Categories

How long before apps overtake physical video game content sales?

After reviewing the payments to suppliers, we can look at the store’s revenue generation rate. With the same assumptions, we have the following chart:

We will have to wait for another report to see whether the recent burst of volume from apps is sustained[1], but the trend shows income from apps narrowing the gap to music. In the last few months apps may have been generating $300 million/month[2].

The blue line above can be interpreted as an arrow aimed at the music industry. We know how that turned out. The red line above can also be interpreted as an arrow aimed at the gaming industry. What are the chances it will play out the same way?

According to NPD, U.S. retail sales of new physical video game content, which includes portable, console and PC game software, generated revenues of $10.1 billion in 2010. That’s $840 million per month. A big number compared to the app business. The trouble is that the figure is going down (-5% from the year before).

If you look at the red line above and its slope, it would indicate that, given time, the App store will overtake the entire physical media gaming industry. The time when that happens will depend a lot on the growth or decline of the physical game media business, but another four years seems a safe bet.

Would this cause the same effect to the industry as digital music had when it replaced physical media? I would say yes. The main reason is that physical media has associated with it a different sales cycle and margin. These factors determine the processes and cost structures of incumbents. Such changes are very difficult to absorb and adapt to.

—-

Notes:

  1. App sales are highly seasonal as there is a burst of downloads post-holidays.
  2. Apple reports iTunes income in financial reports. In the third quarter it reported $1.2 billion in revenues. This is roughly consistent with the data above given that the analysis excludes iBooks, Movie and TV Show sales and rentals.
  • http://twitter.com/wjv @wjv

    There is a distinction to be made, though. iTunes still sells exactly the same music that was previously sold Compact Disc. (One could nitpick the details, but still.) By contrast, App Store gaming serves a very different and more casual market than the currently established videogame industry.

    I think most of the "core" gamers that spent that $10 billion would agree with me that, if App Store gaming was the only sort of gaming available to us, we'd probably not really be gamers anymore.

    That's not to say that digital distribution in general, and the App Store in particular, is not about to have a vast and as-yet unpredictable effect on the gaming industry; indeed, industry rags are awash with speculation as to where this all will lead. But… I do think that merely looking at the numbers misses the distinction I made in the first paragraph above.

    • rattyuk

      Except that iTunes brought casual music purchasing to the fore. If you liked a track from a band you could actually buy that track and not the filler from the rest of the album.

    • Josemir Da Silva

      very good points.

      ALSO Apple doesn't want a gaming console. It would be naive of them thinking they can compete with an all purpose device with a device made specifically for games. Although the Wii has died, it generated enough revenue at the beggining…. once Wii2 comes out, it will start all over again.
      A mobile phone will always be behind in graphics compared to a console. once the iphone runs GT5, the PS3 will be running GT 10 and so on…..

      • Synth

        Apple may not want a gaming console any more than they wanted to compete with the PSP and Nintendo DS. Yet the iPod touch blowing both of those devices out of the water and
        I could easily see the AppleTV being opened up to casual games with iPods/iPhones and iPads as controller. The AppleTV is only a couple small baby steps from running iPod touch apps as they share the same OS and components.

  • Davel

    This is an interesting question. As @wjv above says hardcore gamers are not app store gamers. Look at The wii. It died after 2 yrs. The big boys co opted it's advance.

    As apple hardware gets better the games will get better. Apple ( mobile ) needs to do 2 things.

    1) seamlessly connect to 1080p large screen tv
    2) seamlessly do bi directional file transfers

    I am still waiting for apple to make iTunes wireless. There is no real reason to connect to a pc once the device is set up.

    For gamers u need better hardware. It will come in time. The cloud will provide content and horsepower. The device will become good enuf. Not this year.

    One of ur previous articles led me to the conclusion that pcs r dead. The mobile age is here. The infrastructure to build it is happening. Apple knows this and is trying to be a player. Google is trying to stop apple, but a bigger competitor to both is facebook. Facebook has what both do not. Social.

    • Tom

      Why would you say the Wii is dead? It is less dominant now than it was in 2006 to 2009, but Nintendo is still selling about 5 million units per quarter (more than either Sony or Microsoft) and has clearly won this generation. As another 5 year cycle comes to a close, final marketshares will be around 45 % for Nintendo vs. 27.5 % each for Microsoft and Sony.

  • http://twitter.com/anamnesiancloud @anamnesiancloud

    I would rend to agree wjv:

    I think its unlikely that you will see the App Store disrupt the video game distribution space where retail sales are currently being disrupted by the owners of the major gaming platforms. Microsoft's Xbox 360 and Sony's PlayStation 3 (and yes Nintendo's Wii) are not going to be challenged as gaming platforms. Microsoft, Sony and Nintendo have a huge competitive advantage in the video game distribution space because of the control they have over the hardware platform. Compare that with music; neither EMI nor Tower Records controlled your stereo system.

