Revenues from sources like in-game purchases and digital downloads out-earned traditional retail game sales in the third quarter of this year, but the overall US gaming market is still down compared to the same period in 2010. According to a report by The NPD Group, physical game sales in the US brought in $1.3 billion dollars, while non-traditional revenues — including downloads, in-game transactions, and subscription-based services — earned $1.64 billion. The overall gaming market, including hardware sales, brought in $4.2 billion in the third quarter. An 11 percent drop from the prior year, it puts 2011 on track to be the third consecutive year of decline in US game sales.

It's an indicator of an industry in transition. When the console boom of the 2000s hit, gaming was ideally suited for the traditional retail purchase model: platforms like the Xbox 360 and the PlayStation 3 offered cheap access to relatively powerful hardware, and the only way to obtain high-end games was through physical discs. But as console hardware grew stale, digital distribution took off, and social games like Farmville popularized microtransactions, the landscape shifted. It's the latter option that could have the greatest upside for companies savvy enough to capitalize, as the in-app transactions continue to grow in popularity thanks to free-to-play MMOs, mobile games, and big-in-Europe online multiplayer games like League of Legends. Research group IHS reported that microtransactions in MMOs accounted for a staggering $1.13 billion in revenue in the US and Europe in 2010 — and they're trending upward.

To their credit, many gaming companies see the shift clearly. "We find [these reports] frustrating because it doesn't tell the whole picture," Electronic Art's President of Labels Frank Gibeau told AllThingsD. "If you look at the total interactive business, it's a $50 billion market internationally, and that's up double digits." As the industry continues to work through the transition, there may be some gas left in the PC gaming tank as well. Last month The Elder Scrolls: Skyrim and Modern Warfare 3 drove sales of boxed PC games up a whopping 57 percent.