Along about April, however, my participation with Cafe’ World and Farmville came to a screeching halt. Why? I was getting ready to move my family cross-country and simply didn’t have any time to waste (there, I’ve said it) on non-real-world activities. Besides, most of my neighbors had trailed off on their participation, and it just wasn’t as much fun sending gifts but getting few in return.

This whole phenomenon of social network gaming is the topic of our latest research report cleverly titled “Social Network Gaming,” and it explores in-depth this relatively new form of gaming that has introduced the world of video games to entirely new groups of people. Of all social network gamers, over a third indicated they had never played a game before. But that means that about 2/3 of social network gamers came from existing gamers, which debunks the theory that “real” gamers could never be interested in such simple games. In fact, I was just chatting with one of my nieces the other day. She’s interested in going into the games industry after she graduates from college, and is a pretty dedicated gamer - playing on everything from mobile phones to PCs to handhelds to consoles. In fact, she was telling me how much she is looking forward to playing Black Ops when it releases, but also told me about the time she spent playing Bubble Island while on the job. For her, the social aspects were meaningless - it was about how easy it was to access these games, and at certain locations, to pass time. Another existing gamer, my friend Tim (his name has been changed to protect his identity), is what I would call a core gamer through and through. His current obsession with Farmville, Mafia Wars, Vampire Wars, Castle Age, and Zynga’s Texas Hold ‘Em left a few of us scratching our heads, since we figured he’d never be the type to succumb to this new form of gaming. He mentions the achievements, the collections, and enjoying the fact that his level is higher than that of his neighbors (because he is more efficient at managing his farm) as similar to his experience on Xbox Live and Modern Warfare! He also doesn’t highlight the social aspects as driving his involvement, other than liking the cooperative nature of the gifting - but that is more about getting the collections and achievements than it is about being social.

Regardless, there is a lot that game developers can learn about the swift adoption of social network games. Whether they’re developing social network game titles or more traditional forms of games for other platforms, developers need to pay close attention to what makes these titles so attractive to gamers, and learn to apply this to their own games. Sure, it’s easy to say that a lot of the appeal comes from the fact that so many titles are free to play, but there is much more to it than that. Things happen beneath the surface that encourages someone to take money out of their wallets and pay for virtual items, or, conversely, make them leave out of boredom.

- March 2010 was the third best non-holiday month ever for the industry, behind March 2008 and June 2008

- Unit sales for all categories (hardware, software, accessories) were up over last March.  Only hardware saw a dollar sales decline due to falling average retail prices

- PS3 unit sales increased year-over-year for the eighth consecutive month

- The PS3 platform contributed the greatest revenue to the industry over all other platforms, driven by stellar software performance with four of the top 10 games for the month

- Eight of the top 10 SKUs for the month were new releases, which is a noticeable change in recent trends

- God of War III, Final Fantasy XIII, and Battlefield: Bad Company 2, all launched with significant unit sales growth over previous best-selling games in their respective franchises

And the list goes on.  While one month does not a marked improvement make, the success of the new title launches along with the increase in hardware unit sales combines to help boost industry spirits considerably.  That said,  we all have to acknowledge that video games are still going through a transformational time as digitally distributed content becomes a bigger focus for many publishers, and social network gaming (and other free gaming options) draws the attention of more consumers.  But the appeal of high-quality and deeper gaming experiences to consumers is evident in the March sales results, and that should make everyone feel better coming off what has admittedly been a tough run.

What’s very apparent in this report is that as kids get older their influence over what is purchased for them increases. As kids mature their exposure to what’s available in the marketplace increases as does their sense of style and entertainment options. By the time kids reach 3-5 years old, almost half (47 percent) of dollars spent on them are for items requested by the child. By the time kids reach age 12-14 years old, two-thirds (66 percent) of dollars spent are on items they’ve requested. And this makes sense. As parents, we are very interested in making our children happy, particularly around gift-giving occasions. What could make them happier than getting the items that they put on their wish-lists? So marketers of products for kids must always strike a balance between becoming well-known to kids so that kids are asking for their products, and acceptable to the parents who ultimately control the dollars.

In this sense, iTunes.com could be benefiting from the very same up sell long favored by fast-food restaurants and enjoyed by mass market merchandisers as shoppers pick up impulse items to go along with their planned purchases.

Our newest report, Kids and Gaming, reveals that 87 percent of kids age 6-8 play games on some device, while 50 percent of kids in this same age group report playing games online, and 10 percent are playing games on cell phones. Even at this relatively young age, gaming is deeply rooted in kids’ lives. But one of the issues gnawing at the industry at large, the increasing incidence of free gaming - whether on a cell phone, or online, is an issue with the kids market as well. While there may not be as many young kids engaged in gaming on social networks right now, there are plenty of free online virtual worlds to draw them in. Our report found that only 9 percent of kid gamers ages 2-17 had purchased a microtransaction in the past three months. Having spent quite a bit of time myself now on both Cafe’ World and Farmville, I haven’t found anything that would compel me to take out my wallet and spend real money. My kids, however, have been enticed to buy a Grand Chase pre-paid game card at 7-Eleven. So the ongoing debate about how to best monetize these gaming experiences - experiences kids are clearly engaged in - remains one for the industry to grapple with.

Anyway, gotta go. My spaghetti and meatballs are ready to serve.

So how, if at all, has the economic situation impacted the toy industry?  At a very top-line view, NPD’s monthly consumer tracking service of the toy industry indicates that this year, so far, a greater percentage of toy sales are being purchased via a “store deal” or a “price reduction.”  Conversely, for the 12-month period ending September ‘09, the percentage of toy purchases made which utilized “no special offer” declined 2 percentage points over the previous 12-month time frame.  While there was little increase in the use of a manufacturer rebate or a manufacturer coupon over these periods, there was an up-tick in purchases made using either a store promotion or store coupon.  The promotional vehicle seeing the greatest increase by far was with purchases made via a store sale.  From this it would appear that consumers are actively seeking price discounts when making their purchase decisions.