    Even if we consider the PC as a gaming platform, you still have established players like Valve's Steam, who have an extremely strong and well thought out distribution platform which is very sticky with the "hardcore gamers".

    Don't get me wrong I (and many others) think that digital distribution of traditional video games will outpace retail sales this year but I don't think that Apple/iTunes will have anything to do with it.

  • timnash

    In September, Apple already claimed 50% of the mobile game market and that it sold as many iPod Touchs as the Nintendo DS and Sony PSP combined. Unlike those platforms, Apple offers 3 potential revenue streams – ads, in app purchase of virtual goods and purchase – and many more and cheaper games for users. So for games makers iOS apps will be first choice to address the mobile market for most games.

    While the Mac App Store will improve the games numbers and with Steam give makers a better way to address the Mac market, consoles and PCs are so embedded in serious gaming it is unlikely that Macs will displace them.

  • Annette

    I’m not sure about the statement that digital music has replaced physical media. As far as I know music is still selling best on CDs, but I might be wrong.

  • kevin

    One reason the video game business is shrinking is that the casual game players are leaving for other mobile products with cheaper games, not the hard core gamers, so wjv misses the point. According to the rumors, the next iPad will likely have a significant GPU upgrade, which along with AirPlay in OS 4.3 will mean still another jump in gaming quality, so more casual game players will stop buying $40-50 games.

    The truly hard core gamers will always stay on consoles and PCs as those products will have better hardware. But the core gamers account for a minority of that $10B of gaming revenue. If all that is left on consoles is the truly hard core gamers, that means that gaming market, which is excluding mobile app game revenue, will be much smaller.

    • jovi

      No. The Wii, by far the most successful console of this generation, does not have "core gamers". The console manufacturers have seen this, and are desperately trying to tap into this audience, with Kinect's recent successes, it looks like it is happening.

      Will households choose to neglect a living room gaming experience and instead opt to crowd around an iPad? I doubt it. The casuals may stop paying for $60 games, but that only means you'll see a plethora of cheaper games on consoles, and I wouldn't be surprised if they opened up to the degree that Apple's App Store has.

      • KenC

        One, I'm sure this year, Apple will broaden AppleTV use so you can use Airplay to play your game on the TV screen and not just your iPad or iPod or iPhone.

        I'm waiting for Sony and Microsoft to release "cheaper games", but game development is so expensive on consoles, I'm not so sure we'll ever see things "opened up to the degree that Apple's App Store has". I mean, the whole infrastructure for game development for consoles is more expensive, slow and complicated than in the App Store. Alot of things have to change, for your prediction to become a reality.

      • jovi

        Playing touch control iPhone games on a TV is a non starter.

        Giving AppleTV better hardware would just turn it into a console.

        "game development is so expensive on consoles" – that's because you're still talking about those $60 blockbuster games. The smaller games thing is happening already, you can see this on Steam and the other digital channels.

        What we've not yet seen, are the stores opening up the pricing to the level that Apple's App Store have. There is more curation in the console world, Microsoft have greater control over release dates and promotions in Xbox Live than Apple does.

        That's not a lot of things.

      • Martin

        "Playing touch control iPhone games on a TV is a non starter."

        There's some pretty innovative stuff going on in the iOS gaming community. At least two developers are showing off iPhone/iPad combinations where the iPad is hooked to the TV with the game running, and the iPhone acts as the controller with all the gyro, etc. benefits and data flowing back to the iPhone screen. There's absolutely no reason why the AppleTV can't be the gaming host in this arrangement.

        It's a reverse on the usual arrangement as the controller is the expensive bit and the console the cheap one, but there's what, 50M or so controllers out there? For casual gaming, there's already a huge market that owns the hardware – just needs the software to get hooked together.

      • jovi

        Turning Apple TV into a console doesn't kill the console market, it just means Apple enters it.

        Touch is about direct manipulation of display items. Add in that layer of abstraction by hooking it up to the TV and all you do is break that link. Which is why its a non starter.

        That innovative shit you're talking about? That's not a touch control iPhone game, that's a console game built for Apple TV. It's a console game, but with expensive controllers that you wouldn't be comfortable flinging about, and would shatter on impact.

      • Martin

        "Playing touch control iPhone games on a TV is a non starter."

        I never suggested it would kill the console market. It'll certainly never be a platform that appeals to hardcore gamers, for instance. But the casual gamer market like the wii is designed for… that's a different story.

        And iOS isn't just about touch. AppleTV is an iOS device and isn't designed to be touch oriented at all. And if the expensive controllers are too delicate for gaming, why is Apple crushing Nintendo and Sony at handheld gaming right now? Clearly iPod touch and iPhone owners have no problem using their devices for games. Why does sending that data to the TV suddenly make the controller more fragile?

