Also lol @ the breakdown of game sales that doesn't include digital downloads.
What do you mean, lol. Show me
anythingthat suggests digital downloads of retail disc games matter. The few times we've seen it are weird exceptions like XCOM (heavy PC background), Minecraft (no disc version), and Fire Emblem (supply issues).
Instead, no one is putting out any sort of press releases saying "With digital downloads, our sales have grown 20%!". No one. No one is even making the data public, even to counteract retail physical sales drops of 20% or more. Nothing involved suggests a healthy situation.
The closest I've seen is EA in 2012 or so putting out a mention that with digital sales, they were slightly above 2007.
Except #1) EA had no Wii sales bubble to burst, and 2007 predates most Rock Band sales, meaning all their digital stuff has,
at best, equaled out their losses in traditional video game sales.
#2) That digital sales counts everything digital - downloads, Facebook games, mobile games, DLC, premium services. EVERYTHING TOGETHER only counters their losses in traditional video game sales - digital downloads themselves can only be a fraction of that, meaning overall sales are still down significantly.
Yes, sales on Steam, Origin, etc. do account for a lot of copies. But that's not necessarily the same thing as a lot of net dollars, given the deep (and quick) discounts they get on Steam and the cut Steam takes. Publishers could easily be selling 10-20% more copies of games now with digital download services but still be taking in less money than before, even without the cost of printing discs, distribution, etc.
As to the why:
1) Of course its smart phones. Most of the drop of retail product has been in the handheld sector.
And the kicker? The #1 selling third party 3DS game is... an expensive port of Angry Birds. Nothing better illustrates that the handheld market is being devoured by phones.
2) The industry continues to morph into ~18 disc-based retail megafranchises a year, a mid-tier of $20 XBLA games, and a sea of $1 Facebook/iPhone games. Except the budgets on those megafranchises continue to rise, the release dates get more strict (both for stock reporting and retail sales purposes), and the differentiation allowed gets less and less. In essence they become bigger and bigger bets, with a miss injuring or even killing a publisher (or at least its board).
Gaming isn't dying. It is continuing to morph into something like the music industry, where a store devoted to selling just music seems archaic, where technology allows more and more projects to be put out. Whether more than a handful of people can be successful - or even profitable - with that level of competition remains to be seen.
