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PC games surge in digital download

Online buying almost matches in-store units sold

While physical sales still hold a dominant position over digital downloads when it comes to videogame consoles, retail is in danger of losing that spot with PC gamers.

A study from the NPD Group, which tracks videogame sales, finds that digital downloads of PC games essentially reached parity with retail sales in 2009. Online purchases of full-game PC titles hit 21.3 million in the U.S. last year, compared with 23.5 million units purchased at stores.

PC digital downloads accounted for nearly half of unit sales but only 36% of the dollar sales. Profit margins are considerably higher on digital sales, however, so smaller dollar volume still meant healthy revenues for game developers and publishers.

While PC games can’t boast sales numbers even close to those of console games, the category tends to be a frontrunner for the industry. Microsoft and Sony have both integrated digital sales into their console systems — and users have enthusiastically embraced them.

The leader in digital sales, according to NPD, is Valve Software’s Steam. Launched six years ago to coincide with the developer’s hit game “Half-Life 2,” Steam has become a popular online retail outlet for virtually every publisher in the videogame industry. The service hosts and sells more than 1,100 titles and has more than 25 million active user accounts. In June, the company announced a relationship with Sony that hinted at future Steam involvement on the PS3.

While NPD did not break out sales data or market share in its report, competitors estimate Steam commands 70% of the PC digital distribution space. Valve doesn’t release sales numbers for Steam either, but earlier this year reported that unit sales increased by more than 205% in 2009.

Direct2drive is the second most powerful digital retailer, followed by Blizzard.com, EA.com and Worldofwarcraft.com according to NPD. The presence of Electronic Arts and two Activision-Blizzard-owned sites is noteworthy, as both have shown an increasing interest in the digital space over the past few years.

Digital revenues at EA were up 33% in fiscal 2010, hitting $570 million. Management expects that number to grow to $750 million in fiscal 2011. (The figure includes incomve from advertising and subscriptions as well as its online store.)

Activision-Blizzard, meanwhile, has historically focused on in-game microtransactions, a model that has shown tremendous success. In April, for example, the company began selling a virtual horse in its “World of Warcraft” game. Within eight hours, the queue to buy one was 80,000 players long and eventually topped 140,000. Activision is estimated to have made $3.5 million in one day on sales of the $25 item.

It’s now expanding that strategy, allowing players to buy games directly, including the PC-exclusive “Starcraft II” and “Cataclysm” expansion for “World of Warcraft.”

Top-line digital retailers, who compete directly with brick and mortar stores, saw their market share increase in 2009, while casual game digital retailers (such as online game sites Bigfishgames and Pogo.com) slipped. This indicates not only a growing interest among PC gamers in buying AAA games online, but increased competition in the casual space from both social gaming networks and mobile devices.

“The popularity of social network gaming increased from Q3 ’09 to Q4 ’09 as 4.8 million more people played games on a social network in the U.S.,” said Anita Frazier, industry analyst for The NPD Group. “This demonstrates how consumers can now experience casual types of games through myriad vehicles, broadening the competitive landscape.”

Overall, downloadable content has become so popular that add-on packs for games, which used to be sold via retail, are now largely available only via the dashboards of the Xbox 360 and PS3. The first downloadable content for “Modern Warfare 2” racked up nearly $37.5 million in sales on the Xbox 360 alone within 24 hours.

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