Why Digital Games Could Totally Dominate Physical Formats In Just a Few Years

Analysts suggest that, in as little as six years, digital game sales could entirely dominate the video game market. It's a shift that’s been brewing throughout the PlayStation 4 and Xbox One console generation; but now, the PlayStation 5 and Xbox Series X generation could become the turning point where physical media becomes all-but obsolete.

Unlike other entertainment industries, video game fans have clung on to the nostalgic draw of boxes, discs, and cartridges — so, why is this acceleration happening now, after years of healthy physical game sales?

For collectors who love adding the latest releases to their shelf, this shift might be frightening to consider. But does digital's dominance necessarily spell the end of physical games, or will collectors show enough interest and spend enough money to keep physical media alive, albeit in a new, more specialized form? And will digital change game ownership, standard pricing, and collecting as a whole?

IGN spoke with several video game industry analysts to get their thoughts on this rapidly evolving marketplace.

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Digital Game Sales Are On the Rise

Overall sales of digital versions of video games have slowly been catching up to physical game sales over the last few years. Now, the scale is tipping towards digital more than ever — partially due to the trends set throughout the last few years, and partially due to the ongoing COVID-19 pandemic keeping consumers from shopping in-person — and pushing them towards digital storefronts.

Digital games have hit big milestones over the last few years. Cyberpunk 2077 reportedly saw the biggest digital game launch of all time. Elsewhere, developers are seeing digital sales outpace physical sales numbers, with Capcom reporting approximately 80% of its game sales are from digital downloads.

Reflecting that shift, Sony and Microsoft have now both released digital-only consoles that eliminate the option of using physical media entirely, but offer enticingly cheaper prices. If you have a more expensive PS5 or Xbox Series X with a physical disc drive, you're still given complete freedom when choosing how to buy your games. See a sale online you can't pass up? Go ahead and order the game with 2-day shipping. Want to make an impulse grab you see in a second-hand bargain bin? No problem.

For years, gamers have been offered that freedom as par for the course. Now, the reality of digital-only consoles effectively funnels consumers down a digital pipeline to PlayStation or Xbox’s more controlled stores. But the reason for that is simple — more gamers than ever prize the ensured convenience of digital over the potential freedom of physical.

Taking a deeper look at sales numbers globally supports the idea that more gamers are starting to favor digital downloads. Instead of lining up at GameStop for the latest release, players are waiting for their digital downloads to unlock at the strike of midnight. In Sony's recent Q3 FY2020 results, we saw digital sales outnumber physical sales throughout the entire current fiscal year.

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Even when we exclude games that are typically digital exclusives, digital sales still have the upper hand. In Sony's "Full Game Software" results for the three quarters of the current fiscal year, digital sales accounted for 74%, 59%, and 53% of overall sales, respectively.

This means, when given the choice between retail and downloads, the majority of players on PlayStation consistently choose digital over physical.

It's not just Sony seeing this shift in numbers. In Nintendo's recent earnings report, the company said digital sales made up 40.9% of all software sales, which is a sizable 12.3% increase year-on-year. Nintendo's digital sales also saw an increase of 104.9% when compared to 2019.

Of course, the COVID-19 pandemic has to be taken into account. Sony's 2020 fiscal year began on April 1, 2020, when lockdowns across the world were reaching their peak. Customers who suddenly found themselves housebound could explain the huge 74% statistic in Sony's first quarter, which ran from April 1 to June 30.

"It's very straightforward: in a pandemic, downloads are the safest and most convenient option for concerned gamers," says industry analyst Dr. Serkan Toto of Kantan Games Inc.

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But as we look at 2020, analysts noted that the COVID-19 pandemic was not an instigator for the rise of digital media, but simply an accelerator of a trend we've seen take shape throughout the last console generation.

"The game industry, as well as consumers, have been gradually shifting towards digital sales before the pandemic already," says Dr. Toto. "COVID-19 has of course been a strong accelerant for that trend, as some physical locations were simply forced to shut down or people generally were not eager to go out anymore."

In 2018, digital games accounted for 43% of Sony’s Full Game Software download, and in 2019 it was 55%. Both are large year-over-year increases from even before the pandemic hit.

The acceleration is significant compared to the start of the PlayStation 4 and Xbox One generation. Daniel Ahmad, a Senior Analyst at Niko Partners, said on Twitter that we entered the last generation of consoles in 2013 with digital downloads accounting for 5-10% of total sales. Now, we enter the PlayStation 5/Xbox Series X generation, and digital downloads account for half of the sales.

It's worth noting that we entered the current console generation (2013) with digital downloads accounting for around 5-10% of unit sales.

