Virtual reality may have been a little slow to take off this year, even with the launch of PlayStation VR, but 2016 saw some huge console gaming announcements. Microsoft formally announced two high-end Xbox One consoles at E3 this year, while Sony launched the PlayStation Pro to take advantage of the growing adoption of 4K televisions.

Meanwhile, digital sales of full games have steadily grown over the past few years. This year, NPD launched its Digital Game Tracking Service in partnership with major publishers Activision Blizzard, Electronic Arts, Ubisoft, Take-Two Interactive, Square Enix, Capcom, Deep Silver and Warner Bros. Interactive Entertainment to get a better picture of this significant part of the market.

To better understand some of the major console gaming trends from the past year, particularly the growth of digital, [a]listdaily spoke to industry analysts Joost van Dreunen, CEO of SuperData Research; Peter Warman, CEO of Newzoo; and Patrick Walker, VP of insights and analytics at EEDAR, which was acquired by NPD in August. They share their insights about current trends and what may be in store for next year.

What were the most significant console gaming developments to come out of 2016?

[van Dreunen]: In 2016, we saw the adoption of full game downloads on consoles accelerate. This season the percentage of games sold this way is roughly five times greater than it was in 2012. More so, Sony has done really well with diversifying its content offering with the PlayStation Vue, for instance. Combined with its VR effort, we expect to see more like this.”

[Warman]: Console developers are slowly, but steadily, breaking down the platform’s paid model in favor of alternative approaches. By introducing different ways of selling and monetizing games, console developers are hoping to drive up revenues which, according to our own research, now lags behind PC and mobile. The first way companies are doing this is by exploring free-to-play options. Soccer games have led the way in this sector, with Konami releasing a free-to-play console version of Pro Evolution Soccer in an effort to get players into the card-acquiring myClub mode. Meanwhile, Psyonix’s Rocket League was free [for PlayStation Plus subscribers] on PS4 for its first month to get a user base. Becoming a compelling word-of-mouth success, Psyonix recently announced that the game generated $111 million in its first year, selling an impressive number of copies and themed DLC, such as the Dawn of Justice inspired Batmobile, to an engaged player base.

The other way to do this is through season passes—convincing players to buy a full version of a game as well as all scheduled DLC and some notional updates at launch day. Season passes tie players to the game longer by forcing them to make an initial investment. However, there is little financial evidence of how well season passes monetize, due partly to how well console developers conceal return on investment. But the season pass model has been used by developers of Fallout 4, Call of Duty, Batman: Arkham Knight, Star Wars Battlefront and many other leading titles, showing its appeal.

In short, console developers are slowly breaking away from the traditional “pay once and you’re in” model, though it’s proving to be slow going. Many console players have reacted negatively to the development of these models, due to their familiarity and satisfaction with the pre-existing model. With console needing to find its place in a market where PC and mobile are on the march, expect more developers to try new monetization tactics to pry the free-to-play door open.

[Walker]: The biggest change in console gaming this year was actually a sign of things to come. The launch of the PlayStation 4 Pro didn’t dramatically shake up the console landscape, but it suggests the industry is entering a new era in which the platform holders update the power of the console much more often. This will probably be the last year that the term “console generation” is appropriate.

How have digital game sales grown in 2016?

[van Dreunen]: We’re seeing healthy year-over-year growth across all digital categories. Mobile is up 18 percent YoY, digital console 15 percent and PC seven percent.

[Warman]: The digital games market generated $83.1 billion in 2016, representing 83 percent of the total $99.6 billion market. This is eight percent more than the $73.1 billion generated in 2015 and in the coming years digital revenues will continue to grow towards $110.1 billion in 2019.

[Walker]: Digital sales have grown consistently year-over-year for the past five years, and 2016 was no exception. There is an interesting seasonal relationship, where physical sales are 5-10 percent higher during the holiday, when more consumers are shopping in retail locations, but the overall trend has been steady growth in digital. There are also a lot of nuances in how different types of titles perform digitally, but at this point, we can expect that at least a quarter of a big AAA title’s sales will be digital.

Given the significant growth of digital sales, will retail remain relevant in 2017?

[van Dreunen]: Absolutely. The notion that in a few years all of gaming will be exclusively digital is naive. People will continue to go to stores to try things out and learn about content and devices. But the role of retail will shift and its dominance in the ecosystem will decline. To put it in clear terms, there’s no way that big publishers like Activision Blizzard, Electronic Arts, Ubisoft and Take-Two are going to create a channel conflict with GameStop.

[Warman]: The growth of digitally generated revenues comes not only from the fully digital mobile segment, but also from increasing digital revenues from PC and console gaming. In 2017, boxed retail games will still be very relevant with a global market estimated at $14 billion (-13 percent YoY), mainly consisting of console game revenues. However, this is 24 percent of the total revenues generated by the PC and console segments (29 percent in 2016). In the coming years, this digital transition will continue and result in boxed retail game sales of approximately $8.5 billion worldwide in 2019, or rather 14 percent of the total PC/console market and seven percent of the total global games market.

[Walker]: Absolutely. Retail sales are not only relevant, they are still hugely important. I think the shift to digital gets a lot of attention because there are recent examples of whole industries—such as music—that have switched to an almost entirely digital distribution model, and the effect on the major companies in those industries has been huge. However, the shift to digital in games has thus far been a linear trend, and holiday AAA releases from major publishers can still expect the majority of their revenue to come from retail sales. The steady growth of digital suggests that this will change eventually, but it is unlikely to change in 2017.

How do you think new hardware such as Xbox One S, PlayStation 4 Pro, Project Scorpio and Nintendo Switch will impact console game sales next year?

[Walker]: Next year is a major year in determining the shape of the next several years of the console landscape. Nintendo is betting that the market will respond to a hybrid between a console and handheld, and is riding a six-month marketing surge from Pokémon GO, the NES Classic, and Super Mario Run. The success or failure of the Nintendo Switch will have a major impact on what types of games publishers are making and the trend of physical versus digital sales. Also, Scorpio gives Microsoft an opportunity to get back into the current console race with Sony. The Scorpio’s power is necessary for high-end 4K and VR gaming, and Microsoft’s dominance in OS market share gives it an avenue to blur the lines between console and the rapidly growing PC market through cross-platform initiatives. This may give gamers a reason to jump back into the Microsoft ecosystem.

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