November 5, 2008

Video Games: More Lucrative Than Music and Video?

Over the 12 months to the end of 2008, Verdict predicts that the buoyant video games market will have grown by GBP1.37 billion. This is especially significant when compared to the stagnation in the music and video sectors, which have recorded a combined growth of just GBP0.03 billion. It is likely, then, that the video game retail market will soon become the largest entertainment sector in the UK.

Though the music and video sectors have enjoyed a boost from the rapidly growing digital download market, general trading conditions remain challenging. Music is suffering from piracy, a continual onslaught of price deflation, intensifying competition and the ongoing decline of physical format CDs. While the DVD market has shown robust volume growth, falling prices and heavy discounting have impaired value growth. Through high street consolidation, competition is intensifying at a time when overall growth in the market is grinding to a halt, at just 0.8% over the last five years.

Although the online space has provided a significant opportunity for growth (through the digital download market), it has also proved a hindrance in that music and video retailers are suffering from a massive transfer of spend to online. Thus, sales via high street shops are being hit a lot harder than the overall growth figures would suggest. Indeed, Verdict figures indicate that by the end of 2008 in-store music and video sales will account for less than two thirds of the market and that even this proportion is falling fast.

However, there are signs that specialists HMV and Zavvi are having a measure of success in turning things around. They have established themselves as the dominant specialists with a high street presence, reinvigorating their online offers and better integrating them with stores. Moreover, they have made store environments more appealing by moving away from traditional formats. However, even within this there is an indication of the declining health of the music and video markets, as the two specialists have made a point of diversifying their offers by cutting back on space for music in particular and re-allocating it to more lucrative areas such as MP3 players, books, clothing and video games.

Meanwhile, on the web, the potential for online players to continue increasing CD and DVD sales is limited because of falling sales of the formats in the overall market and robust competition from the remaining high street operators. Furthermore, although piracy is decreasing and legitimate downloading is gaining popularity, the digital market is becoming increasingly fragmented and the growing abundance of music and video download websites is intensifying competition. While price is likely to be a key deciding factor, retailers are going to have to offer innovative features such as iTunes 'Complete your Album', superior sound quality downloads or premium albums with bonus material. Range and brand strength will also be crucial.

For those retailers which can position their offers correctly, the digital channel represents a source of potentially lucrative growth. The ever-growing adoption of digital rights management-free files by retailers such as, Amazon and even Tesco means that files can be easily played on, and transferred between, a range of devices, moving away from the previous restrictions applied by the likes of iTunes, which traditionally limited its downloads to iPods. This embracing of the open MP3 format will reignite download sales, as it will remove the issues of interoperability and encourage album sales. With more record labels and retailers signing up to this format, the download market is more likely to reach its true potential.

In contrast to music and video, the video games market is proving to be the standout performer in a sluggish retail environment, enjoying explosive growth over the past 12 months. Indeed, this year has seen video games catapulted into the mainstream entertainment market, popular with men, women, children and families alike.

Although leading specialist Game and a number of well run independents are well placed to profit on the conspicuously buoyant market, other retailers are also keen to benefit, with grocers, online retailers and selected non-specialists all ramping up their participation in the sector often at the expense of their music and video offers. Having enjoyed a sustained period of rapid growth, when CD and DVD sales boosted incremental non-food sales with little effort, growth of the grocers' market share in music and video has slowed. Consequently, they have reigned in their offers, normally centering them around chart titles. Frequently, lucrative video games offerings have been moved into this space, with the grocers' video games sales now worth more than GBP500m growing from just under GBP100m in 2003.

One surprising aspect of the games market over the past year is its apparent resilience to the current recessionary climate: the more severe the economic downturn has become, the better the gaming market has performed. This is perhaps because games represent a relatively cheap but also exciting and innovative pastime. A video game, while costing three or four times as much as a DVD or CD, offers much more longevity and hence better value for money as people opt to stay in more often. Furthermore, it offers a more involved and interactive form of escapist entertainment when compared to a CD or DVD.

This essence of escapism has been embraced by video game peripheral manufacturers as gaming increasingly moves away from the traditional console and joystick/joypad format. The Nintendo Wii's movement based controller (or 'Wii remote') has had a particular impact on the market, as has the arrival of stylus pens (for the Nintendo DS), dance mats, drum machines, microphones and other assorted peripherals. Sales of these gadgets have widened interest in the sector and generated a new revenue stream for retailers. Indeed, the video games accessories market is set to continue enjoying massive growth, with sales more than doubling in 2008 to represent more than 10% of the video games sector value.

The medium term prospects of the video games market are strong, with the current generation of consoles set to see a peak in hardware sales across late 2008/early 2009 and then enjoy strong software sales, driven by a widely installed console base, into the next decade.

Source: Verdict Research