Video Game Sales Are Down: Are Apps to Blame?

NPD, a research firm that tracks video game sales, reported that March hardware sales rose, but software sales plunged again. The industry cannot entirely articulate the reasons for the drop, which makes countering it all the more difficult.

Total video game sales in the U.S. fell 4% for the month to $1.53 billion. Sales of software -- i.e., the games themselves -- fell 16% to $735 million. Hardware sales moved higher by 12% to $495 million, thanks to impressive sales of Microsoft's (MSFT) Kinect and the new Nintendo 3DS, but the boost they give to the numbers probably masks a downward trend.

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NPD points out that a large fraction of software sales in the video game industry have shifted into apps for smartphones and tablet computers, and those app sales are not included in the firm's numbers. The group claims that 23% of software sales in 2010 came from app sales for platforms like the iPhone.

But is it that simple? Perhaps not for major video game companies like Electronic Arts (ERTS). Many apps, like Angry Birds, sell extraordinarily well on Apple's (AAPL) iPhones. But are Angry Birds sales undermining sales of EA's sports games or Portal 2 for traditional consoles. That depends on how much people are willing to spend overall on video game software. If the figure is fairly low among a large number of gamers, the few dollars they spend per app game will cut into the sales of games played on consoles. If that's true, eventually, sales of hot consoles like Kinect will be badly hurt as the number of apps available for portable devices grows further. But, as the economy improves, so might discretionary spending on overall game software. In that case, the proliferation of games and platforms may simply pull more money from consumers' pockets.

For now, video game companies like Microsoft and EA aren't saying how much the rise of app games may be hurting them. Indeed, the industry is in such a state of flux that they may not know.