Are Changes in the Video Game Sector a Signal to Sell?

Shares of video game retailer GameStop (NYSE: GME ) tumbled 5 percent Thursday on reports that Sony (NYSE: SNE ) submitted a patent application for technology that would block used video games from working on future consoles. Nearly half of GameStop's profits come from the sale of used video games, although they only accounting for about one-third of net sales.

These impressive revenue figures are driven largely by the 47 percent profit margin GameStop enjoys on used games, versus an average of only 21 percent on the sale of new titles.

If Sony went ahead with the technology -- a big if -- competitors Microsoft (NASDAQ: MSFT ) and Nintendo (OTC:NYDOY) would be sure to follow.

BGR reports that Video game sales saw a sharp decline in 2012, falling 25 percent year-over-year based on October figures.

Social gaming is facing challenges too. Video game maker Zynga (NASDAQ: ZNGA ) shut down many of its games at the end of 2012, seeking to cut costs. This comes after the game maker announced plans to lay off five percent of its staff and close its Boston studio as well as other satellite offices.

Zynga is clearly changing its focus, shifting away from social media games largely levered to the success of Facebook (NASDAQ: FB ). It recently announced a partnership with bwin, one of the world's largest online gambling companies.

Zynga plans to release 180 real money online gambling games in Europe while lobbying for the legalization of online gambling in the United States. The company's stock was down 74 percent in 2012 forcing it to look for other revenue streams.

Other video game makers such as Electronic Arts (NASDAQ: EA ) and Activision-Blizzard (NASDAQ: ATVI ) had tough years in 2012 -- down 31 percent and 10 percent, respectively. The decline was fueled, in part, by customer fatigue as they wait for a reboot of current gaming systems which, in the case of Microsoft's Xbox 360, is now 7 years old.

That does not mean that consumers have grown tired of video games. With Halo 4 selling more than 4 million copies in 2012, demand still exists, but the industry is changing. With more games going the way of digital download or cloud based systems, companies are slowly adapting to deliver titles in the way consumers want them.

GameStop, sensing the change, now offers digital downloads as part of its product offerings.

Meanwhile, investors are anxiously waiting for a new stock of gaming consoles to hit the market. To some extent, this started in 2012 with the release of Nintendo's WiiU, but Microsoft's new Xbox, called the Xbox 720, is not rumored to make its debut until Christmas of 2013. Sony's PlayStation 4 is nowhere to be seen at this point in time.

For the video game companies, they may be left in the dark until new consoles arrive and, once again, get consumers excited about video games.

(c) 2013 Benzinga does not provide investment advice. All rights reserved.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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