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Video game retail sales unexpectedly increased in August. According to market research firm NPD, sales climbed 1.0% to $521.0 million from $516.3 million reported in Aug 2012. Sales were significantly up from $443.0 million reported in July but were slightly down from $593.3 million reported in June.

Software sales (including PC) increased 21.0% year over year to $293.4 million, considerably higher than $222.3 million reported in July but lower than $313.8 million reported in June.

Electronic Arts’ (EA - Analyst Report) August release Madden NFL 25 was the top-selling game, pushing EA’s NCAA Football 14 to the #7 place. Saints Row IV from Deep Silver claimed the #2 spot and pushed Microsoft’s (MSFT - Analyst Report) Minecraft to #5. Disney Interactive’s Disney Infinity claimed the #3 position.

Hardware sales plunged 40.0% year over year to $90.8 million, lower than $99.4 million reported in July and $142.0 million in June. Nintendo’s 3DS was the bestselling hardware platform in the month, while Microsoft’s Xbox 360 remained the best console in terms of unit sales.

Accessories sales increased 7.0% year over year to $136.7 million in August. Although accessory sales increased from $133.4 million reported in July, sales were much lower than $155.2 million in Jun 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 Sales

According to market research firm Super Data, overall digital sales increased 4.1% year over year to $846.0 million in August. This was much lower than $1.1 billion reported in Jul 2013.

Revenues from social games were almost flat on a month-over-month basis at $166.0 million. Revenues from mobile games declined as average spending fell below $20.0.

Free-to-play subscriber base remained almost flat at 46.0 million in August. Average revenue per user (“ARPU”) was approximately $36, much lower than $40 reported in July. Sony (SNE - Snapshot Report) announced a new free-to-play game EverQuest Next, while Activision Blizzard (ATVI - Snapshot Report) launched the beta version of The Hearthstone: Heroes of Warcraft.

Subscription based MMO revenues declined 26.0% on a year-over-year basis to $88.0 million. Subscriber base remained steady in August, while conversion rate jumped to 15.0%. Activision’s World of Warcrafts (WoW) lost 200K subscribers in the recently concluded month.

Downloadable game content sales decreased to $116.0 million in August.  

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.

Among the traditional gaming companies, we believe that EA, Activision and Take-Two Interactive (TTWO - Snapshot Report) have strong growth opportunities due to their strong and innovative product pipeline in the near term.

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

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