Media tracker NPD Group's data reveals that industry sales plunged 21% last month. I guess Santa wasn't leaving too many Nintendo 3DS devices in stockings this holiday season.
The news is bleak, but that's pretty much how it has been with the monthly NPD metrics through most of the past three years. Folks aren't buying new games or new systems at the retail level.
It's important to remember that NPD doesn't take a complete snapshot of the industry. While the research group posts that hardware sales plunged by a steep 28% in December -- with software sales falling by a still problematic 14% -- the data only covers traditional retail sales. The metric does not include digital downloads, online sales, and the resale of used games and gear.
However, it's pretty clear that we're not consuming video games the same way we were just a few years ago. The industry is changing, and it's important to know why.
1. Games Last Longer
In the old days, a game was a good escape for a few days or weeks. Once the player beat the game, it was time to save up for a new title.
Online connectivity and gamer networking have changed that. It's hard to put out a blockbuster without a viable multiplayer gaming component. Microsoft (MSFT) now has 40 million Xbox Live users delving into simulated battle campaigns and sports matches with their virtual playmates.
Activision Blizzard (ATVI) is still setting sales records with every annual update of its Call of Duty franchise. However, gamers keep playing the title until the next installment comes out. It's a climate in which the biggest titles fare well, but the market below that has dried up.
2. Used Games Are Easier to Swap
GameStop (GME) revolutionized the industry by allowing customers to trade in used games and gear for credit at its stores. GameStop then resells the games to penny-pinching bargain seekers. This has actually been a higher-margin business for the retailer than its new games and hardware.
The competition is starting to notice. Best Buy (BBY) and Amazon.com (AMZN) have started accepting trade-ins. Best Buy is hungry for foot traffic at its stores, while Amazon is so aggressive on trade-ins that it will cover shipping costs.
The result is that there are a great number of places to buy or swap used games. Unfortunately for the game developers and publishers, they don't see a penny of the subsequent sales.
3. Social Gaming Eats Up the Clock for Casual Gamers
Zynga (ZNGA) going public last month at a market cap similar to traditional gaming software legend Electronic Arts (EA) turned heads. Through Facebook, Zynga has attracted a growing audience of casual gamers fleshing out their virtual farms in FarmVille or playing online Scrabble through Zynga's Words With Friends. This has turned the leading social-game maker a profitable juggernaut.
Diehard gamers will cringe at the mere mention of social gaming. CityVille can't touch Skyrim. However, the time that folks are spending on free ad-supported games or those that require cheap in-game purchases to make more interesting is clearly eating into a larger audience who used to fire up their consoles when they needed to play a game.
4. Apps Are the Main Course
If Facebook is nibbling at the video game industry on one end, smartphone apps are taking more bites on the other.
Apps have also leveled the playing field. The barriers to entry are much lower in developing Android and iOS games than for traditional console titles, forcing prices to be competitive.
5. Your Console Is a Multimedia Device
Even hard-core gamers may not be playing as many games anymore. Microsoft updated its Xbox Live platform last month, giving cable providers and networks the opportunity to stream to their subscribers.
A console isn't just for games anymore. It's an appliance for streaming video, surfing the Web, and listening to music.
Games? Who needs that?
That last question is rhetorical. Of course die-hard gamers still enjoy their favorite games. However, all of these factors have combined to create a difficult climate for the gaming industry that shows no signs of reversing.
The game's afoot, gamers -- and it's out the door.
Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Amazon.com, Best Buy, Microsoft, GameStop, and Activision Blizzard. The Fool owns shares of and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard, Amazon.com, and Microsoft. Motley Fool newsletter services have recommended writing covered calls in Best Buy and GameStop, creating a bull call spread position in Microsoft, and creating a synthetic long position in Activision Blizzard.