The total games market is set to grow to £3bn this year as digital downloads drive sales, but the downturn and lack of new consoles have hit consumer spend.

Why are we talking about it now?

Research last week found that in 2011 sales of video games software overtook video for the first time. According to the Entertainment Retailers Association, the UK games market generated sales of £1.9bn in 2011, ahead of video on £1.8bn and music on £1.1bn.

How big is the total games market?

In 2011 it was worth £2.9bn, including hardware sales, according to Verdict, which predicts the figure will grow to £3bn in 2012 as digital downloads drive sales.

Who are the main players?

Last year Game, which fell into administration this week, had a dominating 34.3% of the market. Amazon trailed with 9%, with HMV (6.9%), Play.com (5.1%), and Asda (4.9%) and Tesco (4.9%) following. Peel Hunt analyst John Stevenson said supermarkets have not encroached on the specialists’ territory “as much as you think”.

He says with a DVD, the grocers sell below cost with aggressive pricing, taking huge amounts of market share. “With gaming, they do the same thing, but don’t take the market share,” says Stevenson.

How has digitalisation affected the sector?

The games industry has not been impacted by digitalisation anywhere near to the extent that the music industry has. As a result, the physical video games market is still strong. Hard copy product, including hardware, sold through stores made up £1.9bn of the total £2.9bn last year. Online purchases of physical products reached £653m, while digital downloads accounted for £397m.

However, sales of digital products are set to grow. Digital downloads are expected to be £539m of the £3bn market in 2012.

What is the outlook?

Not great. Hardware products drive sales, and there has been no new kit since the boom of 2005 to 2007, when the Xbox 360, Wii and PS3 launched. Additionally, the consumer downturn has curbed spend. Stevenson says the market is “as bad as it can get” right now. However, the Wii U comes out this year, and the Xbox 3 is expected in 2013.

Shoppers will soon be able to download more mainstream games titles, which retailers will be able to charge for. “The digital proposition will get better as broadband gets better, and there will be a download market eventually,” says Stevenson.

When gaming streaming service Onlive improves, it will also create a new revenue channel, but a return to the boom years is not certain.

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