We’ve been missing a big part of game industry’s digital revolution

Data! Pew-pew!

Aurich / Getty / Konami

Last year, the Entertainment Software Association’s annual “Essential Facts” report suggested that the US game industry generated $16.5 billion in “content” sales annually (excluding hardware and accessories). In this year’s report, that number had grown to a whopping $24.5 billion, a nearly 50-percent increase in a span of 12 months.

No, video games didn’t actually become half again as popular with Americans over the course of 2016. Instead, tracking firm NPD simply updated the way it counts the still-shadowy world of digital game sales. This “restatement” of the US game industry’s true size helps highlight just how much the game industry at large has transitioned from a business based on physical goods to one dominated by digital downloads and online purchases.

You can see the dramatic changes in NPD’s industry estimates for yourself by looking at the ESA’s “Essential Facts About The Computer And Video Game Industry.” Between the 2016 edition and the newly released 2017 edition of the report, “total consumer spending” for the past few years has changed enormously, as you can see in the graph above (Fig. 1) and the table below.

Year 2016 Report 2017 Report Diff. % diff.
2010 17.1 17.5 0.4 2.34%
2011 16.7 17.6 0.9 5.39%
2012 15.2 18.9 3.7 24.34%
2013 15.4 20.2 4.8 31.17%
2014 15.4 21.4 6 38.96%
2015 16.5 23.2 6.7 40.61%
2016 N/A 24.5 N/A N/A

Table 1: Annual spending on US game content (in billions of dollars. Source: NPD)

This isn’t a small difference—for the 2015 calendar year, the old and the new numbers are separated by over 40 percent. More than that, while the old numbers show the US video game market declining slightly in recent years, the updated numbers show the industry growing at an annual rate of about five to eight percent since 2012. The change brings NPD numbers more in line with NewZoo’s $23.5 billion estimate for the US game market in 2016.

What caused the discrepancy in these historical estimates? I reached out to NPD and got the following explanation from spokesperson David Riley:

The numbers have been restated to account for better visibility on mobile and digital full games and DLC spending. The acquisition of EEDAR, data informed from DLP [a “digital panel” of data directly from publishers], and re-sizing PC DLC spending is what led to the restatements.

In other words, until very recently, NPD didn’t have a very accurate idea of just how much US gamers were spending on game downloads and DLC across consoles, PC, and mobile phones. Only by getting new data from publishers and other sources did NPD begin to realize just how much they were underestimating the impact that non-physical games were having on the market.

The digital present

The ESA reports provide a direct measure of just how far off NPD’s digital-versus-physical estimates have been for years now (“digital” here includes “subscriptions, digital full games, digital add-on content, mobile apps, and social network gaming”). A year ago, NPD estimated that a healthy 44 percent of industry spending was still devoted to physical discs (and collector’s edition accouterments). This year, that number cratered to 26 percent, largely because of NPD’s data-driven “restatement.” (Fig. 2, above)

Year 2016 report 2017 report Diff % diff
2010 71% 69% 2% 2.82%
2011 68% 65% 3% 4.41%
2012 59% 54% 5% 8.47%
2013 53% 46% 7% 13.21%
2014 48% 39% 9% 18.75%
2015 44% 31% 13% 29.55%
2016 N/A 26% N/A N/A

Table 2: “Physical” share of US annual game spending (Source: NPD)

It’s hard to overstate what a seismic shift this has been for the industry. The US game market has completely flipped in just six years from one that was about two-thirds physical to one that’s about three-quarters digital. On a percentage basis, physical game sales today are a smaller share of the market than digital game sales were at the beginning of the decade. On a dollar-for-dollar basis, physical sales have fallen by nearly 50 percent in six years, while digital sales have increased threefold (Fig. 4, above)

The idea of buying games on a tangible disc or cartridge is quickly becoming a shrinking niche, completely overwhelmed by purely digital spending. That has to be worrying to retailers like GameStop, which is probably why the mega-chain is busy diversifying into lifestyle toys and apparel and even digital game publishing.

The game industry seems to be weathering the transition to a digital baseline better than its cousins in music and movies, though. While those media saw total revenues drop or flatten during the transition to largely digital sales, video game revenues continue to increase in the new era.

Nearly four years have passed since EA started making a majority of its revenue from digital sources and the company fully prepared to become 100-percent digital in the near future. Based on these new numbers from NPD, the rest of the game industry should be prepared for the same eventuality before too long.

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