Now we're entering next gen with 50%+ as standard. Packaged sales are still strong, especially during COVID-19, digital is additive overall — Daniel Ahmad (@ZhugeEX) July 30, 2020

A Rising Tide Lifts All Boats

Websites like Amazon, Best Buy, and GameStop have helped keep physical game sales alive during a time when people aren't making purchases in person as often. While you may be hesitant about going out to a store right now, it's easier than ever to go online, add a game to your cart, and checkout within seconds.

In 2020, two-thirds of games sold in the UK were purchased digitally. That's a 20% year-over-year increase from 2019. However, last year also proved players still love cracking open a new game case as 18.2 million games were sold in boxes in the UK — a 2% increase from 2019.

This means digital and physical sales both jumped, but digital increased significantly more. In this case, digital sales numbers rising is more of a reflection of video game sales numbers as a whole going up, not the immediate death of physical media.

"Packaged software sales have been on a decline for the past few years, but this year has been slightly different," Ahmad said. "The impact from COVID-19 expanded the games market as a whole. It led to a sharp increase in digital game sales and helped stem the decline in packaged software sales."

Mat Piscatella, an analyst for the NPD group, says rising digital numbers do not necessarily spell doom for physical games.

"Growth in digital premium game sales is not being offset by matching declines in physical," Piscatella said. "Changes in physical and digital spending are also often not significantly correlated."

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For now, it seems there's a place at the table for both physical and digital sales.

"Recent numbers indicate that physical sales are surprisingly holding up well, as lockdowns don't go on forever and people can still order physical games online even during a pandemic," Dr. Toto said. "At the moment, it looks like the pie has grown overall, without physical imploding."

Analysts believe that digital sales will continue to ascend, but not as quickly as we saw during the unprecedented events of the last year.

"We expect the digital sales ratio to continue increasing, but not at the same rate as 2020," Ahmad tells IGN. "That being said, we are at a point where the overwhelming majority of games sold are via digital download already."

Is the IGN Community Still Buying Physical Games?

We polled you about your preferences between physical and digital games, when games are released in both formats.

Nearly 42% of you said you lean towards buying games digitally, with 22% of you buying all of your games digitally.

41% of you still lean towards physical media, with only 16% of you still buying physical games exclusively.

13% of you said it depends on the best deal, while 4% of you say your buying habits are split down the middle.

An All-Digital Future?

"Like it or not, but there can be no doubt that the future is digital," Dr. Toto said. "Once people are starting to download games, they are likely never going back to buy them physically."

If you're a hardcore physical collector, you may have felt your heart start beating a little faster after reading that. A silver lining? Video games are as popular and profitable as ever. For the games industry as a whole, analysts expect spending to remain high as we move further into 2021.

"We expect the increased engagement across gaming as a whole to maintain post-pandemic," Ahmad said. "We predict that people who discovered gaming in 2020 will continue playing."

However, analysts do believe physical sales will slowly diminish, leading to digital cementing itself as the primary way players purchase games. Dr. Toto said an all-digital future raises some concerns for consumers.

"What about ownership of a digital game? Is there a guarantee that I can access my download in 20 years or am I effectively just renting it? Why is there no second-hand market on digital? How do platform providers on console aim to solve the storage problems that come with downloads?"

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These concerns have cropped up from time to time throughout the last few years. Some games get delisted due to licensing issues, becoming inaccessible to redownload in order to play or preserve. Also, consumers who rely on trade-ins to help fund future game purchases are hung out to dry on digital storefronts.

"The convenience outweighs any negatives for most consumers," Ahmad said. "That being said, there are moves that publishers can make to increase digital game ownership acceptance among a broader audience, such as offering timed refunds, gifting, or trading."

If you're worried about not being able to add the latest releases to your shelf, don't panic too much just yet. Analysts think the future of physical games will be sharply redirected towards the most hardcore, passionate corners of the fanbase.

"There will continue to be a market for packaged software in the future. While the ratio of digital games keeps increasing, it’s important to note that over 200 million packaged games are still sold each year across the major console platforms," Ahmad said. "We may see packaged game offerings evolve in the future, with a larger focus on special editions."

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Analysts believe physical games aren’t going anywhere, anytime soon. This is partially due to the hardcore segment of the fanbase, and the group of consumers who go to the store to buy physical games as gifts for friends or family members. Most would probably agree it's more fun to gift a physical game than a download code.

But no matter how physical gaming clings on, analysts we spoke to feel set on the idea of digital becoming the true force in the industry in the not-too-distant future. "My estimate is that digital will be the totally dominant form by the end of the decade, after the life cycle of the current PlayStation and Xbox models," Dr. Toto said.

Microsoft and Sony's new consoles launched last Fall and, judging by the length of the last two console generations, this estimate pegs digital game downloads as the completely dominant form of game purchases by around 2027-2028.

Six or seven years may seem like a long time, but in the scope of video games, it's not that far off. The video game industry adapts at a rapid pace, and before you know it, mass-market physical games could feel like a distant memory.

