Apple Captures U.S. Video Game Market Share

More than 30,000 games have been released in the iPhone App Store since its launch in July 2008. With titles that consistently dominate the Top Paid and Top Grossing lists, there is no question that the games category is the most lucrative category in the App Store. This report focuses on how Apple has affected the market share of U.S. video game and portable game revenue since the introduction of games sold through the App Store for iPhone and iPod touch.

Using publicly available market data, provided by NPD (mostly through Gamasutra's Behind the Numbers series), Flurry calculated U.S. console and portable game software sales for 2008 and 2009. We also estimated Nintendo DS and Sony PlayStation Portable game software sales, which make up the significant majority of the portable category, in order to compare these to iPhone game sales. We estimate iPhone game sales using a combination of data made available by Apple and using ratios and calculations from an aggregated set of data that we track through our analytics service.

We begin with a look at the U.S. gaming market, which NPD defines primarily as console and handheld. PC gaming, which has been declining over the last decade, and is currently approximately 5% of the total U.S. market, is not included. Also, for this analysis, we ignore online gaming revenue (e.g., virtual goods and subscription fees from social networking games and massively multi-player online games).

Below is our estimation of market share by platform among console, portable and iPhone platforms for 2008 and 2009.

NPD Group shows that combined U.S. console and portable software revenue was approximately $11 billion and $9.9 billion in 2008 and 2009, respectively. After estimating portable sales, we were able to back into console revenues. We then added our own estimates for iPhone game revenue, detailed later, which total $115 million and $500 million for 2008 and 2009, respectively.

With these figures, our main finding is that iPhone (and iPod touch) is a gaming platform to be reckoned with. Controlling 5% revenue of a $10 billion industry in just a year and a half is significant. From a market share perspective, console games lost ground to portable platforms and iPhone. While the downturn in the economy may have dampened sales of the more expensive console games category, there is no denying that iPhone has generated substantial revenue and entered strongly into a mature industry.

More interesting to us than iPhone's impact on U.S. gaming was its impact on the portable category, which we estimate totaled $2.25 billion and $2.55 billion in 2008 and 2009, respectively. Michael Pachter, managing director at Wedbush Morgan Securities and a prominent video game analyst, suggests "iPod touch is the most dangerous thing that ever happened" to game publishers. As prices come down for the iPod Touch, and games sold through the App Store continue to have lower price points, more of the young gaming generation may switch to Apple devices over Sony PSP and Nintendo DS for gaming. Further, Apple has squarely positioned the iPod Touch as a gaming machine. Check out a TV spot here to get an idea.

From what we calculate, consumers are downloading iPhone games in droves. Comparing iPhone against Sony and Nintendo games sales shows that Apple has taken nearly one fifth of the portable market in 2009, largely at the expense of Sony PSP. With Sony PSP Go, Sony's latest effort to revive its portable sales,having fallen short of expectations, Sony finds itself now challenged by two competitors in this segment.

Looking forward, with the iPad set for an April release, the traditional gaming giants may yet again be disrupted by Apple. With companies like Electronic Arts and Gameloft joining Apple on stage during its January unveiling of the iPad, the tablet device will enjoy elite game publisher support on day one. Further considering data that Flurry released in its latest Smartphone Industry Pulse report, where we determined that more than one third of iPhone game developers come from the traditional gaming industry, Apple has already established broad third-party game publisher support. With the iPad featuring a larger screen and more processing power, games on the tablet take a step closer to PC and console gaming. Unless the other major video game platform providers (i.e., Sony, Nintendo and Microsoft) respond accordingly, Apple could continue to roll up video game market share.

Video Games see Social Networks as Growth Engine

For those wondering when the video-game industry will enter its next console cycle, some argue that the new cycle has already started, with social networks as the next big opportunity. Such was apparent this week at the Game Developers' Conference in San Francisco, an annual gathering of video-game designers and publishers. While the event saw some big developments among traditional gaming -- most notably, Sony's new motion-control system -- a big theme running through the event was the rapid growth of social networking and the related opportunity for game makers.

The opportunity is big indeed. The largest social-network site -- Facebook -- alone has more than 400 million monthly users. MySpace, its closest rival, has 100 million monthly users. Those numbers are far above the number of people who own traditional video-game consoles. Games are becoming hot property for social networks. The soaring popularity of games such as "Mafia Wars" and "FarmVille" over Facebook has attracted the interest of both game makers and investors looking to pump money into the next Big Thing. Such was apparent at GDC this week. Among the crowd of programmers and designers were venture capitalists, financial analysts and private equity funds, sniffing for opportunities in the market.

These investors are not looking to sink money into the next PlayStation or Xbox game; rather, they are looking for the next Zynga -- the San Francisco-based company that makes "Mafia Wars," "FarmVille" and other social-network games. Still privately held, Zynga landed $180 million in funding late last year from Digital Sky Technologies, or DST, the Russian outfit that also bought a large stake in Facebook. Media reports said the investment gave Zynga a market valuation between $1.5 billion and $3 billion. The company reported 100 million unique monthly users in November, and reportedly has about $250 million in annual revenue.

There are over 200 million people playing games on Facebook each month, out of 400 million total Facebook users, suggesting a 50% penetration rate. For game makers, the growing interest among social networks provides a new opportunity beyond the industry's typical channels -- which are largely consoles such as the PlayStation 3, Xbox 360, Wii and associated handheld devices. These social networks are competing against each other to lure developers -- and each offers its own unique set of advantages and disadvantages. Facebook offers the largest base of users, by far. Offsetting that is recent developments whereby the social-networking giant will be taking a portion of the revenue generated by games in the form of virtual goods sales. The company has also changed some of its policies that had previously allowed game makers to market their games more aggressively, after several users compared the efforts to spam.

Hi5, a social network with about 50 million monthly users, is working to make itself into a gaming-focused site. The company recently hired Alex St. John -- founder of the successful online gaming site WildTangent -- as its president and chief technology officer. St. John said the company will target the best games from developers and give them top promotion, in order to reduce the need for promotional activities by the developers that may upset users.

While social networks offer game makers a large potential audience, the business models are very different from the traditional, retail-based game business. Many social games are free to play. Rather than charge up-front costs, producers try to drive revenue through in-game transactions and some advertising. The social networks themselves are trying to solidify their own businesses. Social games are growing like a weed, but the industry is facing some new challenges. Facebook's new policy of taking a portion of gaming revenues and limits on how game makers can promote their products to other users may crimp future growth, he said.

Social games are still expected to change the overall face of the gaming business. Traditional high-end games such as "Call of Duty" take two years to develop and can cost near $100 million in production expenses. "FarmVille" was developed in five weeks, according to Mark Skaggs, vice president for product development at Zynga. During a presentation at GDC, Skaggs contrasted the development cycles for the two types of games, noting that social games have the advantage of being continuously improved based on user feedback. With traditional games, most of the work happens before the launch. With social games, most of the work happens after the launch.