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Video game retail sales declined for the thirteenth consecutive month in December 2012. According to market research firm NPD, sales slumped 22.0% year over year to $3.2 billion last month. Overall video game sales in 2012 declined 22.0% to $13.26 billion from $16.99 billion reported in 2011.

Both software and hardware sales plunged in December 2012. The holiday season failed to revive software sales, which declined 26.0% year over year to $1.54 billion in December.

Activision’s (ATVI - Snapshot Report) Call of Duty: Black Ops II continued to top the game sales chart in December 2012. Currently, Activision has a Zacks Rank #3 (Hold). Ubisoft’s Just Dance 4 was #2, which pushed November runner-up Halo 4 from Microsoft (MSFT - Analyst Report) to #3 position. Microsoft has a Zacks Rank #3 (Hold).

As per NPD, Call of Duty: Black Ops II was the top-selling game in 2012, followed by Madden NFL 13 from Electronic Arts (EA - Analyst Report), another Zacks Rank #3 (Hold) stock. Halo 4 took the #3 spot, while Ubisoft’s Just Dance 4 and Assassin’s Creed grabbed the #4 and #5 spots, respectively. Activision’s Call of Duty: Modern Warfare 3 and EA’s FIFA Soccer 13 made it to the top 10 games list for 2012.

Hardware sales plunged 20% year over year to $1.07 billion. The year-over-year decline was due to 37.0% decline in stand-alone hardware sales. Hardware sales declined 27.0% year over year to $4.04 billion in 2012.

Microsoft’s Xbox 360 was again the top-selling console with 1.4 million units sold in December. Nintendo sold 1.25 million 3DS and 470,000 of standard DS last month. After a gap of six years, Nintendo released its new gaming console Wii U on November 18, 2012 and sold approximately 460,000 units in December, less than 475,000 units sold by the original Wii during the same period in 2006.

To date, Nintendo has sold 890,000 units of Wii U in the US. However, the new console earned more revenue (approximately $30.0 million more) compared with the original due to higher pricing. The most expensive Wii U costs $350, compared to Wii’s single $250 model.

Our Take

We expect video game sales to remain sluggish over the next few months. 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, declining software sales remain a concern. We believe that the rapid adoption of free-to-play games will continue to cannibalize retail software sales in 2013. Further, the highly fragmented video game market will continue to witness increased competitive pressures, which will hurt overall profitability.

However, 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 going forward.

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

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