Video game retail sales declined for the eighth consecutive
month in July 2012. According to market research firm NPD, U.S
video game store sales slumped 20.1% year over year to $548.8
million in the month of July. Although the year-over-year decline
narrowed from the prior-month level of 29%, dollar sales
deteriorated from $699.8 million reported in June.
Lower number of new game releases (which approximately accounts
for 50% to 60% of total sales), as publishers continue to postpone
titles for the upcoming holiday season, were a major cause behind
this decline. Ongoing transition from physical to digital platform
also hurt sales.
This is evident from the fact that both hardware and software
sales continued to decline in July. Hardware fell 32% year over
year to $150.7 million, while software sales plunged 23% year over
year to $260.7 million.
NPD noted that consumer spending on used games, rentals,
subscriptions, mobile games, social network games, digital full
game downloads and add-on content jumped 17% year over year to
$1.47 billion in the second quarter. However, this strong growth
was not enough to offset the significant decline in physical sales,
as overall consumer spending dropped 16% annually in the second
quarter of 2012.
According to NPD,
NCAA Football 13
Electronic Arts (
topped the game sales chart brushing aside June topper Warner Bros.
Lego Batman 2: DC Heroes.
The Amazing Spiderman
came in at #3.
Microsoft Corp's (
Xbox 360 was again the top-selling console for the 17th straight
month with 203k units sold. However, this was down from 277k sold
in the year-ago quarter. As per NPD, only Nintendo's DS and 3DS
shipments increased on a month-over-month basis in July.
According to Bloomberg, Nintendo is expected to release its new
3DS XL with 90% larger screens and a new "Super Mario" game in
August 2012. The company is also expected to offer its new Wii U
later this year. We believe that the release of this new gaming
hardware will drive video game retail sales going forward.
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.
Online gaming is also expected to witness growth at the expense
of retail sales, given the growing popularity of digital
distribution and free-to-play browser games. 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 going
However, lack of visibility around the monetization of the
digital platform (particularly social & casual online games)
compels us to remain on the sidelines. Since most of the digital
and online games are offered as free-to-play, they remain
significantly dependent on advertising revenues and online sales of
the in-game virtual items. Moreover, the highly fragmented video
game market continues to witness increased competitive pressures,
which are hurting overall profitability.
We maintain our Outperform recommendation on Activision over the
long term. We remain Neutral on EA and Zynga over the long term
We believe that growing popularity of the
Call of Duty
franchise will drive Activision's growth story in the near term.
Currently, Activision has a Zacks #1 Rank, which implies a "Strong
Buy" rating in the near term. EA and Zynga both have a Zacks #3
Rank, which implies a Hold rating in the near term.
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