(ATVI) Gloomy Year for Video Games

Robust holiday sales were always expected to lift domestic video game sales, but it could only improve performance on a sequential basis. U.S. video game sales were up 36% sequentially in the month of December, as new versions of some famous franchises and positive consumer spending joined hands to drive the sales higher. However, the yearly comparison was not so upbeat, hinting at the lingering macro-economic factors.

According to the NPD Group, the video games industry logged revenues of $3.99 billion in December, significantly higher than the $2.93 billion in November 2011. However, sales plummeted 21% on a year-over-year basis.

Software sales in December were $2.04 billion, up 22.2% from November, but down from $2.37 billion in the comparable prior-year period. For the second month in a row, Activision Blizzard Inc.’s (ATVI) Call of Duty: Modern Warfare 3 was the top selling game for December. It was closely followed by Ubisoft’s Just Dance 3 and Bethesda Softworks’ The Elder Scroll V: Skyrim. Electronic Arts Inc.’s (EA) Battlefield 3 ranked fifth.

Hardware sales were the worst hit when compared on a year-over-year basis, plunging 28% in December. Apart from Nintendo’s 3DS and DS platforms, all other consoles recorded weaker sales than the comparable quarter in the previous year. Separately, accessories were down 27.0% from the year-ago quarter.

2011 Metrics

The total U.S. video game sales for 2011 were a dismal $17.02 billion, down 8% from 2010. Sales through digital media and spending on social and mobile games rose 7% from the comparable quarter in the previous year to $ 7.24 billion. This partially offset the decline in new physical retail game sales, which dropped 6% from 2010 to $8.83 billion.

Hardware revenue from U.S. retail was down 11% to $5.58 billion from $6.29 billion in 2010. In this segment, Microsoft Corp’s (MSFT) Xbox 360 and Sony Corp’s (SNE) PlayStation 3 were the star performers for the year, selling more units than in the previous year. Accessory sales also dropped 11% to $2.61 billion from $2.95 billion in the year-ago quarter.

First among the titles that made headlines was Activision’s Call of Duty: Modern warfare 3, which ended the year as the top-selling game. Ubisoft’s Just Dance 3, Bethesda Softworks’ The Elder Scroll V: Skyrim and EA’s Battlefield 3 came in second, third and fourth, respectively.

December failed to impress, bringing in only 23% of the annual sales for 2011, as against the average of 28%.

With the changing dynamics of the video games industry, publishers and gamers alike are more inclined toward the digital versions of the games, which will likely cannibalize physical sales going forward. With consumer spending on mobile games and social networking games rising, we believe that publishing companies having an exposure in these segments would be able to gain a first mover advantage.

As a result, major publishers are increasing their exposure in the social and mobile gaming market through acquisitions and partnerships.

Nonetheless, the overall video game market remains highly fragmented with a large number of companies increasing competitive pressure, and leading to stiff price competition.

Despite competition and ongoing macroeconomic concerns, we believe that companies with a greater focus on the digital business will do relatively better even in this sluggish market.

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