      • jovi

        iOS is about touch. It's "magical" and "revolutionary". The greatest games on iOS are those designed for touch, from Angry Birds to Infinity Blade.

        Doing touch on a TV is fail, you lose the advantage of touch, you may as well use a mouse. And so when you design an AppleTV game, it's not going to be about direct manipulation of screen items, it'll be about using an iOS device as a controller.

        A controller like the WiiMote is a controller. Like Move is a controller. Robust enough for that? Or do you think its acceptable to merely cradle your iOS device like a 360 controller? Replacing tactile buttons with glass?

        And no, you didn't state that iOS would kill the console market – but that's what the thread starter did state. That consoles with become irrelevant, and the asymco crowd gives him the thumbs up – shows what they understand.

  • kevin

    @Annette: You are both right and wrong. The total revenue from all CD sales still is more than all digital song sales, so you are right, but the downward trend is solidly in place. It's just a matter of time, so you are wrong.

    All the large CD stores (including Best Buy, Walmart, Target) have already shrunk their shelf space and inventory for CDs; if this continues, they'll soon only be selling the top 30. The iTunes Store is already the largest music retailer in the world, bigger than Amazon and Walmart.

  • jovi

    This is not an interesting comparison, you're just comparing the app store to an arbitrary market number. The point when apps surpass physical games says very little about either market. You may as well ask when apps overtake tennis rackets.

    Physical products are on the decline, but the primary driver of this is not the app store. It's distribution channels such as Steam and Xbox Live. Mass Effect 2, one of the biggest games of 2010 is debuting on the PS3 as a download. EA believe that their digital market will exceed physical goods by the end of 2011.
    http://www.wired.com/gamelife/2011/01/electronic-

  • http://twitter.com/BrianSHall @BrianSHall

    Great stuff. Can you clarify:
    does "revenue" include in-app purchases and in-app advertising?

    • asymco

      No to both. This revenue is a function of downloads only.

  • Marcos El Malo

    I'm not sure if I buy that the iTunes App Store itself is what will overtake physical media games. However, the trend is there for apps and downloadables in general, as we are already seeing with Steam and Xbox Live, etc. A standard joke these days (amongst the young people) is "What's a DVD?"

  • Tom

    I'm sure most commenters already realized that: AppStore games revenue will be only half of of total AppStore revenue, or $150 million per month. And worldwide videogame revenue will be 2 to 3 times more than just US videogame revenue, or $2 billion per month. So we are still talking about a factor of 1:10 or 1:15 at present. The crux of the AppStore revenue model is that encumbent game companies have so far worked with budgets above $1 million for most of their titles, often above $10 million. A typical Nintendo release can pull in $100 million to $1 billion in revenue, much like a Hollywood blockbuster. Making those kinds of investments and turnover is unthinkable on the $1 AppStore, at least as long as the user base hasn't crossed 1 billion.

    • Horace the Grump

      Hmm… not sure about this – you seem to imply that Hollywood blockbusters are the norm rather than the exception… I'd speculate that the hit/miss ratio for movies is about the same for game titles – in other words there are a few really big games and a lot of games that don't cover their costs… the same thing applies to the book and music industries… the few really big hits offset the losses on all the dross you never hear about…

      So I'm not sure your numbers work…

      • Tom

        It's the norm for Hollywood studios to bet $100 million each on a dozen movies per year, even if not all of them are breaking even. Similar for companies like Activision or EA when they're betting in excess of $10 million each on a handful headline titles per year. In the AppStore economy, it would not be prudent to have budgets of more than $1 million even for the most promising titles.

  • Josemir da Silva

    Although an ok idea, this is more of an intern research. A = b , B = A ? not always. Wait until like Wii 2 , Ps4 Xbox 720 (or whatever the names will be) comes out, and bam, games sales explodes again.

    This is ENTIRELY based if the industry remains as it is, which is a ridiculous assumption for anything with a GPU in it.

  • http://twitter.com/Stooshie @Stooshie

    The study is about app sales verses song sales. Nowhere is "physical video game content sales" mentioned!

    The app store sells a lot more than just games! And even if it did, it would not represent "the entire physical media gaming industry". Also, iTunes sells a lot more than just songs.

    It would be an interesting enough story that appstore sales may outstrip iTunes sales in the near future. Please don't overblow the story.The study is about app sales verses song sales. Nowhere is "physical video game content sales" mentioned!

    The app store sells a lot more than just games! And even if it did, it would not represent "the entire physical media gaming industry". Also, iTunes sells a lot more than just songs.

    It would be an interesting enough story that appstore sales may outstrip iTunes sales in the near future. Please don't overblow the story.

    • josemir da silva

      I dont think you RTFA, IT SAYS RIGHT ON THE TITLE !!! and on the test