What's going wrong at UK games retail?

All the headlines over the past few weeks suggest there's a crisis brewing over at UK games retail.

Over in the US, GameStop stated that the big releases of October all under-performed its forecast (despite NPD stating that revenue for October was up 31 percent year-on-year).

Meanwhile, in the UK, there's been the Titanfall 2 launch - which was down over 75 percent compared to its predecessor. Followed by Call of Duty: Infinite Warfare, which was down 48 percent, Dishonored 2 down 38 percent and now Watch Dogs 2, tumbling 80 percent compared with the first week of Watch Dogs 1.

A cluster like that has resulted in a number of GamesIndustry.biz readers approaching us to ask: 'What is going on?'

Let's start with the facts. Sales of physical software in the UK is down 16 percent to 16m games sold year-to-date. Revenue is down by 15 percent to £547m. Console hardware sales (primarily PS4 and Xbox One) are also down this year, albeit by single digits - and things have improved significantly since the launch of Xbox One S, PS4 Slim and PS4 Pro. All these figures are from GfK, which takes data directly from retailers and covers 95 percent of the UK market.

However, there's no evidence that consumers are spending less on video games overall. Data specialist IHS, which makes estimates around digital sales, expects that when you factor in money spent on digital console games, DLC, microtransactions and services, then the UK console market will be up by five percent.

"I currently expect digital sales of games and increasing spend on subscription services to mitigate for the drop in physical retail sales of games."

Piers Harding-rolls, IHS

IHS games boss Piers Harding-Rolls told GamesIndustry.biz: "I currently expect digital sales of games and increasing spend on subscription services to mitigate for the drop in physical retail sales of games.

"As we know physical media retail is only part of the picture and is being steadily disrupted by digital day and date availability of all releases. Part of this disruption comes in the form of digital pre-order strategies which are increasingly sophisticated and undermine a key proposition from specialist retailers. In this context prompt availability can sometimes override the other benefits of pre-ordering in store.  

"Other factors which are changing the landscape include a drop in volume of triple-A games as publishers look to engage gamers over a longer period of time and monetize them in-game. This is a longer term structural change for publisher's business models which unfortunately squeezes traditional games retail that find it a challenge to compete with digital stores."

IHS' figures are just estimates, but they're backed up by the recent financial reports from EA, Activision, Ubisoft and Take-Two.

EA stated in its last report that it has secured net sales of $2.6 billion from digital services and goods over the last 12 months, which is 57 percent of its total. Based on the first four weeks on sale, FIFA 17's Ultimate Team mode (which is the microtransaction business within that game) is 23 percent up over FIFA 16. EA's PC and console downloads are up as well, albeit slightly, increasing by 4.5 percent.

What's more, EA CEO Andrew Wilson stated that markets such as North America and the UK 'are growing at a faster rate'.

Ubisoft last financials had digital revenues up by 102 percent and 'recurring player investment' (so money made by DLC and microtransactions) up 132 percent. Activision says its Q3 digital revenues were $1.3bn, a growth of 114 percent year-over-year, with over $1bn coming from DLC alone. And Take-Two says its digital delivered revenue increased by 14 percent in the last quarter, and this segment accounted for 31 percent of its total revenue.

However, just because there's growth in digital areas does not in itself explain the drop in the physical market - it is possible for both areas of the industry to grow, of course. Likewise, it doesn't explain why specifically the recent triple-A releases of Titanfall 2, Call of Duty: Infinite Warfare, Dishonored 2 and Watch Dogs 2 should decline so severely when compared with their predecessors.

"People who are buying fewer mint games aren't just moving into digital - this accounted for just 13 percent of value decline this year."

Kantar Worldpanel

Kantar Worldpanel, which is a data firm that speaks directly to consumers to understand their buying behaviour, says there are 180,000 fewer shoppers in the market this year compared with last - and those that remain are spending less money on average. Kantar says that digital isn't the only reason for the drop. It says: "People who are buying fewer mint games aren't just moving into digital - this accounted for just 13 percent of value decline this year. The problem is with generally lower engagement among repeat mint games shoppers."

Kantar states that retailers are seeing a decline in consumers spending on new generation machines compared with older consoles, which speaks to the trend of gamers buying fewer titles and spending longer playing them - which is the phenomenon we've seen around the likes of Destiny, The Division, Grand Theft Auto Online and Overwatch.

In comparison to the other entertainment industries, the decline at UK games retail is quite similar to what has happened in the DVD space. Kim Bayley, who is the director general of the Entertainment Retailer's Association in the UK, states that physical DVD is "under pressure" due to the "massive growth of Sky Buy To Keep, Netflix and so on." Music, however, is far more resilient, the physical CD market is anticipated to drop by between six and eight percent - an impressive figure considering the lack of a new Adele album, while Vinyl sales are actually up 50 percent. Digital music, particularly from streaming, is showing growth. So across entertainment, there is no sign of a drop in consumer spend.

All this data does suggest growth in digital for video games is having some impact upon physical sales, and that consumers are buying fewer titles. We have also already analysed the potential trend of gamers waiting beyond the first week to pick up their titles - something that certainly has happened in relation to EA's Battlefield 1.

"Look beyond these high profile failures and you'll discover some lower-profile success stories such as Skyrim, NES Mini and Battlefield 1."

Another impact that cannot be ignored is the almost complete drop-off of Xbox 360 and PS3 software sales. GAME stated in its latest financial report that Xbox 360 and PS3 sales have 'pretty much played through', which is its way of saying that - bar an occasional FIFA or LEGO game - people have almost entirely stopped spending on last generation platforms. The severe declines of these older machines will be having a detrimental impact upon the figures.

It's also worth noting that there are fewer massive releases this year. In 2015, there were five games in the UK that sold over 1m units - currently this year, there's just one (FIFA 17). There's been no Fallout 4-size release, no Star Wars: Battlefront, no major Destiny expansion, while GTA V, although still selling incredibly well, is not quite as big this year as it was in 2015.

Indeed, it is possible we're overselling the problems in the UK physical games market at the moment. If you take the four examples of games that are struggling, you'll discover that each one has individual reasons for underperforming.

Titanfall 2, effectively a new IP to PlayStation owners, was sandwiched between two major shooter launches with a smaller marketing campaign. Dishonored 2 was always a niche game and releasing it in November with a sizeable marketing push was never a guarantee of success (and success may still come). In terms of Call of Duty: Infinite Warfare, this is a franchise that has slowly been declining year-over-year, while last year Black Ops III (which bucked the trend) is still being played by a huge number of people. Finally, the original Watch Dogs significantly over-indexed due to a high level of anticipation for the title, and it didn't quite live up to expectations. Its sequel was always going to have a tougher start to life.

Furthermore, look beyond these high profile failures and you'll discover some lower-profile success stories. Bethesda may be disappointed in Dishonored 2, but it won't be upset with its Skyrim remake, which is emerging as one of the sleeper hits of the year. Battlefield 1 had a good start and is continuing to perform very strongly; the game is currently the No.1 shooter in the UK and could even emerge as the biggest Battlefield game in the series yet.

FIFA is always a huge seller, but this year's game has exceeded even EA's expectations, with the game actually selling-out in places in the UK. Xbox One S and Forza Horizon 3 have also outperformed retail expectations, while the Mini NES has become one of the most talked about products of Christmas - if only Nintendo had released enough stock, then retail may have had its Q4 saviour.

There's no disputing things are tough on the High Street in the UK, and we can expect some severe discounting during Black Friday and over the next month. Nevertheless, there remains signs of promise in the physical space, with five weeks still to go until Christmas.