Video Game Sales Decline Continues

Video game retail sales declined for the tenth consecutive month in September 2012. According to market research firm NPD, U.S video game store sales slumped 24.0% year over year to $843.3 million in the month of September. Although the year-over-year decline widened compared with the prior-month level, dollar sales increased from $515.6 million reported in August.

Hardware sales plunged 39% year over year to $210.9 million while total software sales declined 14.0% year over year to $547.3 million. Accessories sales declined 11.0% annually to $139.9 million. The weak retail sales were primarily due to the ongoing transition from physical to digital platform and aging hardware consoles.

According to NPD, Madden NFL 13 from Electronic Arts (EA - Analyst Report) topped the game sales chart pushing August topper Darksiders 2 from THQ out of the top 10 list. Borderlands 2 from 2K Games was placed at #2, while EA’s FIFA Soccer 13 grabbed the #3 spot.

Microsoft Corp’s (MSFT - Analyst Report) Xbox 360 was again the top-selling console for the 19th straight month with 270K units sold. As per NPD, hardware sales improved on an average sales-per-week basis compared with August for Xbox 360, Nintendo’s DS and 3DS shipments, as well as Sony’s (SNE - Snapshot Report) PS3 and Vita gaming systems.

Nintendo benefited from the recent release (August 19) of its new gaming console 3DS XL, as 3DS software sales jumped 89% year over year in the month of September. In this regard, the upcoming release of Nintendo’s Wii U in mid November will be eagerly watched by investors.

We believe that the upcoming holiday season will boost video game sales over the next couple of months. Most of the publishers including EA and Activision Blizzard (ATVI - Snapshot Report) are scheduled to release new games of their top-most franchises over the next two months, which will be the key growth factor in our view.

However, declining consumer spending on video games and the continued rapid adoption of free-to-play games remain the main headwinds over the long term. 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), low priced digital games have failed to offset the rapid decline of high priced retail sales in recent times

Moreover, the highly fragmented video game market continues to witness increased competitive pressures, which are hurting overall profitability.

We maintain our Neutral recommendation on Activision and EA over the long term. Currently, both of them have a Zacks #3 Rank, which implies a “Hold” rating in the near term.