'Halo: Reach' Not Enough to Lift Falling Game Sales

Even “Halo: Reach” couldn’t bring the video game industry out of its slump in September.

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Software sales at retail stores were down a shocking 6 percent last month to $614 million, according to The NPD Group. That’s vastly worse than analysts were expecting and could scare investors, who were holding out hope that September would be a bright spot in an otherwise dismal year for game sales.

“Halo: Reach” sold an impressive 3.3 million units — comparable to the launch of “Halo 3” and “Halo 2”. But other new titles apparently failed to inspire consumers to make purchases.

NPD, which monitors game sales, recently changed its reporting structure and no longer gives sales data on individual titles or on hardware units, so it is difficult to quickly ascertain how other new titles – including Electronic Arts’ “FIFA 11” and Activision’s “Spider-Man: Shattered Dimensions” — performed.

The organization, though, tried to calm industry watchers, noting that total consumer spending numbers (incorporating used game sales, game rental, subscription services from massively multiplayer games and digital downloads) for the first half of 2010 would be released tomorrow.

"While industry sales of new physical retail sales show a decline versus year ago, it's important to remember that there is a growing volume of content being sold digitally, or otherwise outside the traditional retail channel,” said NPD analyst Anita Frazier. “These numbers reflect the largest channel for hardware, software and accessories sales, but there are content sales happening elsewhere.”

Digital and other sales are growing, but likely not enough to offset the month’s significant miss. Analysts were expecting software sales, which are generally looked to as the best barometer of the industry’s health, to be up as much as 4 percent in September.

Hardware sales recorded grim numbers as well, but that was largely expected. Facing a tough comparison, due to PlayStation 3 price cuts a year ago by Sony, overall hardware sales were down 19 percent to $383 million. Overall, the industry remains 8 percent behind its pace of a year ago.

One console did buck the trend, though. Microsoft’s Xbox 360 continues to defy the odds and post sales increases.

"Xbox 360 hardware sales were up versus last year, and this month marks the best month of unit sales for the platform yet in 2010 which says a lot considering sales are up 34 percent on a year-to-date basis," said Frazier.

Analysts now believe there is virtually no chance that game sales will end the year in positive territory.

“Unfortunately, we do not see many catalysts for the software publisher group over the remainder of 2010,” says Michael Pachter of Wedbush. “We think that console and handheld software sales in 2010 will end up in negative territory, offset by an increase in PC software from the launches of ‘StarCraft II’ in July and ‘World of Warcraft: Cataclysm’ in December.”

Year to date, the industry is 8 percent behind 2009’s pace. Software sales, which are generally looked to as the best barometer of the industry’s health, are down 8 percent as well. Hardware sales are off 12 percent.

This comes despite the fact that 2009 sales were lower than 2008. Last year was the first time the industry recorded negative growth since 2002. And there have never been back-to-back years of lower sales historically.

Mounting evidence that that will occur — and disappointments such as the September sales — should prevent any momentum for video game stocks in the near term.

“Until we see a reversal of the negative trend, we expect investors to remain on the sidelines,” said Pachter. “We think that 2011 has the potential to be a bright year for the publishers, but we think that investors will have to be patient to see evidence of a rebound.”