After six straight months of dreadful sales figures, it appears that the retail video game industry in the U.S. has settled into its new reality . Given that memories of the white-hot sales figures of 2008 haven't faded completely, the contraction has certainly been painful.As we enter the back-half of the year, the key issues from a top-level view are how much has the industry contracted and what can we expect by year's end. I can certainly answer the former, and I'll also elaborate on my view of the latter.First, the big revenue picture, including all segments of the retail market: hardware, software, and accessories, shown below.Normally I've shown this kind of figure with full data for previous years, but to emphasize just how weak retail sales are in 2012 I've restricted each year to just the first six months. Seen in this light, sales this year look like they fell off a cliff after the more gradual declines in 2009, 2010, and 2011.So where does this leave the full market once 2012 is over? Well, if we go back and grab the best back-half of a year ever - sales from July 2008 through December 2008 - and use it as an upper bound for what will happen in the remainder of this year, then the full year of sales would come out to $17.8 billion at retail.Sure, that would be a bit better than the $17.0 billion total from last year, but worse than the totals in 2007 ($18B), 2008 ($21.4B), 2009 ($19.7B), and 2010 ($18.6B). In short, the industry could deliver a miraculous turnaround for the remainder of this year and it still wouldn't measure up.Since a miracle clearly isn't in the offing, it's natural to simply compare to last year's figure. If retail video game revenue for the rest of 2012 is basically flat compared to last year, then the final total will end up around $15 billion - making this the worst of the last six years in terms of revenue.I don't think the industry can pull out a second half that's on par with last year, however, since every month since December 2011 has recorded a 20 percent or greater year-on-year decline. Just in 2012, the market is down 29.7 percent and if that were to continue through this holiday season this will be the weakest year for the video game industry since 2005.That's effectively a worst case scenario, and would reset the industry to levels it last knew in the very first months of the Nintendo DS and before the Xbox 360 launched.A picture helps here, so here are total retail video game revenues for the U.S. in each of the last seven years along with the three scenarios (miracle, flat, and worst case) I've outlined above.But the total of retail revenue is actually three different segments, and each is subject to somewhat different factors. Hardware revenue is affected not just by how many units sell, but also by how they're priced. So a price cut could move more systems, but it would also cut into the total revenue as well.Currently the software market appears to be heavily driven by new releases, but that hasn't always been the case. During the Wii's heyday titles likeandandcould shift as many units in a summer month as the top-selling new releases have in some months of 2012. The foundation of lower level catalog software sales appears to be much lower today.And the accessory segment - the most opaque of the segments, because the NPD Group releases so little information about it - has been driven by popular peripherals from time to time. Wii remotes used to be extremely popular, and during its first few months the Kinect sensor add-on for the Xbox 360 appeared to be pumping up accessory revenue. Now the leading items areaction figures and points/money cards for Microsoft's Xbox Live and Sony's PlayStation Network.So let's break it out further, looking at each segment, starting with hardware.First, just in terms of raw hardware numbers, the picture is quite similar to the revenue figures you see above. As the Wii and Nintendo DS burned brightly throughout 2007, 2008, and 2009 hardware sales for consoles and handhelds saw tremendous gains.While the Xbox 360 has continued to grow its sales, especially in 2011, these sales haven't been enough to bend the effect of the terminal trajectory the Wii is following. Moreover, the introduction of two new handhelds - the Nintendo 3DS and PlayStation Vita (PSV) - did little to lift the market for dedicated handheld hardware.As Michael Pachter, analyst for Wedbush Securities, recently observed about May 2012 sales: "Over the last 11 years, console unit sales have averaged over 600,000 units in May, and over the last five years, unit sales have averaged over 700,000 units." That was the weakest May since before the PS2 launched in 2000. June was somewhat better, I believe, but still not good.The underlying problem here is pricing, I believe. One of the counter-intuitive trends in the past few years has been the unusual pricing models that hardware manufacturers have pursued. For example, the Nintendo DS launched at $150 and then dropped to $130 (prior to the launch of the DS Lite model) but then the introduction of the DSi and DSi XL models pushed the average price for the platform up above $150 again.Something similar happened with the introduction of Kinect for the Xbox 360, where the average price of the system went from a low of around $250 to well over $300 as the Kinect models were pushed heavily.On top of these de facto price increases, each manufacturer of hardware has been reluctant to cut their respective entry-level prices. As of this writing, the lowest priced (non-contract) Xbox 360 is still $200, the Wii is still $150, and the PS3 still can't be bought for under $250. I'd also posit that the PSP lingered too long at $170, when it should have been below $150.Of course, consumers had to agree to purchase those systems, so I'm not faulting the hardware manufacturers for pursuing winning pricing strategies. Rather, I'd argue that pricing for hardware in general has been much higher this generation and that has to have limited the market for these devices. Despite these impediments, the installed base on paper is much larger than at the same point last generation. (See this column from last