Verdict Research: Video game spend surpasses music & video

There has been a huge shift in consumer attitude towards the entertainment market says Verdict Research in its latest reports – UK Music & Video 2008and UK Video Games & Consoles Retailing 2008. In the 12 months to the end of 2008 Verdict predicts that the buoyant video games market will have grown by a massive GBP1.37bn – at a time when the combined music & video sectors have stagnated, with growth of just GBP0.03bn between them. This will see the video game retail market overtake music & video, to become the largest entertainment sector in the UK.

Despite the digital revolution, times are torrid for music & video retailers
Though the music and video sector has enjoyed a boost from the rapidly growing digital download market, general trading conditions remain challenging. Music is suffering from piracy, a continual onslaught of price deflation, intensifying competition and the ongoing decline of physical format CD’s. While the DVD market has shown robust volume growth, value growth is impaired by falling prices and heavy discounting. With the high street consolidating and online becoming increasingly fragmented, competition is intensifying at a time when overall growth in the market is grinding to a halt, at just 0.8% over the last 5 years.

“The music & video market is not just suffering from a slowing of growth but a massive transfer of spend to online,” says Malcolm Pinkerton, Senior Retail Analyst at Verdict Research and author of the Music & Video report. “So in actual fact the sales via high street shops are being hit a lot harder than the overall growth figures would suggest.” Indeed Verdict figures predict that by the end of 2008 in-store music & video sales will account for less than two-thirds of the market – and that this proportion is falling fast.

However, there are signs that specialists HMV and Zavvi are having a measure of success in turning things around. They have established themselves as the dominant specialists with a high street presence, reinvigorating their online offers and better integrating them with stores. Moreover, they have made store environments more appealing, by moving away from traditional formats. But even within this there is an indication of the health of the music & video markets, as the two specialists have made a point of diversifying their offers, cutting back on space – in music in particular – and re-allocating it to more lucrative areas such as MP3 players, books, clothing and video games.

Online music & video specialists continue to grow – but need to innovate going forward
The potential for online players to continue increasing CD and DVD sales is limited – because of falling sales of the formats in the overall market and robust competition from the remaining high street operators. Moreover, although piracy is decreasing and legitimate downloading is becoming more popular, the digital market is becoming increasingly fragmented, with a growing abundance of music and video download websites intensifying competition. While price is likely to be a key deciding factor, retailers are going to have to offer innovative features, such as iTunes’ aEUR~Complete your Album’ or superior sound quality downloads and premium albums with bonus material. Range and brand strength will also be crucial.

For those who can get their digital offers right the digital channel represents a source of potentially lucrative growth. The ever-growing adoption of Digital Rights Management (DRM)-free files by retailers such as Play.com, Amazon and even Tesco, means files can be easily played on, and transferred between, a range of devices – moving away from the previous restrictions applied by the likes of i-Tunes, which traditionally limited its downloads to i-Pods. “The embracing of open MP3 format will reignite download sales, as it will remove the issues of interoperability and encourage album sales,” adds Pinkerton. “With more record labels and retailers signing up to the MP3 format, the download market is more likely to reach its true potential, as there will be a universally-compatible open format. ”

Unprecedented boom in video game spending
In contrast to music & video, the video games market is proving itself the stand-out performer in a sluggish retail environment, enjoying explosive growth – at the end of which it will emerge with a larger, more significant, chunk of the retail market. “Whereas music & video has become somewhat stale, video games has enjoyed an array of technological innovation, which has widened the market demographic enormously and driven phenomenal growth,” said Matthew Piner, author of the Video Games & Consoles Retailing report. “2008 has seen video games catapulted into the mainstream entertainment market, popular with men, women, children and families alike”.

Although leading specialist Game and a number of well-run independents are well-placed to profit on the conspicuously buoyant market, other retailers are also keen to benefit, with grocers, online retailers and selected non-specialists all ramping up their participation in the sector – often at the expense of their music & video offers. Having enjoyed a sustained period of rapid growth, when CD and DVD sales boosted incremental non-food sales with little effort, growth of the grocer’s market share in music & video has slowed. Consequently they have reigned in their offers, normally centering them around chart titles. According to Verdict it is frequently a lucrative video games offer which has moved into this space, with the grocer’s video games sales now worth more than GBP500m – growing from just under GBP100m in 2003.

Resilience to the recession and growth of peripherals
One surprising aspect of the games market over the past year is that the more severe the economic downturn has become, the better the gaming market has performed. “Games represent a relatively cheap, but also exciting and innovative, pastime,” adds Piner. “As more people save money by staying in, a video game, although it may cost three or four times as much as a DVD or CD, offers much more longevity and hence better value for money. Moreover, it offers a more involved and interactive form of escapist entertainment when compared to a CD or DVD.”

The medium term prospects of the market are strong with the current generation of consoles set to see a peak in hardware sales across late 2008/early 2009 and then enjoying strong software sales, driven by a widely installed console base, into the next decade. The video games accessories market is also set to continue enjoying massive growth – with sales more than doubling in 2008 and now representing more than 10% of the video games sector value. Over the past few years gaming has increasingly moved away from the traditional console and joystick/joypad format. “The Nintendo Wii’s movement based controller, or aEUR~Wii remote’ has had a particular impact on the market, as has the arrival of stylus pens (for the Nintendo DS), dance mats, drum machines and microphones to play games,” concludes Piner. “Sales of these peripheral gadgets have widened interest in the sector and generated a new revenue stream for retailers.”

Entertainment markets size 2002-2007
Total Music & Video Spending
GBPm Y-o-Y Growth % Total Video Games Spending GBPm Y-o-Y Growth %
2003 4,426 8.6 2,179 2.1
2004 4,692 6.0 2,113 -3.0
2005 4,456 -5.0 2,284 8.1
2006 4,415 -0.9 2,545 11.4
2007 4,434 0.4 3,270 28.5
2008 4,461 0.6 4,643 42.0
Source: Verdict Research