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Video game retail sales declined for the twelfth consecutive month in November 2012. According to market research firm NPD, U.S video game store sales slumped 11.0% year over year to $2.25 billion in the month of November. The decline was the smallest we have seen this year in both dollar and percentage terms.

A flurry of new game releases and Nintendo’s new console launch in mid-November was fully offset by lackluster console sales from other hardware developers. Tough year-over-year comparisons were another reason for the decline, as the comparable prior-year month had a number of heavyweight releases that included Battlefield 3 from Electronic Arts (EA - Analyst Report)), a Zacks Rank #3 (Hold) stock and Call of Duty: Modern Warfare 3 from Activision Blizzard (ATVI - Snapshot Report), a Zacks Rank #3 (Hold) stock.

There were some big releases this November as well, namely Activision’s highly anticipated Call of Duty: Black Ops II and Halo 4 from Microsoft Corp (MSFT - Analyst Report),a Zacks Rank #3 (Hold) stock. But the strong retail sales of both the games failed to drive year-over-year software sales growth (including PC games), which declined 11.0% to $1.43 billion in the month.

According to NPD, Call of Duty: Black Ops II topped the game sales chart, pushing October topper NBA 2K13 from Take-Two Interactive (TTWO - Snapshot Report), a Zacks Rank #3 (Hold) stock, to the #8 spot. Halo 4 was placed at #2 while Ubisoft’s Assassin’s Creed III clinched the #3 spot.

Hardware sales plunged 13% year over year to $838.9 million. After a gap of six years, Nintendo released its new gaming console Wii U on November 18, 2012 and sold approximately 425,000 units over the next seven days. Microsoft’s Xbox 360 was again the top-selling console with 1.27 million units sold in November. After reporting strong growth in October, accessories sales declined 8.0% year over year to $281.0 million last month.

As evidenced from the strong demand of Wii U, we believe that the highly anticipated launch of new hardware consoles from Microsoft and Sony (expected in 2013) will boost the sagging video game retail sales market over the next few years. Until that happens, Nintendo will enjoy a competitive advantage over its hardware rivals, in our view. 

However, declining software sales remain a concern. We believe that the rapid adoption of free-to-play games will continue to cannibalize retail software sales, going forward.

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 is hurting overall profitability.

We maintain our Neutral recommendation on Activision, EA, Take-Two and Microsoft over the long term (6-12 months).

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