A lack of major releases dragged video game retail sales in
April down 32% year over year to $630.4 billion, according to
market research firm NPD. Dollar sales declined significantly from
$1.10 billion on a monthly basis.
Both hardware and software sales continued to decline in April,
primarily owing to the ongoing transition from the physical to the
digital platform. Hardware fell 32% year over year to $189.7
million, while software sales plunged 42% year over year to $292.1
million. Accessories sales were flat year over year at $148.6
The steep year-over-year decline in software sales was primarily
attributed to an early Easter and lesser number of title releases
during the month. According to the NPD analyst, Easter fell much
earlier this year compared to last year. Hence, the majority of
Easter-related purchases were completed in March, which led to the
unfavorable year-over-year comparison.
According to NPD,
topped the game sales chart, brushing aside March topper
Mass Effect 3
, which fell to the #8 position. Lucas Arts
Kinect Star Wars
grabbed the #2 spot, while Activision's all-time popular
Call of Duty: Modern Warfare
jumped up 5 places from the prior month to grab the #3
According to NPD, strong performance of
Kinect Star Wars
also drove higher sales for
) Star Wars Kinect 360 bundle. During the month, Microsoft sold
approximately 236,000 Xbox 360's as compared to 371,000 units in
the prior month.
According to NPD new physical retail sales generated 65.0% of
total sales. NPD noted that consumer spending on used games,
rentals, subscriptions, mobile games, social network games, digital
full game downloads and add-on content accounted for approximately
$1.0 billion in the month of April.
We believe that the ongoing transition from the physical to the
digital platform will ultimately benefit the video game industry
over the long term. As compared to the physical platform, digital
games are more profitable since they require minimum packaging
cost. This cost effectiveness has helped publishers to use the
digital format to keep a popular franchise running profitably over
a long period of time.
Traditional publishers such as Activision are banking on
downloadable contents (DLCs) to expand the customer base of its
popular games such as
Call of Duty
. Launch of content packs has many a time provided much needed
boost to sagging sales of the original game.
According to Electronic Entertainment Design and Research
(EEDAR), DLCs are expected to generate $1.0 billion in sales in
2012 based on its increasing popularity among Xbox 360 and Play
Station 3 console owners.
According to market research firm Gartner, video game-related
spending is expected to reach $112.0 billion by 2015, with 50.4% of
spending on software ($56.5 billion). Over the next five years, the
share of gaming hardware, as a percentage of total spending on
gaming, will remain constant while spending on the fast-growing
online gaming outpaces software spending.
Gartner estimates that consumer spending on global online gaming
(subscriptions and microtransactions) will grow at a compound
annual growth rate of 27% through 2015. Online gaming is expected
to grow from 15.6% in 2010 to 25.2% by 2015, representing the
highest growth among all other gaming platforms.
Online gaming is also expected to witness growth at the expense
of retail sales, owing to the growing popularity of digital
distribution and free-to-play browser games. Gartner believes that
the subscription-based business model will gradually be replaced by
the freemium model, where a game is provided for free to gamers but
is monetized through advertising.
We believe that consumers are increasingly spending more on
smartphones and portable devices (such as the iPad) as compared to
traditional devices for playing online games. This trend keeps us
optimistic on the video game industry over the long term.
We believe that publishing companies with a focus on the digital
segment will stand out even amid sluggish market conditions. For
instance, some companies like EA,
) and Activision are well positioned to benefit from this trend
However, NPD's retail sales data partly reflects the gaming
industry trends and hence it is gradually losing relevance. We
believe that including digital gaming, the video gaming industry is
poised for significant growth going forward. However, the highly
fragmented video game retail market continues to witness increased
competitive pressures, which is hurting overall profitability.
This compels us to remain Neutral on these stocks over the long
term. Currently, EA, Activision and Zynga have Zacks #3 Ranks,
which imply a Hold rating in the near term.
ACTIVISION BLZD (ATVI): Free Stock Analysis
ELECTR ARTS INC (EA): Free Stock Analysis
MICROSOFT CORP (MSFT): Free Stock Analysis
ZYNGA INC (ZNGA): Free Stock Analysis Report
To read this article on Zacks.com click here.