Video Game Sales Drop, but Nintendo 3DS Performs Well

While Nintendo had a lot to brag about in March, the overall video game industry wasn't so fortunate.

Nintendo 3DS
Yoshikazu Tsuno | AFP | Getty Images
Nintendo 3DS

Initial sales of the 3DS handheld gaming device beat those of its predecessor, and the powerful Pokemon franchise set new sales records for the company. Despite these achievements, overall retail software sales fell 16 percent last month and revenues on the whole were down 4 percent, according to The NPD Group, which gathers sales data for the industry.

The software drop was considerably larger than analysts were expecting. The general consensus on Wall Street was a decline of between 8-10 percent. A shift in this year's Easter holiday into April and the slow economic recovery are being blamed.

The Nintendo 3DS, which launched on March 27, sold 100,000 fewer units than the DS did in its first week on shelves, but with its higher price tag, the new system won the revenue fight. It also was released during a non-holiday period, which made its launch more impressive.

"We must consider that the DS launched in November and had holiday seasonality and a price differential of about $100," said Anita Frazier, an analyst with NPD. "In addition, the 3DS was launched in an environment where there are more devices that can support the portable gaming experience such as tablets and smartphones."

Additionally, software sales for the 3DS beat the DS launch in both units and dollars. Capcom's "Super Street Fighter IV 3D" led the pack.

"Pokemon White" and "Pokemon Black," both DS titles, were the month's top selling games, breaking four-year old franchise sales records. The popularity of that franchise helped the DS claim the top selling hardware spot, stealing some of the spotlight from its newer, flashier successor.

Things weren't as good for the Wii, though, as it was the only system to lose marketshare. Microsoft's Xbox 360 and Sony's PlayStation 3 both saw sales gains.

Among publishers, THQ had the most to celebrate, as "Homefront" captured the number three sales spot, despite shaky reviews. The company has high hopes for the game, which envisions a near-future America that is occupied by a unified Korean army. Electronic Arts saw success with "Dragon Age II," but action-shooter "Crysis 2" only managed to debut in seventh.

Activison-Blizzard's "Call of Duty: Black Ops," meanwhile, finally showed signs of weakness after a four month run as the industry's best selling title, falling to 5th place.While the retail numbers weren't what investors were hoping to see, NPD says it appears that much of the ground is being made up on the digital front.

"While new physical sales of video game hardware, software and accessories are down 1 percent in the first quarter of 2011, the trends we've measured with regard to growth in digital formats like full game and add-on downloads, microtransactions, mobile apps and social network gaming will likely result in net industry growth when we release our full measure of the first quarter consumer spend on games in June," said Frazier.

In fact, NPD now estimates that with digital sales included, 2010 was essentially flat compared to 2009 (versus the initial estimate of a 6 percent decline).

That, along with expected positive retail sales figures next month, could push investors off the sidelines.

"The publishers are poised for significant multiple expansion once software sales return to positive territory," says Michael Pachter of Wedbush Securities. "The best of the publishers trades at or below the market multiple after adjusting for cash, compared to historical multiples that were 125 to 150 percent of the market multiple. Should investors see evidence of a return to positive software sales growth in the middle part of the year, we expect multiples for the publishers to expand, and would expect to see share prices for the group appreciate by 25 to 35 percent by the end of summer."

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