After witnessing a horrific slump over the last five months, the video game industry was supplemented by marginal sales growth in October 2011. According to a recent report from market research firm The NPD Group, U.S. video game retail sales spiked 1.0% to $1.08 billion (including games released for personal computers).
The year-over-year growth was primarily driven by new game releases. October witnessed a surge of new game releases (seven of the top 10 games were new releases), which sold 23.0% more than the top 10 titles released in October last year.
However, we note that video game retail sales fell sequentially from $1.23 million reported in the month of September. We believe that consumers may have curtailed their spending prior to the holiday season (November, December), which will likely see the maximum number of new and popular game releases.
However, a number of new releases helped drive software sales in the month. Software sales increased 3.0% year over year to $621.3 million. Including PC games, software sales increased 1.0% year over year to $649.5 million.
Electronic Arts Inc.’s (ERTS) late October release Battlefield 3 was the top-selling game with approximately 2 million units sold (Battlefield 3 was released on October 25). Warner Bros. Interactive Entertainment’s Batman: Arkham City was placed in the #2 position, while 2K Sports’ latest NBA installment NBA2K12 came third.
Hardware sales increased 6.0% to $295.6 million, driven by strong sales from Microsoft Corp’s (MSFT) Xbox 360 console, which sold approximately 393,000 units in October. Sony Corp.’s (SNE) PlayStation 3 and Nintendo’s Wii and 3DS handheld device sold approximately 250,000 units each in the reported month.
Our Take
Although retail sales constitute a significant portion of the Video game industry, rapid adoption of digital gaming driven by increased usage of portable devices, smartphones and tablets are gradually lowering its relevance. As NPD does not track digital sales, we think it is becoming increasingly difficult to gauge the performance of the video game industry going forward.
Nevertheless, we believe that the upcoming holiday season looks brighter given the line up of new game releases. The next two months will witness the release of some of the highly anticipated titles from popular franchises, such as Star Wars from Electronic Arts, Uncharted 3: Drake's Deception, Elder Scrolls: Skyrim, and Zelda: Skyward Sword.
On November 8, 2011, Activision Blizzard Inc. (ATVI) released its highly anticipated Call of Duty: Modern Warfare 3. On the very first day of its release, the first person shooter game sold a massive 6.5 million units in North America and the United Kingdom, garnering revenues of approximately $400.0 million.
This marks a solid beginning to the holiday season, in our view. However, whether the strong growth in the next couple of months will be enough to offset the devastating summer (May, June, July and August) performance remains to be seen.
We also remain cautious on retail sales and believe that strong growth in the digital business will cannibalize the market going forward. According to one of the latest studies by Strategy Analytics, the global online games market is currently worth $4.0 billion and is expected to triple in the next five years. Moreover, the US video game industry remains fragmented with cut-throat competition, which will further hurt top-line growth in our view.
Despite competition and a lackluster macro outlook, we believe companies with significant exposure to the digital business will stand out even in this sluggish market going forward. Hence, we remain Neutral on Electronic Arts over the long term (6-12 months).
We also remain Neutral on Activision Blizzard, the other gaming company in our coverage. Although Activision does not have the significant exposure to online and social gaming as compared to its arch rival Electronic Arts, we believe Activision’s product pipeline is much stronger. Call of Duty boasts a strong fan following and its last instalment Black Ops was the top selling game in 2010. We expect the recently released Modern Warfare 3 to help Activision maintain its lead in 2011.
Both Electronic Arts and Activision Blizzard have a Zacks #2 Rank, which implies a Buy rating on a short-term basis, reflecting new releases and the solid growth prospects in the holiday season.
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