Video game sales on the rebound

For the first time in a long time, it's a good time to be in the video game business....
January 1, 1997

For the first time in a long time, it’s a good time to be in the video game business.

Sparked by consumer panic over stories of rapidly dwindling supplies of Nintendo of America’s new Nintendo 64 game platform, the video game business has emerged from a protracted slump to see sales grow over 16 percent in 1996.

Unexpectedly robust sales of Nintendo 64 hardware have also benefited Nintendo’s chief rivals, Sega of America and Sony Computer Entertainment America, and retailers, who have sold out inventory.

The only people not smiling are parents who were unable to purchase the must-have toy this past Christmas season. The N64 is evidence that parents are willing to pay top dollar for quality entertainment for their children.

‘The performance of Nintendo 64 exceeded our wildest expectations,’ says Nintendo spokesperson Beth Llewelyn. ‘We thought we had a hot product, but you never know for sure until you launch it.’

As of a week before Christmas, 1.2 million N64 units had been shipped and over a million sold. The company was planning to ship 100,000 more units each week through the end of January. Retailers including Kmart, Toys ‘R’ Us and Wal-Mart all reported that the system had sold out or was near sellout. A Toys ‘R’ Us spokesperson said that because of the number of customers on its waiting lists, most of its new shipments will never reach store shelves.

Retailing at just under US$200, Nintendo 64 is the flashiest of the next-generation systems. The hardware offers 3-D character graphics with a 3-D background. Sega Saturn and Sony PlayStation, 32-bit next-generation systems that debuted in 1995, offer 3-D characters with two-dimensional backgrounds or vice versa. Those systems retail at a similar price.

Nintendo received criticism in some quarters for not having a large enough inventory to meet expected demand. The company explained that its order quantity for initial U.S. shipment 500,000 units was based on sales figures for the initial launches of the Sony PlayStation and Sega Saturn, each of which sold about half a million units during their debuts last year.

Llewelyn speculates that the combination of the superior graphics, the popularity of the Super Mario character and Nintendo’s ability to retail the system at a mass-market price all played a part in driving up demand.

Not everyone agrees that Nintendo is solely responsible for the improved fortunes of the video game industry.

‘People are making the assumption that Nintendo drove the gaming business this holiday season,’ says Sega spokesperson Dan Stevens. ‘All of the gaming companies make 80 percent of their money in six weeks, so everyone sells at peak.’

He adds that Nintendo has capitalized on the publicity surrounding the scarcity of its system.

That said, Sega’s fortunes weren’t hurt by the addition of Nintendo’s advertising dollars to draw consumers’ attention to advanced video games. Sega spent some US$50 million on marketing its products during the holiday season.

Sega’s strategy was to focus on the arcade experience and on the variety of games available on its Sega Saturn system as compared to those offered for the N64. Until December, only three games were available another five were released in December for the N64 system, while customers can choose from over 200 titles for the Sega Saturn.

Additionally, Sega bundled three games free with the purchase of every Sega Saturn system. Initial sales results were positive, with gains of 400 to 500 percent during this past Thanksgiving weekend compared to the same time last year. Sega also hopes to interest families who want to surf the Net, but who cannot afford a home computer, with Net Link, a modem that turns the Saturn into an Internet access device. In the first quarter of 1997, Sega will ship its first series of on-line games that enable multiple users to compete against each other via the Internet.

Some industry observers feel that parents’ willingness to pay the high-ticket prices for products with significant technological improvements shows that they are willing to spend a higher percentage of discretionary income on quality entertainment for their children.

‘When you have a dynamic toy that delivers value, people are willing to pay for it,’ says Ira Mayer, publisher of industry newsletter Youth Markets Alert. ‘What is most valuable to parents today is more of a time issue than a dollar issue. If the perception is that this is going to deliver high-value entertainment, price isn’t an issue.’

Jason Rich, president of Teen Talk Communications, and a long-time video game industry observer, concurs. ‘Parents are always willing to spend more on entertainment for their kids, especially if both parents are working and don’t have a lot of time to spend with them.’

When compared to other entertainment options, video game systems prove much more economical in the long run, Rich adds. For example, a game like Super Mario can offer 50 to 100 hours of play time. Compared to the cost of taking the family to a movie, the game systems work out to be relatively inexpensive entertainment. Even though games cost upwards of US$70, most can be rented at the local video store. Kids can test titles for play value before committing their parents’ dollars.

Video game companies continue to aggressively promote their older 16-bit systems, which retail for considerably less than the newer systems, but still provide efficient entertainment.

‘We expect that over 50 percent of sales for the industry will come from the 16-bit and hand-held games,’ Nintendo’s Llewelyn says. ‘The next generation is growing, but the bread and butter of the industry will be the 16-bit game.’

Since sales figures for the 1996 holiday season won’t be released until January, there’s no indication whether the upswing in video game system purchases has come at the expense of other toy categories. Toy Manufacturers of America expects a five-percent increase in toy sales for 1996. Wal-Mart reports that it is ‘very positive’ on its overall toy sales for the season. More likely, videos games will pull discretionary income from a variety of entertainment options, including PC-based games, movies, home videos and dining out, as well as toys.

Now that all of the choices of next-generation systems are available for comparison, the focus in 1997 becomes creating the best games possible. In a constant ‘can you top this?’ battle, great software will create the demand for the hardware. That’s not only good for the consumer, but bodes well for an industry that hopes to get back on solid footing.

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