January 2012 video game industry sales figures revealed that it has not yet recovered from the 2011 slump. While late December economic data was mostly upbeat, consumer confidence data failed to excite. January was no better, with sales figures remaining weak.
According to market research firm The NPD Group, US sales for January 2012 plummeted 34% to $750.6 million from the comparable prior-year period, mostly on account of tough comparisons with the year-ago when there were a number of launches like Dead Space 2 and Little Big Planet 2. Moreover, weak performance from the hardware segment played havoc on the total sales of the industry.
However, sales through digital downloads of full games and add-on content downloads, social networking games, mobile games, rentals and subscriptions accounted for an additional $350 to $400 million.
Software and hardware sales were both down 38% from the previous-year period to $355.9 million and $199.5 million, respectively. Moreover, sales of videogame accessories were $195.2 million, down 18% year over year.
For the third month in a row, Activision Blizzard‘s (ATVI) Call of Duty: Modern Warfare 3 was the top selling game in January with Ubisoft‘s Just Dance 3 snatching the second position. Elder Scrolls V: Skyrim, Bethesda Softworks was third in line, while Take 2 Interactive‘s (TTWO) NBA 2K12 was fourth. Electronic Arts Inc.‘s (EA) most coveted Battlefield 3 remained in the fifth position for the second month in a row.
The weaker hardware numbers were attributable to the aging of gaming consoles from Microsoft Corp (MSFT), Sony Corp (SNE) and Nintendo. Incidentally, Microsoft’s Xbox 360 has been on the market for seven years and its competitors, Sony’s PlayStation 3 and Nintendo’s Wii, are both six years old.
For the past several months the video game industry has been bearing the brunt of weak consumer spending and troubled economic conditions. We note that the Consumer Confidence Index declined in January according to Conference Board, reversing its gains in December. However, analysts are optimistic about February and March sales, expecting new game releases such as UFC, Resident Evil, Mass Effect 3 and Kingdoms of Amular: Reckoning to save the day.
We believe that the video game industry is undergoing a massive transition from physical to digital. Thus the corresponding retail sales decline is not unexpected. Digital online games — including used games, rentals, mobile games and social games — have gained tremendous popularity in recent times. We believe that publishing companies having an exposure to these segments would be able to gain a first mover advantage.
However, we also remain cautious about retail sales and believe that strong growth in the digital business will cannibalize the market going forward. According to one of the 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 overall video game market remains highly fragmented, graced by a large number of companies. This has increased competitive pressures, keeping prices down.
Despite competition and a lackluster macro outlook, we believe that companies with significant exposure to the digital business will stand out even in this sluggish market. Additionally, new game releases and improvement in consumer spending will act in favor of the industry.
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