month on that score.)Now, at the tail end of a generation, the hardware players continue to maintain what I believe are unrealistically high prices. So far in 2012 the average price for the Wii has been right around $148, the PS3 around $269, and the Xbox 360 around $285. Combined, consoles are averaging $250 this year while handhelds are averaging around $180.While I don't have complete data from last year, I think the figure for consoles has come down around $25 per system while the handheld price has actually gone up. Remember that at this point last year, only the languishing Nintendo 3DS had an entry-level price above $170. Across systems of all types, the average price last year was $228 and this year's its just $224.Prices have to come down before the situation is going to change, and that's true for just about every system. I'll speak more to this for individual systems in a coming column.Let's move onto software, because the dynamics there are similar but slightly different because of the nature of the product. Comparing the first six months of each year going back to 2007, the picture looks like this.I've provided three retail estimates for the first half of each year: total units sold, total revenue, and year-to-date average selling price (ASP). (The YTD ASP is just the total revenue divided by the total units.) A few months ago , I observed that the total software unit sales figures for 2011 could be suggestive that the erosion of the retail software market was bottoming out. That is, after declining about 7 percent per year in both 2009 and 2010, the unit decline in 2011 was a mere 1 percent.Yet retail sales so far in 2012 appear to indicate otherwise, since the year-over-year decline is already a staggering 30 percent. (That's not a typo. It really is 30 percent.)On top of that, as the table below the graph shows, the average price of the software being sold is going down as well. Together these factors have driven total software revenue down 31 percent.Anita Frazier, an analyst for the NPD Group, points to the number of new titles being released as a key factor in the contraction of the market. Here's what Frazier said:"In the first half of 2012, there were 34 percent less new software SKUs compared to last year. On an average SKU basis, they generated 4 percent less units, but 2 percent more dollars on average. This shows that while new launch performance is relatively stable, it is the sheer reduction in the number of launches that is contributing to the overall softness we are seeing in software so far in 2012. The decrease in new launch volume accounts for 41 percent of the net unit decline and 47 percent of the net dollar decline from first half of 2011."Another way of saying this, I believe, is that new releases are performing like new releases should butof the decline in unit sales and revenue is coming from older titles - what are commonly referred to as catalog software.This is, I believe, what analysts Michael Olson and Andrew Connor of Piper Jaffray have referred to as the shorter tails of recent game sales. For example,has shown sales each month this year that are consistently 50 percent lower than comparable period sales ofa year ago. If this were to happen across a wide swath of older software titles, then that would certainly contribute to the other 59 percent decrease in volume and 53 percent decrease in dollars.Moreover, consumers have the option to buy less expensive software, and I would submit that this is likely just as big a factor as the shorter tails of new releases. That is, consumers are buying older, cheaper software or seeking out newer titles only when they are on sale.Even if a title generates more revenue when it's new as Frazier indicates, a shorter tail and consumer pressure on pricing could mean a lower net revenue over the lifetime of a title for publishers. That's bad news any way you cut it.Turning to the final segment of the market, I think we can say that the accessory segment is one of the brighter areas of sales this year. Let's look at first half revenue figures over the past few years and make a direct comparison to this year.Clearly the accessory market has been more stable, in terms of revenue. I believe that underneath these figures are actually no fewer than three accessory waves that have helped maintain these levels. However, as I've stressed before, we have almost no direct view into the accessory segment since the NPD Group gives out few details and even some analysts don't subscribe to the accessory data that the Group provides. What follows is my own informed opinion.The increase in accessory revenue in 2008 and through 2009 is contemporaneous with demand for plastic instruments for music games like Guitar Hero and Rock Band and increased demand for Wii remotes as that console set mid-year sales records. In early 2011 I believe accessory sales were buoyed by sales of Kinect sensors for Xbox 360 systems. And in 2012, both points cards and figures for Skylanders have been hot sellers. In fact, NPD's Frazier noted that "point card sales were exploding" in 2012 and are up 36 percent from the first half of 2011.Finally, let me comment on the longer term, as we head into late 2012 and then 2013. In order for the retail part of the industry to look respectable by the end of this year, hardware and software will have to make turnarounds.On the hardware side, a turnaround will require price cuts from both Sony and Microsoft. I'm looking for Sony to move in August when a new and less expensive model will be introduced, while Microsoft may well wait for the effect of its new service plan pricing to become apparent. Moreover, the Wii U will have to launch at a reasonable price and see rapid uptake by consumers to make up for collapsing Wii sales.With several key software titles moved out of the tail end of 2012 and into 2013, the stage is set for big names likeandandandto compete only with each other for consumer dollars.I want to dig into each of these areas more thoroughly - particularly the fortune of current and future platforms and some software specifics - later this week in a couple more columns, so stay tuned.