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Video game retail sales continued to decline in Mar 2013. According to market research firm NPD, sales decreased 10.0% to $992.5 million from $1.1 billion reported in Mar 2012. However, sales were much better than $810.0 million reported in Feb and $834.7 million reported in Jan, 2013.

Software sales climbed 2.0% year over year to $602.4 million in March. This was much better than $369.9 million reported in February and $373.1 million reported in January. The year-over-year growth was primarily driven by strong performance from new games, which sold 40% more units than new launches in Mar 2012.

BioShock Infinite from Take-Two Interactive (TTWO - Snapshot Report) was the top-selling game in the month,  pushing February topper Dead Space 3 from Electronic Arts (EA), a Zacks Rank #3 (Hold) stock, out of the top 10 list. Currently, Take-Two has a Zacks Rank #3 (Hold).

Tomb Raider from Square Enix took the #2 spot, while Microsoft’s (MSFT - Analyst Report) Gears of War: Judgment was placed at #3. Currently, Microsoft has a Zacks Rank #3 (Hold).

Hardware sales fell 32.0% year over year to $221.6 million from $244.2 million reported in February. However, March hardware sales were better than $205.0 million reported in January.

Microsoft’s Xbox 360 was again the top-selling console. It sold 261,000 units in March compared with 302,000 units sold in February. This was also much less than 281,000 units sold in January. On a year-over-year basis, Xbox unit sales declined 30%.

As per NPD data, Nintendo’s 3DS handheld sales grew 9.0% year over year last month. According to NPD, total US video game sales were $1.9 billion in Mar, 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 (SNE - Snapshot Report) will boost the sagging video game retail sales market by the end of 2013.

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