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Video game retail sales increased in November, primarily driven by strong hardware sales, which fully offset the declining software sales during the month. According to market research firm NPD, sales increased approximately 7.2% year over year to $2.74 billion.

November sales were significantly up from $791.1 million reported in October and were better than $1.08 billion reported in September.

Software sales plunged 24.0% year over year to $1.09 billion, but were considerably higher than $482.5 million reported in October and $754.3 million in September.

Activision’s (ATVI - Snapshot Report) Call of Duty: Ghosts was the top-selling game of the month, which pushed Take Two Interactive’s (TTWO - Snapshot Report) Grand Theft Auto V to #5 position. Electronic Arts’ (EA - Analyst Report) October release Battlefield 4 was the #2 best-selling game, pushing Nintendo’s Pokemon X for 3DS out of the top 10 list.

Ubisoft’s Assassin’s Creed 4: Black Flag captured the #3 position, pushing Nintendo’s Pokemon Y for 3DS out of the top 10 list.

Hardware sales surged 58.0% year over year to $1.3 billion, much higher than $171.7 million reported in October and $183.2 million in September.

The stupendous growth was driven by strong unit sales of the new consoles Xbox One and PlayStation 4 from Microsoft (MSFT - Analyst Report) and Sony (SNE - Snapshot Report), respectively. According to NPD, both the companies sold more than 1 million units within a short span of time, creating the highest console sales record in a month.

Microsoft sold 909,132 Xbox One within the first nine days post the consoles debut on Nov 22. To date, the company has sold more than 2 million units globally. On the other hand, Sony reportedly sold 2.1 million PlayStation 4s from its debut on Nov 15 through Dec 1.

According to NPD, PlayStation 4 was the top-selling console in November. However, Xbox One was the leader on an average per-week basis.

Nintendo’s 3DS sold approximately 770K units in November, as the sales of Wii U console soared 340% over sales in October, primarily driven by a price cut in September.

Accessories increased approximately 17.0% from the year-ago quarter to $327.4 million, primarily driven by robust sales of interactive gaming toys from both Walt Disney’s (DIS - Analyst Report) Infinity and Activision’s Skylanders in the quarter.

Digital Games Sales

According to market research firm Super Data, overall digital sales increased 25.0% year over year to $1.07 billion in November. This was higher than $1.03 billion reported in October and $970.0 million in September.

Revenues from social games increased $169.0 million, which remained almost flat on a month-over-month basis. Mobile gaming revenues surged 34.0% year over year and 4.0% month over month to $274.0 million.

Free-to-play revenues were down 17.0% month over month to $217.0 million, while average spending per user declined approximately 10.0% month over month.

Subscription-based MMO revenues were $81.0 million, down from $86.0 million reported in October. Downloadable game content sales increased 41.0% year over year to $325.0 million in November.  

Our Take

We expect video game retail sales to improve significantly in December due to strong unit sales of new consoles from Microsoft and Sony. However, the November decline in Software remains a concern.

Although we expect retail software sales to increase in December (due to new game releases), the long-term outlook remains bleak. According to PwC, worldwide console game sales are expected to grow 4.2% to $26.0 billion in 2013 and 6.4% in 2014. However, this is much slower than the 28.0% growth reported in 2007, after the release of Xbox 360 and PlayStation 3 consoles.

We believe that slow console sales growth reflects ongoing consumer transition to smartphones and tablets. We expect increasing revenues from mobile and downloadable contents (DLCs) to 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 near-term headwind.

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

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