Video Games Seen Stumbling Into the New Year

After two consistent years of negative growth, investors in the video game industry are hoping for things to start turning around in 2011, but they may have to wait a little longer for that to happen.

Analysts expect software sales in January, which will be announced after the market closes Thursday, to be well off of last year's pace, as a lack of big titles and the traditional post-holiday slump drag down the retail sector.

Call of Duty Black Ops
Source: Activision
Call of Duty Black Ops

Michael Pachter, managing director of equity research at Wedbush Securities, is forecasting software sales will be down 11 percent for the month, saying the big movers of last year – Activision-Blizard's "Call of Duty: Black Ops," Ubisoft's "Just Dance 2" and Microsoft's Kinect motion sensor – are likely to fall off precipitously and sales of back catalog games will be unable to make up the difference.

Hardware sales, he adds, should be down 31 percent year over year - with the Nintendo Wii taking the biggest hit. Only the Xbox 360 is expected to see any sort of gain over its January 2010 sales. (While hardware sales are certainly of interest to investors, it's software sales that are generally considered the best barometer of the industry's health.)

January is often a quiet month for publishers, as new console owners catch up on older games. Last month, only Electronic Arts and Sony have had major releases, with "Dead Space 2" and "Little Big Planet," respectively.

Put another way: In December, there were 101 games that sold 100,000 units or more. Pachter only expects there to be 16 boasting those numbers in January.

The expected declines could be doubly disappointing to investors, given the months' easy comparables. Last January's retail sales were down 12 percent, compared to the 2009 numbers. The performance could shake confidence in the sector, which is already waning after two very tough years.

"We think that consecutive sales declines in 2009 and 2010 position the industry for a rebound," wrote Pachter in a note to investors. "However, while we expect a rebound in 2011, we think that the first two or three months face difficult comparisons, and do not expect sales growth to commence until late March, when the Nintendo 3DS launches."

In addition to the 3DS, which is generating advance buzz among players eager to experience 3D games without having to wear special glasses, most analysts expect 2011 will bring hardware price cuts to the industry, which will further boost sales.

No console manufacturer reduced their retail prices last year (though each did offer their machines bundled with games and/or peripherals for the same price). Most analysts feel a $50 across-the-board price cut will come before the end of the year.

One thing that's important for investors to keep in mind is that the numbers released Thursday afternoon only represent sales in brick-and-mortar retail stores. Those represent just 60 percent of the overall revenue in the video game industry. Used games, game rentals, subscriptions, digital full game downloads, social network games, downloadable content and mobile game apps all contribute to the bottom line of publishers – and are a growing force.

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