Is the Videogame Industry Dying?

E3 is usually the videogame industry's big party of the year — a chance to celebrate its strengths and showcase the titles it expects to drive sales forward for the rest of the year.

But as the game makers gather for this year's event, a cloud hangs over the soiree. Retail sales are down 27 percent compared to this time in 2011. Mobile devices are stealing the spotlight from traditional consoles. And naysayers are openly questioning the long-term viability of the console industry.

Given the hard numbers, that's understandable, but there are a few other factors to consider before making such a declaration.

The first is the age of today's game machines. Microsoft's Xbox 360 made its debut in 2005 — and Sony's PlayStation 3 bowed the next year. In an industry that has traditionally swapped in new hardware every five years, that's a big gap — and it's one that is starting to affect sales.

"We've had an abnormally long console cycle and I think people are ready for something new," says Eric Handler, senior equity analyst at MKM Partners.

Investors are also comparing current sales numbers to the cycle's peak, back when the Wii was a must-have device that retailers couldn't keep on store shelves. Now that demand for Nintendo's system has effectively dried up, the numbers can't compete.

If not for the recession, those Wii owners might have kept the industry on a fairly even keel. But the longevity of the economic downturn, coupled with the rise of the smart phone and the app market with its cheap games, stole much of Nintendo's audience away.

"Gaming received a massive boom at the start of the cycle because of the Wii," says Handler. "Schools were buying Wiis. Nursing homes were buying Wiis. Everyone under the age of 95 was playing ‘Wii Play.’ It created this massive groundswell. I would say the hard-core gamer has been pretty constant [in his or her gaming habits], but the big shift has been among the casual players who have come into this space."

He also touched upon the impact the expanding mobile space has had on the industry.

"When the recession hit, you had this massive downdraft [and everyone] stopped buying Wii games," he said. "Then, you had the rise of the [Apple] iPad and smartphones and suddenly the casual business changed from a $35 business to a $1, $3, $5 business."

At this year's E3, the videogame industry begins the march to what it hopes will be its new peak, with the introduction of the first next-generation system — the Wii U, which will be out before the end of the year.

At its pre-show press conference, Nintendo is expected to showcase the final version of the hardware and discuss launch details, such as big titles consumers can look forward to. (Don't expect to hear a launch date or price, though — the company will save that information to control the news cycle on another day.)

Sony and Microsoft have both said they have no plans to talk about their next-generation systems, which are expected in 2013. That's largely because both are hoping to get a final push from the current generation with a strong software lineup.

Microsoft will showcase "Halo 4" at this year's show — the beginning of a new trilogy for its most popular franchise — while Sony will showcase "PlayStation All-Stars: Battle Royale," a "Super Smash Bros"-like game featuring some of the best-known characters exclusive to the platform.

Third-party publishers are also hoping to take advantage of the large installed base of systems to showcase some of their biggest franchises. Ubisoft will center its focus on action games "Assassin's Creed III" and "Far Cry 3." Electronic Arts will showcase a new "Medal of Honor" game and graphical wunderkind "Crysis 3."

Most investors will be focused on Activision Blizzard, though. The company will give its first in-depth look at "Call of Duty: Black Ops II" at the show (likely at the start of Microsoft's press conference), which has already exceeded the early pre-order levels of its predecessors, thanks in part to its near-future setting.

Activision will also show off the next installment in its "Skylanders" series, which combines real-world toys with a videogame and was one of the 2011 holiday period's biggest surprise hits. (Collectors are paying up to $1,200 for rare figurines from the game on eBay .)

The biggest title on tap for next year, however, won't be at this year's E3 — and its publisher likely won't discuss it. "Grand Theft Auto V" is the game that could end "Call of Duty's" reign as the industry's top seller, but developer Rockstar Games traditionally shuns E3.

Take-Two Interactive Software has not announced a release date for the game, but in its most recent quarterly earnings, the company strongly hinted in its guidance that it expected the game to come out before the end of its fiscal year. Most analysts expect it in the first calendar quarter of next year.

Take-Two generally prefers to create its own news cycle for its most important franchise, as making any announcement at E3 risks dulling the impact (due to the cacophony of other gaming announcements).

Still, if you're looking for a grand finale to the current generation of consoles, there's really no safer choice than GTA.

—By CNBC's Chris Morris
Follow Chris Morris on Twitter: @MorrisatLarge