Video Game Investors Brace for Another Bad Month

With a weak slate of titles, February is shaping up to be another negative month for the video game industry.

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

Analysts expect game sales, which will be announced by the NPD Group after the market closes Thursday, to be significantly lower than the 2010 figures, as publishers once again had a lack of new blockbusters in the pipeline.

Michael Pachter of Wedbush Securities is predicting a 6 percent drop in software sales (the most closely tracked figure) compared to a year ago. Colin Sebastian of Lazard Capital Markets, similarly, is expecting a decline of between 5 and 10 percent.

February only saw two notable releases, Sony's "Killzone 3" and Capcom's "Marvel vs. Capcom 3". Neither is likely to oust Activision-Blizard's "Call of Duty: Black Ops" from the top spot, which it has occupied since last November. Ubisoft's "Just Dance 2" is likely to retain strength as well.

Hardware sales are likely to slide once more as well. Microsoft is expected to sell the most units, as its Kinect motion controller continues to be a runaway hit at retail. The company announced Wednesday that it has sold 10 million units life to date – indicating it has sold some 2 million since the holidays (an impressive feat, given consumer buying habits).

The negative growth pattern is something Pachter expects to continue until Nintendo , Sony and Microsoft cut the prices of their consoles, something he expects to occur early this summer.

"Until hardware sales rebound, consistent software sales growth is unlikely, and we do not expect console hardware sales to return to growth until the manufacturers cut price, likely in June," he said in a note to investors.

Another potential catalyst is the launch of Nintendo's 3DS system later this month. The handheld gaming device, which lets users play games in stereoscopic 3D without the need for special glasses, has been a phenomenal hit in Japan, where it was released in late February.

The company says it has learned from the constant sellouts the Wii faced when it was initially released and is determined to avoid that this time.

"Our goal is not to have that situation," says Nintendo of America president Reggie Fils-Aime. "Our goal is to be able to meet the needs of every consumer beginning with Day One of the launch."

While the brick and mortar sales numbers might frustrate investors, keep in mind is that the numbers 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.

Downloadable content (DLC), such as add on packs to retail games, is an area seeing especially solid growth.

"Activision has dominated with over 20 million units of DLC sold for its 'Call of Duty' brand cumulatively, and we think that figure could exceed 10 million units in 2011 alone," says Pachter.

In fact, note analysts, non-retail figures could be the industry's saving grace this year.

"For the year, we continue to expect a mid-single digit decline in packaged goods software sales," says Sebastian. "[That will be] contrasted by a 25-30 percent increase in online/social/mobile game sales."

Questions? Comments?