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Video Game Industry Raises the Bar in 2001

  |  February 12, 2002   |  Comments

The U.S. video game market had its best year ever in 2001, and now it turns its head to the convergence of broadband, the Internet and gaming.

The market for video games rolled along in 2001, with U.S. sales for hardware, software and accessories increasing 43 percent compared to 2000, according to The NPD Group, Inc.

Not only was the video game market not slowed by a softening economy or the terror attack, but 2001 turned out to be the best year ever for the U.S. video game industry. The total U.S. video game industry grew from $6.6 billion in 2000 to $9.4 billion in 2001. The previous all-time record was $6.9 billion in 1999.

The video game industry got a big boost from three new gaming systems in 2001: Nintendo's GameCube and Game Boy Advance and the Microsoft Xbox. The new systems led to a 39 percent increase in hardware unit sales over 2000. Next-generation consoles that sell at higher prices led to a 120 percent increase in dollar sales over 2000.

"Last year was a tremendous rebound from a slightly lower sales year in 2000. The impact from the next-generation console systems was nothing short of record breaking during the holidays," said Ilene Haase, director of toys and video games for NPDFunworld. "Three different gaming consoles, priced at $200 to $300 price points, sold through more than a million pieces last holiday season. Last year will be a tough year to top since higher-priced hardware systems drove the majority of the dollar growth. As for 2002 and beyond, we look forward to seeing the industry move towards connectivity via the Internet and a new level of superior quality games that can harness the power of these technologically advanced machines."

Sales of the total U.S. interactive entertainment software market, which includes PC entertainment and video game software, approached $6 billion in 2001 versus $5.4 billion in 2000, NPD found. Console and portable software sales rose 8.3 percent in unit sales, compared to 2000, while PC entertainment software experienced a unit increase of 3.8 percent.

"Sales in the PC game sector during 2001 were largely driven by a handful of proven franchises and correlating sequels or expansion sets," said Steve Koenig, senior software analyst, NPDTechworld. "As a result, the market for PC games managed to achieve relatively good growth in 2001, despite the gaming industry's strong focus on the console business during the last half of the year."

The No. 1 PC entertainment title was The Sims by Electronic Arts, which has sold more than 2.6 million units life-to-date, although it debuted more than two years ago. The Sims franchise has four titles appearing in the top 10, according to NPDTechworld. PC games also received a lift from Harry Potter and the Sorcerer's Stone, which after only two months on the shelves became the third top-selling PC game of 2001.

Most people remain convinced the future of gaming lies in its incorporation of the Internet, and next-generation consoles are designed with the Internet in mind, although the real rewards of online gaming remain at least one year away.

GartnerG2 expects online console gaming revenue in the United States to grow from $138 million in 2002 to $2.3 billion in 2005. It also predicts that online console gaming, a bonus feature of games in 2002, will become an assumed feature in 2005. GartnerG2 defines online console gaming revenue as proceeds from subscriptions for online console gaming using a broadband connection. It does not include any revenue from PC gaming or any ancillary services enabled via the console (such as music subscriptions).

The key to success in online gaming is broadband Internet access. While household broadband penetration rates are increasing in the United States, the broadband access point is usually located near the PC, not the television. This leads GartnerG2 to speculate that wireless broadband could play an important role in online gaming adoption.

According to Forrester Research, online gaming is expected to be the killer console application in Europe where powerful and flexible next-generation consoles are springing up for a number of applications.

"Applications like Web access and consumer electronic device hubs for digital cameras, MP3 players, and PVRs have all been proposed as areas where next-generation consoles could win," said Forrester Technographics analyst Paul Jackson. "But despite the wealth of potential applications, only online games will succeed in taking the devices beyond what previous consoles can do. Today, the only noncore console functions used by a significant number of consumers are CD and DVD playback, and consoles will have difficulty expanding on this early success. Game consoles' primary purpose has been the presentation of compelling gaming content, and consoles are designed around a TV output device, an ergonomic joypad input device, and ease-of-use -- that will not change."

Europe, however, has been plagued by slow broadband adoption. As both broadband and consoles become more affordable in the next three years, Forrester expects 10 million European households will have the technology to play online games via console by 2006.

"Three distinct phases in the development of online console games will emerge," Jackson said. "For 2002 and the first half of 2003, manufacturers will focus on selling the base console, compelling game bundles, price reductions and the continued promotion of 'better-than-ever' one-player games will all stimulate consumer interest. For the second half of 2003 and 2004, attention will move to connecting the broadband network with consoles. By 2006, 24 percent of European households will have broadband access -- 41 percent of online households -- and next-generation consoles will be among the first non-TV devices (along with PCs) to plug into broadband. The online gaming explosion will occur in 2005 when 12.7 million households will have the necessary technology to play online games."

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