Video-Game Industry Braces for Negative Sales Report

After a turbulent and revolutionary year, the video game industry is bracing itself for 2010’s holiday and total-year retail sales figures.

Microsoft’s Xbox Kinect, a gesture-recognition controller – a camera that is able to detect subtle movements and sounds from players.
Source: Microsoft
Microsoft’s Xbox Kinect, a gesture-recognition controller – a camera that is able to detect subtle movements and sounds from players.

Buoyed by continued strong sales of titles like “Call of Duty: Black Ops” and Microsoft’s Kinect, many analysts expect December sales to show more positive momentum when the numbers are released after the market closes this afternoon.

Wedbush Securities’ Michael Pachter, for instance, is calling for a 2-percent increase in software sales, which many investors look to as the best barometer of the industry’s overall health.

For the year, though, things are likely to be a different story. The 2010 retail numbers are expected to show their second consecutive decline—a first for video games.

The only thing that could prevent that would be an absolutely tremendous December for hardware sales. And on the whole, that seems unlikely. Pachter predicts Kinect will push sales of the Xbox 360 up 91 percent compared to 2009.

However, the Nintendo Wii and Sony PlayStation 3 are expected to lose ground.

And the handheld market, specifically Nintendo’s DS lineup, will likely see a significant fall-off as that device prepares to cede the spotlight to the 3DS, a portable gaming system that projects stereoscopic 3D images without the need for special glasses, in March.

Kinect is the wildcard for the month. Microsoft recently said the device had sold 8 million units in its first 30 days—60 percent more than the company forecast. The question is: Did that draw money from other parts of the industry?

“This month was particularly difficult to estimate, as the surprisingly high volumes for Kinect … drained many consumers’ wallets, and may have affected their ability to purchase software,” says Pachter.

Winners And Losers

Among software companies, Activision is likely to lead the pack in December, thanks to “Call of Duty”. Ubisoft will also have a strong showing with “Assassin’s Creed: Brotherhood” and “Just Dance 2,” which sold 5 million units worldwide during the holiday season.

For the year, look for Take Two Interactive Software to place high, as “Red Dead Redemption” dominated the charts for a good part of the year. Electronic Arts might also show signs of strength as its “Madden” franchise saw a bit of a rebound this year.

While the retail numbers—particularly the year-end ones—are important to investors, they don’t present a complete picture of the video game industry’s overall health.

Digital downloads are a fast-growing source of income in the industry, both on the PC side (which is led by Valve Software’s Steam distribution service) and, increasingly, on consoles, through services like Xbox Live and PlayStation Network.

Retail sales, in fact, make up just 60 percent of the industry’s total revenue. Beyond digital downloads (both full-game and add-ons), there are also used game sales, game rentals, subscriptions, social network games and mobile game apps.

Most analysts expect 2011 to be a repeat of 2010 for retail, with continued negative growth. The key for investors, they say, is to keep an eye on the bigger picture.

“At this point, I’d say it looks like the industry could be down again from a software perspective, maybe low single digits, but the overall industry would be up, due to mobile games and maybe Facebook games,” said Colin Sebastian of Lazard Capital Markets late last year. “That’s a story that investors may not understand. The packaged goods business is challenged and publishers are publishing fewer games each year. The titles that do come out seem to be slanted towards the core gamer.”