Major releases in the month of March 2012 failed to curb the
slide in video games sales as it declined 25% year over year to
$1.10 billion, according to market research firm NPD. Although
dollar sales improved from $1.06 billion on a monthly basis, the
year-over-year decline was worse than the prior-month level of
20%.
As expected, both hardware and software sales plunged in March,
primarily due to the ongoing transition from physical to digital
platform. Hardware fell 35% year over year to $323.5 million, while
software sales declined 26% year over year to $553.1 million. We
note that hardware sales ($381.4 million in February) also declined
on a month-over-month basis in March. However, software sales
($464.4 million in February) improved significantly from the prior
month. Accessories sales also declined 8% year over year to $222.5
million in the month of March.
Microsoft's (
MSFT
)
Xbox 360 was the top selling hardware gaming console for the 15
th
consecutive month, according to NPD. Microsoft sold 371,000 Xbox
360, down from 433,000 reported in the year-ago month.
However, the steep year-over-year decline in software sales was
surprising; despite a number of highly anticipated game releases in
the month.
Electronic Arts' (
EA
)
much-hyped
Mass Effect 3
(released early March), topped the game sales chart, brushing aside
February topper
Activision's (
ATVI
)
Call of Duty: Modern Warfare 3
, which fell to the #8 position. Capcom's
Resident Evil: Operation Raccoon City
grabbed the #2 spot, while Sony's baseball game
MLB 12
was placed at #3.
Emergence of Digital Gaming: New Data trends
We believe that NPD's retail sales data partly reflects the
gaming industry trends. As the industry continues to shift from
physical to digital gaming; driven by increased usage of portable
devices, smartphones and tablets, NPD's retail sales data is
gradually losing relevance.
However, NPD has provided some broad numbers for digital 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 $2.5
billion to $2.7 billion across the U.S., U.K., France and Germany
in the first quarter of 2012.
This is particularly significant considering the staggering
growth projections for online gaming, which includes social and
mobile gaming. According to one of the studies conducted by
Strategy Analytics, the global online games market is currently
worth $4.0 billion and is expected to triple in the next five
years.
Most importantly, 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.
Our Take
With rising consumer spending on digital gaming (social, mobile,
casual), we remain optimistic on the video game industry's growth
trends 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,
Zynga (
ZNGA
)
and Activision are well positioned to benefit from this trend going
forward.
However, the highly fragmented video game market continues to
witness increased competitive pressures, which are hurting the
overall profitability. This compels us to remain Neutral on these
stocks over the long term.
Currently, EA, Activision and Zynga have a Zacks #3 Rank, which
implies a Hold rating in the near term.
ACTIVISION BLZD (
ATVI
): Free Stock Analysis Report
ELECTR ARTS INC (
EA
): Free Stock Analysis Report
MICROSOFT CORP (
MSFT
): Free Stock Analysis Report
ZYNGA INC (
ZNGA
): Free Stock Analysis Report
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