Video Games Out of Summer Slump - Analyst Blog

Buoyed by the pre-holiday season rush and strong sales performance of the newly released games, the video games industry recorded growth in the month of November 2011. According to the NPD Group, the video games industry logged revenues of $2.93 billion in November, significantly higher than the $1.05 billion in October 2011. However, the video game sales figure dropped slightly from $2.99 billion reported in November 2010.

The software sales for November came in at $1.67 billion, up 11.3% from the previous year. The hugely popular game Call of Duty: Modern Warfare 3 , from Activision Blizzard Inc. 's ( ATVI ) stable, positively impacted the software sales and topped the selling chart with 8.99 million units being sold. Bethesda Softwork's Elder Scrolls V: Skyrim and Electronic Arts Inc. 's ( ERTS ) Battlefield 3 captured the second and third spot, respectively.

Although retail sales constitute a significant portion of the video game industry, rapid adoption of digital gaming is gradually lowering its relevance. The digital gaming arena has been significantly trending up in recent times, driven by increased usage of portable devices, smartphones and tablets. On that note, as NPD does not track digital sales, we think it is becoming increasingly difficult to gauge the performance of the video game industry going forward.

Despite the strong performance from Microsoft Corp. 's ( MSFT ) Xbox 360 and Sony Corp. 's ( SNE ) PS3 gaming systems, hardware sales for the month of November 2011 was down 9% from the comparable quarter in the previous year. Nintendo 3DS enjoyed a higher number of units being sold as compared with October 2011. Separately, accessories were down 33.2% from the comparable previous year.

The video games industry is expected to perform better during the holiday season. This is obviously because the big publishers tend to release their major and popular titles in this time span to capture the holiday mood of the retailers. However, it remains to be seen how well the season fares and if it can provide some respite to the industry that suffered a slump during the summer.

We also remain cautious about retail sales and believe that strong growth in the digital business will cannibalize the market going forward. According to one of the studies by Strategy Analytics, the global online games market is currently worth $4.0 billion and is expected to triple in the next five years.

In the present scenario, with the changing dynamics of the gaming industry, consumer spending on mobile games and social networking games are gaining tremendous popularity. We believe publishing companies having an exposure in these segments would be able to gain a first mover advantage. To drive home the advantage of the popularity, major publishers are increasing their exposure in the social and mobile gaming circuit through acquisitions and partnerships.

However, the overall video game market remains highly fragmented, graced by a large number of companies, including Activision, Electronic Arts, Take Two Interactive Software Inc. ( TTWO ), Capcom, Koei, Konami, LucasArts, Midway, Namco, Sega, THQ and Ubisoft. This has increased competitive pressures, keeping prices down.

Despite competition and a lackluster macro outlook, we believe that companies with significant exposure to the digital business will stand out even in this sluggish market. Being the holiday season, we expect December to again be positive for the industry with several titles awaiting release. Additionally, the already released titles are most likely to continue their strong performance during the holiday season.

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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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