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Looking Ahead to the Next Few Years

However, the fate of physical games could rest upon how hard platform holders push the digital-only consoles in this generation, and how much of the player base jumps on board.

"If players gravitate towards the current digital editions of next-gen consoles, which are priced lower, we could see platform holders move to double down on digital-only consoles next generation," Ahmad said.

Piscatella agrees, saying, "the long-term trends will depend on the types of consoles being made, and developer- and publisher-driven initiatives."

But Ahmad was quick to point out that digital sales overtook physical sales even before the digital-only consoles launched, which suggests there are other significant factors in play.

From the publishers and developers’ perspective, digital game sales give them a boost by cutting out the middleman, leading to more profit. Capcom's latest earnings report specifically mentions how digital sales have increased the company's profits by subtracting retailers from the equation.

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"In my view, retailers large and small will be cut out of the game industry's value chain in the long run," Dr. Toto said. "Microsoft, Sony, or Nintendo won't say it openly, but cutting out the middleman is clearly where the industry has been shifting towards for years now already."

Even if the goal is to cut them out in the long run, analysts believe stores will continue selling physical games until the market ceases to exist altogether. There's an unquestionable convenience to digital games, but there's also something to be said for swinging by the electronics section to pick up a game on your weekly trip to pick up milk and eggs.

"As long as there is physical retail, they will all keep selling physical games," Michael Pachter of Wedbush Securities said. "But the evolution of sales to digital downloads will ultimately impact their health."

Some analysts believe the shift to digital will be gradual, until the point where the majority of fans are used to the digital storefront as the primary way to purchase games. At that point, we may see some big publishers pull the plug on physical game production entirely.

"The tipping point is reached when it doesn't make any economic sense to produce physical games and when the backlash of the fanbase is expected to be manageable," says Dr. Toto. He added we could even see a major publisher shift to digital-only releases as soon as sometime this generation.

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It's not just the big companies that benefit from digital sales. Indie developers and publishers rarely release physical games because digital sales help the bottom line significantly more. For many indie developers, the cost of manufacturing discs just isn't worth it. In recent years, we've seen indie developers creating boutique physical editions of their games once they’ve become a proven success, in some ways leveraging the love of a hardcore audience as a second revenue stream — a model that could be seen as a blueprint for larger developers and publishers in future.

The increasing irrelevance of physical games means less competition for digital storefronts hosted on Microsoft, Sony, and Nintendo's consoles. Console storefronts almost certainly won't suffer from the internal competition seen on PC – where Steam, Epic Games Store, and more compete for digital gamers' attentions – and if retailers like Best Buy and Walmart ever fall out of the equation, it gives the publishers a larger slice of the pie. This could end up leading to an increase in prices for the consumer.

"In the future, we will see US $70 as the new standard price for single games," Dr. Toto said. "Some titles are offered with that price tag already." Dr. Toto added that platforms like Xbox Game Pass will likely see price increases as the catalogue grows and the service becomes a more popular mainstream option.

While the timetable may be fuzzy, digital game sales are looking to dominate the market completely, and evidence suggests the shift is irreversible.

"It would be safe to assume that the share of physical premium games within the overall content market should continue to decline over time," Piscatella said. "To what extent and over what time period remains opaque."

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While the speed may be subject to debate, the analysts we spoke to agree the curtain has fallen on the dominance of physical games, saying it's only a matter of time until cases, cartridges, and discs join a past era of game manuals, memory cards, and composite cables (although, somewhat ironically, memory cards seem to be making a small comeback entirely because of digital).

For physical collectors, this may raise some concerning questions about the future of trade-ins, lending games to friends, and game ownership. On the widest possible level, it’s not unthinkable to imagine a future console generation that forgoes physical media altogether, making physical game collecting itself a thing of the past. For players who already primarily buy games digitally, it may be a change that goes unnoticed – until the point when publishers might feel comfortable enough to jack up the cost of their games due to the lack of competition from physical marketplaces.

While the shift to digital sales is all-but inevitable, games companies remain tight-lipped about their long-term plans for how to react to it. Questions regarding disc drives, game preservation, and digital exclusives loom large as the industry enters a new era. Some players are embracing the change and shifting their game libraries from their shelves to their hard drives. Others are clinging on to physical media, planning to stay on the ship until it goes down.

This console generation will, without a doubt, answer some of our lingering questions about physical media's demise. Regardless, it's time we realize the question isn't if digital will become entirely dominant, but when and how the change will impact the way we buy and experience games.

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Logan Plant is a news writer for IGN, and the Production Assistant for Nintendo Voice Chat, IGN's weekly Nintendo show. You can find him on Twitter at @LoganJPlant.

source https://www.ign.com/articles/why-digital-sales-could-totally-dominate-physical-formats-in-just-a-few-years