(TTWO) Video Gaming Industry Shrinks in May

Just a month after posting robust sales in April 2011, the video games industry fell off the cliff to a new low since October 2006, in May. According to market research company, The NPD Group, US retail sales of the video game industry shrank 14% in May 2011 from the comparable previous year to $743.1 million.

A lower number of new game releases coupled with weaker sales of portable games dragged the overall performance of the industry lower.  According to NPD, only 42 new stock keeping units (SKU) or new games were introduced in May as compared to 58 in May 2010 and 72 in May 2009.

Software sales were down 19% year on year to $375.8 million against analysts’ expectations of a flattish performance. Amid this dismal picture, some of the games that stole the limelight were Take-Two Interactive Software Inc.’s (TTWO) L.A. Noire which took the number one position, followed by Bhethesda’s Brink.

Disney Interactive Studios’ Lego Pirates of the Caribbean: The Video Game and Electronic Arts Inc.’s (ERTS) Portal 2 snatched the next two positions, respectively.

Last month’s winner Warner Bros. Interactive’s Mortal Kombat 2011 slipped to fifth position and Activison Blizzard Inc.’s (ATVI) Call of Duty: Black Ops came in sixth.

Hardware sales were $228.9 million, down 5% from $241.6 million in the year-ago quarter. Despite the drop, Microsoft Corp.’s (MSFT) Xbox 360 sales increased 39% to 270,000 units from the previous year. Year to date, Xbox 360 has comprised 34% of revenues. Hardware sales of Sony Corp. (SNE), the maker of PlayStation 3 and PlayStation Portable, jumped 14% year over year. However, Nintendo Co.’s Wii posted dismal sales, and was the main laggard in the hardware segment.

Accessory sales were down 6% from $121.5 million in the year-ago quarter to $114 million.

We believe that there has been a shift in the preferences of gamers to more of an “apps” format of the games that can be played on mobile devices such as Apple Inc‘s (AAPL) iPad and online social games. Nonetheless, consumers continue to buy games that can be downloaded to consoles or computers. Moreover, digital downloads, used game sales and game rentals are gaining popularity.

In the recently concluded Electronic Entertainment Expo (E3), every major video game publisher recognized the need to digitize their products and have been shifting the business model to the digitized format where the popular and new titles would be available in their digital versions. This would generate a revenue stream that is likely to benefit the video game publishing companies in the long run.

We believe that cut-throat competition within the industry will make it difficult for any single company to gain significant market share in 2011 and that is evident from the monthly reviews. Moreover, increasing competition from social networking companies, such as Facebook, remains a major concern.

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