Our latest toy industry topical report, Toy Purchase Decisions, lends more insight into these findings, and the role that price and promotions play in the toy purchase process.  The biggest impact price plays is in the selection of the retailer.  The majority of toy purchases are planned, and of those planned purchases, for 78% of them, the buyer knew exactly where they wanted to shop.  So where do store sales and discounts come into play?  Well, a shopper could have two or more specific items in mind when they enter the store, and the presence of an in-store price reduction could sway their decision to one over the other.  Also, while a majority of toy purchases are planned in advance, the rest are not, and the study found that those that purchased toys on impulse were more likely to take advantage of an in-store price reduction indicating that price promotions are an important catalyst to unplanned purchases. 

And there is something new at play in this arena that I find particularly fascinating.  The impact of “social shopping” and the retailers and manufacturers use of social sites like Twitter and Facebook to communicate promotions to their fans and followers.  Just the other day, Toys R Us used the power of Twitter to communicate that the first 50 shoppers to their store that day could pick up Zhu Zhu Pets (which for those of you who don’t know is emerging as the hot hard-to-find toy of this holiday season).  The retailer also uses Twitter to promote their “Deal of the Day” which is usually a very compelling price reduction on popular items.  The sheer variety and creativity in the use of social media makes this trend a really fun one to follow, and certainly we’ll see an impact on how purchases are made because of this phenomenon.

Hardware price cuts delivered what they were designed to do: all three console systems received a price cut in either later August or September and the month-over-month unit sales increase, taking into account the extra week of sales in the September reporting period, was noticeable. PS3 unit sales increased 87 percent on a weekly sales basis over August, while the Xbox 360 and the Wii realized increases of 31 percent and 33 percent, respectively. Historically, price reductions on hardware have impacted unit sales anywhere in the range of 2 percent to 200 percent, with greater increases usually coming from price cuts that occurred earlier in the lifecycle than this recent round of cuts did. In most cases, unit sales of hardware exceeded what many analysts had expected. So, on the hardware front, the industry performed very well. And a greater install base of hardware provides the foundation for future software growth, and can provide a healthy shot in the arm for the entire industry ecosystem.

But for September, software sales didn’t live up to what many expected, despite having realized a 5 percent gain over last year. All eyes were on the battle of the Bands as The Beatles: Rock Band, and Guitar Hero 5 hit store shelves. While both titles performed well, and are the type of games that can have a long life, particularly through the upcoming holiday season, some were expecting bigger numbers out of the gate. Halo 3: ODST grabbed the top spot for the month, selling an impressive 1.5 million units. It is important not to overlook the fact that Madden NFL 10, which hadn’t performed as well in August as compared to last year’s game, made up some ground this month, narrowing the difference in the first two months sales of the title. Looking forward to October there are some key releases, which should generate some solid sales. They include Wii Fit Plus, Uncharted 2: Among Thieves, Brutal Legend, Mario & Sonic at the Olympic Winter Games, NBA Live 10, and more. The content line-up in aggregate looks very much like it could hold its own against last year.

Overall, based purely on seasonality trends, which put historical year-to-date through September sales in the range of 47 percent to 55 percent of annual sales, the total industry is poised to land in the range of $19 to $22B for the year. Because of how this year has shaped up so far, I would say that it looks more like a year where sales could be more heavily weighted in the back months than average, so the industry ending up flat at $22B isn’t out of the question.

While it’s certainly not new for companies to harness the power of the Internet, and specifically YouTube and now social networking sites as part of their overall marketing plans for their products, it might surprise some that they would be part of a marketing program for a product aimed at younger kids. But in truth kids are big users of a lot of these Web sites, and as detailed in our recent report Kids & Cross-Entertainment Behaviors, YouTube.com ranked in the top 5 Web sites used by kids ages 2-12. This same report shows that among purchases made for kids during the past holiday season, 58 percent of dollars spent were spent on entertainment-related product categories. So you can imagine that for companies involved in entertainment, understanding kids and how they’re consuming various types of entertainment is pretty important. But given the power of entertainment in kids lives, any company involved with products for kids in any category needs to understand where kids are spending their time and how they’re participating with and consuming entertainment and media in order to best promote their products and services. After seeing this new Barbie music and dance video it’s clear that Mattel understands just that.

But why promote to kids? Don’t parents make all the purchase decision anyway? Well yes, and no. While some product categories are heavily driven by parental decisions, most entertainment categories (including toys) are heavily driven by the child’s request or influence. Our new Toy Purchase Decisions report takes a deep dive into the mechanics which influence a toy purchase, and dolls is one of the categories in which purchases are most influenced by child request. So using the right media vehicles that kids in your particular target market are using is critically important to catalyzing that kids’ request. While seeing the announcement of the Barbie video got me thinking about this whole subject, in fairness to both genders, let me address boys for a moment. Boys are also big users of YouTube, and in fact our report shows that the Web site is used by boys more than girls. And while gaming content is very popular and consumed by both genders, it’s relatively more important to boys than girls. Our Kids & Cross-Entertainment Behaviors report goes into a lot of detail about how games are acquired and consumed by kids, and the importance it plays in the usage of a multitude of devices from computers to video game systems to phones. As we head into the all-critical holiday time period for many industries, toys and video games included, thinking about these issues and most effectively reaching kids and stimulating that “kid request” could very well be the difference between success and failure for many products.