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Video game retail sales declined massively in May 2013. According to market research firm NPD, sales decreased 25.0% to $386.3 million from $517.0 million reported in May 2012.

Moreover, sales were significantly down from $495.2 million reported in April and declined more than 50% from $992.5 million reported in March.

Software sales plunged 31.0% year over year to $175.1 million in May, considerably lower than $254.3 million reported in April and $602.4 million reported in March.

Injustice: Gods Among Us from Warner Bros. Interactive remained the top-selling game in the month. Activision Blizzard’s (ATVI - Snapshot Report) Call of Duty: Black Ops 2 took the #2 spot, pushing Dead Island: Riptide from Deep Silver to #4.

Nintendo’s Donkey Kong Country Returns claimed the #3 spot, while the Wii U maker’s Luigi's Mansion: Dark Moon got the #5 position.

NPD cited strong year-over-year comparisons (due to strong performance from Diablo III, last years release from Activision), weak sales performance from the existing games and lack of new releases from major publishers such as Activision and Electronic Arts (EA - Analyst Report), all of which hurt software sales.

Hardware sales fell 31.0% year over year to $96.0 million from $139.0 million reported in May 2012. This was significantly lower than $109.5 million reported in April and $221.6 million reported in March.

Microsoft (MSFT - Analyst Report) sold just 114,000 units of Xbox 360 compared with 160,000 units in the year-ago month. This was also much less than 130,000 units sold in April and 261,000 units sold in March.

According to NPD, Nintendo’s 3DS was the best selling video game platform (including hardware and software) in the month. Nintendo had three games in the top 10 list in May and 3DS game unit sales jumped 60.0% from the year-ago month.

The huge decline in hardware unit sales primarily reflects a matured console market. Moreover, customers postponed their purchases as both Sony (SNE - Snapshot Report) and Microsoft are slated to release their new console hardware by the end of this year.

Accessories sales declined 6.0% year over year to $115.3 million, primarily due to strong sales of Activision’s “Skylanders” toys. As per NPD, unit sales jumped 50.0%, while dollar sales surged 60.0% from the year-ago month.

According to NPD, gamers spent $787.0 million on video game hardware and software (which includes used games and rentals of $91.0 million, while digitally delivered content and subscriptions amounted to $339.0 million) in May compared with $802.0 million in Apr, 2013.

Our Take

We expect video game sales to remain sluggish over the next few months. Although we believe that the ongoing transition from the physical to the digital platform will ultimately benefit the video game industry (due to the cost effectiveness), lower priced digital games have failed to offset the rapid decline in higher-priced retail sales in recent times.

Moreover, declining software sales remain a concern. We believe that the rapid adoption of free-to-play games will continue to cannibalize retail software sales in 2013. Further, the highly fragmented video game market will continue to witness increased competitive pressures, which will hurt overall profitability.

However, we believe that the highly anticipated launch of new hardware consoles from Microsoft and Sony will boost the sagging video game retail sales market by the end of 2013.

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