Video Game Sells $650mil in Five Days

I continue to be stunned by the extent to which video games have displaced movies as the most important entertainment medium for a substantial portion of the public, and more generally by video games as a money-maker.

The latest release of Call of Duty, Black Ops, generated $650 million in sales in its first five days of release. By comparison, the biggest movie of all time, The Dark Knight, had a box office of less than a third of that, $200 million, in its first five days.

I wonder what the star game designers are making compared to movie personnel?

I love the Wii

And not just because it's a lot of fun. I also love the Wii because it's a great marketing story. Nintendo, if I recall the numbers correctly, was trailing Sony and Microsoft fairly significantly pre-Wii. Hardcore video gamers (such as my son) turned up their noses at Nintendo's products.

So Nintendo simply redefined the market, creating a family-friendly game system that facilitates rather than impedes social interaction, and that appeals more to adults and little kids than teen boys. It was marketing genius -- if you're losing in the existing market, create a new one.

And it has paid off big-time. The video game business is one of the bright spots in the economy, with January sales up 13% over last year, and within that growing market, Wii's console sales are double those of Playstation and Xbox, while the top three games are all for the Wii.

And besides that, Mario Kart is a blast.

GameStop makes money on used games

GameStop, according to Wall Street Journal, is making a large part of its profit from sales of used games.

About 42% of GameStop's overall gross profits come from its secondhand business, compared with half that level for new games. "When you consider that most retailers operate on single-digit margins, it's astronomical," said Evan Wilson, an industry analyst with Pacific Crest.

The big contribution to the bottom line is due to the margins on used products -- typically the used games are sold for double what the store gives the former owner (and that payment is in credit toward future purchases). Thus GameStop averages 48% on used product, compared to 20% on new games and a miserable 7% on new consoles.

The bright spot in the entertainment biz

The woes of the music biz have been discussed endlessly (here and elsewhere). The movie biz is hurting as well, and the networks' TV ratings are crashing through the floor. Not coincidentally, video game revenue growth has been phenomenal. It's not a coincidence because teenage boys and young adult males have always been among the biggest buyers of music, and a large part of the audience for movies and TV.

The incredible $500mil generated by Grand Theft Auto IV in its first week (the company is calling it the biggest entertainment event ever -- possibly hyperbole, but I can't think offhand of anything bigger) is not the only evidence of the shift. Activision had no new intros, but is still generating great results based on older titles:

Activision Inc posted a quarterly profit on Thursday that blew past expectations as demand for its "Guitar Hero 3" and "Call of Duty 4" video games made up for a complete lack of new releases. [,,,]

Revenue was $602.5 million, towering 93 percent above a year ago and burying the average estimate of $373.6 million.

Not bad, and more than enough to have folks at the record companies saying, "So that's where my missing $600 million went!"

Meanwhile, Microsoft announced that it has reached the ten million mark in sales of Xbox 360, although Nintendo's Wii is outselling it now and close behind at 8.8 million.

The worst thought for the traditional entertainment venues is what this probably means in terms of talent. If you were a young, talented, creative person, would you be dreaming of a future in music, movies, TV ... or video games?

Yet another medium

A couple interesting items from the video game biz. In one piece of news, we learn that Guitar Hero has racked up over a billion dollars in sales. I think that one of the factors that is too often ignored in discussions of the decline of the music and movie business is how much time and money their core audience spends on video games. A billion dollars is a lot of money diverted out of teens' entertainment budgets.

In another item, we find that EA is going to be making on-line games available for free, in an ad-supported format:

Electronic Arts is to release a free online version of the popular Battlefield game to be supported by adverts and micro payments.

The PC game, Battlefield Heroes, will be available only online later this year, and will not be sold in shops.

The move marks EA's first major attempt to tap into new sources of ad-driven revenue in Western markets.

The firm has a free version of its Fifa game in South Korea, earning more than $1m a month through in-game sales.

An inevitable development, I suppose, but also another contributor to media fragmentation. If you want to reach teen and young adult males, should you advertise on radio and TV, or on Battlefield Heroes?

Nintendo's on a roll

The good news continues to pour in at Nintendo: Ad Age selected them as Marketer of the Year -- one of those rare occurrences where I don't disagree with that mag.

Video-game sales were starting to flatten in North America. In a dash of in-home market research, Nintendo executives saw their own families divided into gamers and nongamers. Instead of a problem, they saw an opportunity.

So while other video-game makers were busy trying to incorporate gamers' intense demands into their next-generation hardware, Nintendo set out to create products that could change the dynamics of gaming and expand the audience well beyond what it had been before.

More importantly, the company's profitability and stock price are soaring:

The stock rose 5.3 percent to 71,300 yen on Monday, bringing its market capitalization to 10.1 trillion yen -- a fivefold increase in the past two years.

Nintendo's market capitalization is almost double that of Sony, whose total revenue is more than eight times as big as Nintendo's.

From a channel marketing standpoint, what all this means is that Nintendo is able to watch smugly as their competitors are forced to cut price:

Profits at Nintendo have surged on the runaway success of the Wii and the portable Nintendo DS machine in North America, Europe and Japan, forcing Sony and Microsoft to slash console prices in a desperate catch-up bid ahead of the holiday season.

Iwata said the company was struggling to meet demand of the Wii and a price cut was out of the question.

Round one to Nintendo

It looks like Nintendo's Wii is leading in the early returns in the big battle of game system intros. November sales figures show:

• 476,000 - Nintendo Wii
• 195,000 - Sony PlayStation 3

While that news is encouraging to the folks at Nintendo, it should be noted that Microsoft's Xbox sold 511,000 units in November, and appears on track for 4 million for the year.

Pass the popcorn, and let's settle in to watch the battle.

Time for an anti-dumping suit against Sony?

According to this item, Sony is selling PS3 for less than it costs to build it:

The cost of manufacturing and materials for the low-end, 20GB version of the console comes to $805.85 ... That means that for every PS3 Sony sells for $499, it will lose $306.85 on components alone. Marketing and advertising costs would then boost the actual cost to Sony even higher.

The federal anti-dumping laws (invoked most famously regarding steel imports) say that it is illegal for a foreign company to sell a product in the US at less than its manufacturing cost. The idea is to protect US companies from unfair competition.

Of course, we know that Sony is doing this because they expect to make any losses back on selling games and accessories (Gillette's famous business model: "Give away the razors, sell the blades"), but isn't this a case where the DoJ should (based on the logic of the law) file an anti-dumping suit to protect Sony's poor, disadvantaged US competitor -- Microsoft?

PS: Actually, I have great doubts about the wisdom of anti-dumping laws, but the irony of DoJ protecting Microsoft from "unfair competition" is delicious.