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Video game retail sales witnessed modest growth in October, primarily driven by higher software sales, which fully offset declining hardware sales in the month. According to market research firm NPD, sales increased 27.0% year over year to $791.1 million.

However, October sales were significantly down from $1.08 billion reported in September but were much better than $521.0 million reported in August.

Software sales increased 12.0% year over year to $482.5 million, considerably lower than $754.3 million reported in September but higher than $293.4 million reported in August. The strong year-over-year growth was primarily driven by robust performance from Take Two Interactive’s (TTWO - Snapshot Report) Grand Theft Auto V, which remained the top-selling game of the month.

Nintendo’s Pokemon X for 3DS was the #2 best selling game, pushing Electronic Arts(EA - Analyst Report) August release Madden NFL 25 out of the list. Nintendo’s Pokemon Y for 3DS captured the #3 position.

Hardware sales declined 8.0% year over year to $171.7 million, slightly lower than $183.2 million reported in September but much better than $90.8 million reported in August.

Nintendo’s 3DS maintained its top spot as the bestselling hardware platform in the month by selling 452K units. Microsoft’s (MSFT - Analyst Report) Xbox 360 re-captured the #1 position as the best console in terms of unit sales in the month. Both Microsoft and Sony (SNE - Snapshot Report) are set to launch their respective next generation console systems this month.

Accessories increased approximately 1.0% from the year-ago quarter, primarily driven by robust sales of interactive gaming toys from both Walt Disney (DIS - Analyst Report)’s Infinity and Activision (ATVI - Snapshot Report)’s Skylanders in the quarter.

Digital Games Sales

According to market research firm Super Data, overall digital sales increased 11.0% year over year to $1.03 billion in October. This was higher than $970.0 million reported in September and $846.0 million reported in Aug 2013.

Revenues from social games increased 12.0% year over year to $173.0 million, but remained almost flat on a month over month basis. Mobile gaming revenues surged 27.0% year over year, but remained almost flat on a month-over-month basis at $264.0 million.

Free-to-play revenues were up 15.0% year over year to $261.0 million in the month, while subscriber base contracted by approximately 1.7 million. Subscription based MMO revenues were $86.0 million, down 12.0% year over year. Downloadable game content sales increased 25.0% month over month to $247.0 million in October.  

Our Take

We expect video game retail sales to improve significantly over the next couple of months due to the launch of new hardware consoles from Microsoft and Sony and new game releases. Moreover, anticipated higher consumer spending during the holiday season will further boost sales in the near term.

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 have significant growth opportunities due to their innovative product pipeline in the near term. However, market fragmentation remains a major headwind in the near term.

Currently, Activision has a Zacks Rank #2 (Buy), while both Take Two and Electronic Arts carry a Rank #3 (Hold).

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