the momentum for gaming coming from?

• New game titles for Xbox 360, PS 3, and Wii are starting to realize the potential of the new hardware.
• Children who grew up with an Atari 2600 are now adults that continue to play games. As of 2007, 93% of parents who play games have children who play and parents are often making it a family activity.
• A cascading effect from Nintendo, through the Wii and the DS, has started to accelerate the move of gaming into untapped mainstream demographics, including families, well beyond the cliché adolescent male gamer. From 2005 to 2007:
• Average age of gamers has increased from 30 to 33 years.
• Gamers over 50 have increase from 19% to 24%.
• The total ratio of female to male gamers has decreased slightly from 43% to 38%, but the ratio of women over 18 that game has increased from 28% to 31%.
• Gamers who are boys under 17 stood at 21% and 20%, less than the women over 18 demographic did.
• The newly minted gamers, previously oblivious to the variety of gaming, are exploring and finding other games targeted to their tastes.
• No longer considered the activity of a recluse or a loner, gaming communities such as Xbox Live and the more social titles such as Rock Band and Guitar Hero are pulling people together to play.

Hollywood, in the meantime, is making a quagmire for improving home video sales by having a format war:

• The format war has stalled adoption of a successor to the DVD that might have otherwise reinvigorated video sales through compelling new HD quality content.
• Consumer confusion is caused by the competing formats, which increases hesitancy, further limiting sales.
• Some movie studios are taking sides in an attempt to force consumer choice in the war, which further limit sales.

The currently sluggish economy limits consumer’s disposable income, forcing more decisions between competing entertainment choices. Here the choice is playing out as gaming or DVDs, but not both.

Gaming is offering compelling new next generation content and hardware, expanding to untapped demographics, and becoming a social activity to draw families and friends together. Gaming is also riding other market trends in a complimentary way with $73 million in HDTV sales directly attributed to the Xbox 360 alone and 13% of broadband internet subscribers also subscribing to online gaming as of 2005.

Hollywood’s answer to revive home movie sales and compete with gaming is to create compelling new HD quality content but then they go and make sure it is stillborn by participating in a format war rather than riding in the wave of HDTV sales.

By providing the latest HD content on competing formats, Hollywood is creating consumer confusion and hesitancy, and then limiting consumer choice by taking sides when they should care less about what kind of disc a movie is purchased on as long as consumers are purchasing the movies. With total sales for both format of HD-DVD discs taking up only a miniscule fraction of the SD DVD sales, consumers obviously are not.

It is never good business for companies to impose artificial limits on consumer choice. Such actions run contrary to the fundamentals of a free market economy driven by producer supply and consumer demand.

With DVD sales stalling and the new HD formats not even starting up in the mainstream market, it looks like all those brilliant MBAs running the Hollywood studios are being taught a refresher lesson in basic economics.

If there has to be a format war for hardware, don’t be moronic and compound the negative effect on the market by forcing consumers to pick sides by using the movies. Sell to whoever is willing to buy.

Sometimes the decisions being made by studios are so bad you wonder if they needed a good 3-year run of losses to balance out some hidden books somewhere.