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Video Game Industry Looks for a Holiday Miracle

Holiday cheer may be in short supply for the video game industry this year.

Dan Kenyon | Stone | Getty Images

While there are bound to be some hot titles and big sellers, it will take a true Christmas miracle for the industry to see retail sales hit positive territory in 2010. Year to date, they’re down over 8 percent and analysts say it will be hard for any month in the fourth quarter to top 2009’s numbers.

That’s not going to stop publishers from making a full-on assault, though. Microsoft will spend hundreds of millions of dollars promoting Kinect, its new motion-capture controller. And Activision-Blizzard has a two-fer of guaranteed smashes coming out in the fourth quarter.

The biggest of those is “Call of Duty: Black Ops,” the follow-up to last year’s “Modern Warfare 2”—a title so immense it set entertainment industry sales records. And so far, pre-orders for “Black Ops” are tracking above where “Modern Warfare 2” was this time a year ago.

As if that weren’t enough, a new expansion pack for “World of Warcraft” will hit shelves in December, which could give a subscriber bump to the game that already has more than 12 million active players.

The December quarter is the most important to the video game industry. It represents about 46 percent of annual software units sold, with the vast majority of that occurring in November and December.

"More people are buying and playing games, but they’re doing it somewhere other than retail." -M2 Research, Billy Pidgeon

For some companies, it’s critical. Nintendo, for example, sells the vast majority of its hardware in the final month of the year. (In December 2009, for example, the company sold a record 3.81 million Wiis and 3.31 million DS units.) And with the company in October reporting a quarterly loss for the first time in seven years, Nintendo has acknowledged that this holiday season is critical.

The landscape of the video game industry is evolving quickly, though, which may impact the importance of the holidays in coming years. The line between core gamers and the mass market audience is getting wider—with enthusiasts buying hot games the minute they come out and the mass market having its attentions wooed by Apple and social networking sites.

“In this industry, like other industries, there’s a 'new normal,'” says Billy Pidgeon, senior analyst for M2 Research. “With games, the market is going elsewhere. People are buying more [digitally downloaded content]. More people are buying and playing games, but they’re doing it somewhere other than retail.”

While that’s likely to impact year-end numbers, it doesn’t mean the industry is on a death march, as some investors seem to think. The current console cycle is lasting significantly longer than previous ones have, so the slowdown in hardware sales impacts the bottom line. And, as people buy add-on packs for games, they’re doing so digitally, which hurts retail software sales numbers.

Indeed, the NPD Group, which tracks video game sales, reported in mid-October that its studies found that retail sales now make up just 60 percent of the industry’s total sales.

Sales of used games, game rentals, subscriptions, digital full game downloads, social network games, downloadable content, and mobile game apps added between $2.6 and $2.9 billion over the first six months of the year.

“I wouldn’t break out the hearses and the 21-gun salute,” says Pidgeon. “Things are changing and it’s important for publishers and retailers and vendors to embrace these changes. … [But] those that adapt will be just fine.”

Questions? Comments? Email us at consumernation@cnbc.com

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