The video game industry thrived in the second quarter as shelter-at-home measures amid the COVID-19 pandemic led to a spike in demand for game consoles.
Although Sony Corp. and Microsoft Corp.'s respective PlayStation 4 and Xbox One consoles are in their final year before the launch of next-generation consoles this holiday season, both companies experienced quarter-over-quarter growth in hardware sales.
Sony sold 1.9 million PS4 units in the second quarter, up from 1.4 million units in the first quarter. Microsoft, which does not officially disclose Xbox One sales numbers, is estimated to have sold 1.4 million Xbox One units, up from 500,000 units a quarter ago, according to data by Kagan, a media research group within S&P Global Market Intelligence. In comparison, Sony sold 3.2 million PS4 consoles and Microsoft sold 700,000 Xbox One units in the second quarter of 2019.
But Nintendo Co. Ltd. was the clear leader in the gaming hardware space in the second quarter, as demand for its Switch console skyrocketed following the launch of a new "Animal Crossing" game. Nintendo sold more than 5.7 million Switch consoles in the second quarter, up from 3.3 million units in the prior quarter and 2.1 million units a year earlier.
Nintendo has been grappling with supply issues this year after the pandemic caused factory shutdowns in China. Those closures triggered component shortages and slowed output for factories in Vietnam, where the Switch is manufactured. Although Nintendo in its Aug. 6 earnings release said the production situation has almost recovered, there was still a shortage of Switch consoles at major retailers around the globe as of Aug. 13.
When contacted by S&P Global Market Intelligence, a Nintendo spokesperson declined to comment on when retailers would start receiving new shipments of the consoles.
According to data by Panjiva, U.S. seaborne imports linked to Nintendo surged by 45.7% year over year in May, and remained up by 4.2% year over year in July.
However, Nintendo may struggle to continue that rate of growth in the third quarter without encountering increased shipping costs, according to Christopher Rogers, a senior analyst at Panjiva.
If the company is still working to catch up on shipment backlogs later in the year, it may need to utilize air- rather than sea-freight, which can be more expensive, Rogers said. "There are also concerns that there may be another round of increases in air freight rates later in the peak shipping season, as there is little prospect of a return of air passenger activity," he said.
Another burst of Nintendo shipments late in the year would also compete with those from Microsoft and Sony, which are expected to claim a lot of surplus airfreight capacity with their new consoles set to release this holiday season, Rogers noted.
Panjiva data found that shipments linked to PlayStation also surged recently, with a 32.9% year-over-year increase in July. Microsoft, however, did not experience a significant uptick in shipments, despite a spike in Xbox One console sales in the second quarter.
According to full-year 2020 console shipment estimates by Kagan, Sony is expected to end the year with the second-most sales, at 10.9 million units, comprised of 7.4 million PS4 consoles and 3.5 million PlayStation 5 consoles. Microsoft is forecast to come in third with 5.6 million shipments, including 2.8 million Xbox One consoles and 2.8 million Xbox Series X consoles. Nintendo is expected to remain the top console seller by far for the rest of the year, with about 18.7 million total Switch sales.
"As consumers return to work and the new school year begins, we anticipate game sales will level off," said Kagan analyst Neil Barbour. "That said, Animal Crossing has taken on a life of its own. Nintendo has not announced a major title for its holiday quarter, and may be counting on Animal Crossing to keep up its winning streak."
Despite trailing both Nintendo and Sony in console sales, Microsoft's strategy for its gaming division indicates it will be less reliant on Xbox hardware sales going forward, said Michael Goodman, director of digital media strategies at Strategy Analytics.
"Microsoft is slowly but surely shifting its gaming initiatives towards a service-based platform," Goodman said. "Between its Xbox Live, Game Pass and xCloud services, the company is more interested in getting gamers abroad their subscription ecosystems than following a traditional console cycle."
Goodman noted that all first-party video game titles that Xbox's studios develop will be available on PCs, for instance, and many will also be playable on smartphones via the xCloud streaming offering. This essentially allows Microsoft to expand its install base to hundreds of millions new devices, compared to only consoles for Sony and Nintendo.
"Microsoft's service-based model has changed the dynamics of the marketplace because they no longer need to rely on a console install base to be successful," Goodman said. "They are no longer selling to an addressable market of Xbox owners. They are selling to an addressable market of gamers."