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Video game retail sales continued to decline in July. According to market research firm NPD, sales plunged 19.3% to $443.0 million from $549.1 million reported in Jul 2012. Sales were significantly down from $593.3 million reported in June but were much better than $386.3 million reported in May.

Software sales (including PC) fell 20.0% year over year to $222.3 million, considerably lower than $313.8 million reported in June but higher than $175.1 million reported in May.

Electronic Arts’ (EA - Analyst Report) July release NCAA Football 14 was the top-selling game, replacing The Last of US from Sony (SNE - Snapshot Report) that fell to #3 position. Microsoft’s (MSFT - Analyst Report) Minecraft climbed one place to claim the #2 spot, pushing Animal Crossing: New Leaf from Nintendo to #5. Activision Blizzard’s (ATVI - Snapshot Report) Call of Duty: Black Ops 2 remained at the #4 spot at the end of the month.

Hardware sales plunged 34.1% year over year to $99.4 million, significantly lower than $142.0 million reported in June but slightly higher than $96.0 million in May. Nintendo’s 3DS was the best selling hardware platform in the month, while Microsoft’s Xbox 360 remained the best console in terms of unit sales.

Accessories sales declined a modest 3.0% year over year to $133.4 million in July. Although accessory sales declined from $155.2 million reported in June, it was much better than $115.3 million posted in May 2013.

According to NPD, sales of physical goods (hardware, software and accessories) accounted for approximately 50% of consumer spending, which was almost $1.2 billion in the month.

Digital Games July Sales

According to market research firm Super Data, overall digital sales increased 5.4% year over year to $1.1 billion in July. This was much higher than $841.0 million reported in Jun 2013. Conversion rate improved 2.11% across all categories. 

Revenues from social games surged 23.3% on a month-over-month basis to $164.0 million. In July, King’s Candy Crush Saga replaced Zynga’s (ZNGA - Snapshot Report) Farmville 2 as the most played social game on Facebook (FB - Analyst Report) in terms of monthly active users (“MAUs”). International Game Technology’s (IGT - Analyst Report) DoubleDown Casino Slots & Poker claimed the #3 spot.

Revenues from mobile games soared 32.0% year over year to $271.0 million, with an impressive conversion rate of 5.0%, which indicates consistent higher spending. King’s Candy Crush Saga and Marvel’s War of Heroes were leading apps, followed by Kabam’s The Hobbit: Kingdoms of Middle Earth.

Free-to-play subscriber base slightly declined to 45.8 million from 46 million in June. Average revenue per user (“ARPU”) was approximately $40 much higher than $27 reported in June.

Subscription based MMO revenues declined 9.0% on a monthly basis to $76.0 million. Subscriber base declined to 5.8 million from 6.3 million in June. This was much anticipated due to the loss of 600K subscribers for Activision’s World of Warcrafts (WoW) in the recently concluded quarter.

Downloadable game content sales increased 5.0% on a monthly basis but declined 13.0% year over year to $286.0 million. The month-over-month increase was driven by strong performance from PC, which fully offset a decline in console sales.

Our Take

We expect video game retail sales to remain sluggish over the next few months, till the release of new hardware consoles from Microsoft and Sony. The new consoles and a host of new game releases such as Grand Theft Auto V, Battlefield 4 and Call of Duty: Ghosts will boost retail sales.

We believe that increasing revenues from mobile and downloadable contents (DLCs) will drive digital revenues going forward. Mobile has strong growth potential due to improving gaming quality, which is a major factor behind higher user spending.

Further, game developers such as EA and Activision are actively using the digital distribution platform to provide additional downloadable contents for popular titles such as Battlefield and Call of Duty. This will further boost revenues from DLC going forward.

Moreover, Facebook’s entry into the gaming market as a publisher is a major growth catalyst in our view. Its massive user base is expected to attract game developers that will eventually boost revenues from social gaming going forward. Currently, Facebook has a Zacks Rank #2 (Buy).

Among the traditional gaming companies, we believe that both Activision and Take-Two Interactive (TTWO - Snapshot Report) have strong growth opportunities in the near term based on the release of Call of Duty: Ghosts and Grand Theft Auto V.

Activision’s recent announcement that it will buy back Vivendi’s 429 million shares worth $6.0 million is major positive will provide the company more freedom  to decide the fate and operating structure of most of its games including WoW.

Currently, Activision has a Zacks Rank #1 (Strong Buy), while Take-Two carries a Rank #2 (Buy).

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