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After a brief rise in January, video game sales plunged in Feb 2013. According to market research firm NPD, sales decreased 25.0% year over year to $810.0 million last month. This was also short of $834.7 million reported in January.

Software sales decreased 27% year over year to $369.9 million in February. This was slightly short of $373.1 million reported in January. Dead Space 3 from Electronic Arts (EA - Analyst Report),a Zacks Rank #3 (Hold) stock,was the top-selling game in the month, which pushed January topper Call of Duty: Black Ops II from Activision (ATVI - Snapshot Report),a Zacks Rank #4 (Sell) stock, to #2 position.

EA’s Crysis 3 took the #3 position, while Take-Two Interactive’s (TTWO - Snapshot Report) NBA 2K13 was placed at #4. Currently, Take-Two has a Zacks Rank #2 (Buy). Metal Gear Rising: Revengeance from Kojima Productions occupied the #5 position. EA had another game in the top 10 list, Madden NFL 13 at the last position.

Hardware sales fell 36.0% year over year to $244.2 million. Hardware sales were better than $205.0 million reported in January. Microsoft’s (MSFT - Analyst Report) Xbox 360 was again the top-selling console with 302,000 units sold in February. This was also much better than 281,000 units sold in Jan. Currently, Microsoft has a Zacks Rank #3 (Hold).

According to NPD, total US video game sales were $1.2 billion in Feb, 2013.

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 Nintendo (released in Nov 2012), Microsoft and Sony (expected in 2013) will boost the sagging video game retail sales market by the end of 2013.

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