May Video Game Sales Likely to Be Weak

After spending a week looking into the future, the video game industry must once more face the reality of the present.

Nintendo 3DS
Nintendo 3DS

May sales figures are expected to be announced after the market closes Monday – and they're not likely to add any sort of boost to the goodwill that often accompanies the E3 trade show. Analysts expect sales, at best, to be flat compared to last year.

A light lineup of new titles and the continued weakness of Nintendo's 3DS handheld system are likely to keep the industry from building on the momentum of April's surprisingly strong performance. (Software sales were up an impressive 26 percent that month.)

And industry observers say they don't expect to see a lot of consistency in sales numbers until later in the year, at best.

"We continue to believe that sustained software sales growth will remain elusive until hardware sales rebound for an extended period of time," says Michael Pachter of Wedbush Securities. "In our view, given the 3DS’ weak debut and the likely limited impact from May’s Wii price cut, a rebound is unlikely to happen until Microsoft and Sony cut the price of their consoles.

"Although we had initially expected Microsoft to cut the price of the Xbox 360 at E3, given the phenomenal sales growth the console has seen this year, we believe the company will wait until the holidays or until sales decline before considering a price cut."

May saw the release of two top-tier games – Bethesda Softworks' "Brink" and Take-Two Interactive Software's"L.A. Noire." Of the two, it's "L.A. Noire," which was overseen by the company's Rockstar division, that holds the most potential. The game had much higher review scores, while players and critics labeled "Brink" a disappointment.

E3 Electronic Entertainment Expo - A CNBC Special Report
E3 Electronic Entertainment Expo - A CNBC Special Report

The good news for publishers is that the lingering chatter about E3 could overshadow the sales figures – barring a disastrous month. While investors weren't overjoyed with Nintendo's next generation console, the consensus from the show was that independent publishers have a very healthy lineup of games in store for late 2011 and early 2012. Standout titles included EA's "Battlefield 3" and Activision's "Modern Warfare 3".

Among hardware sales, Nintendo's DSi is likely to see sales continue to erode. The 3DS should continue to struggle as well. Nintendo cut the price of the Wii to $150 at the beginning of May, which should staunch the bleed there somewhat, but likely won't turn the platform around. Pachter says he expects big gains for Microsoft's Xbox 360 and moderate improvements in PlayStation 3 sales.

The price cut of the Wii and, to a larger extent, Activision's announcement that it plans to monetize the online portion of its hit "Call of Duty" franchise, are creating some optimism about the rest of the year, though.

"We think that the introduction of a premium subscription service will address investor concerns about a future drag on packaged goods sales going forward," said Pachter. "This is not to say that we won’t see negative software sales growth ever again.

"We think it is likely that future software sales will grow at approximately the rate of the GDP, as we think that robust console software sales growth will be partially offset by a migration to subscription online multiplayer services, and we expect to see further pressure from downloadable content (DLC), which has gained in popularity over the last several quarters."

While brick-and-mortar sales of new games are the most visible indicator for investors of the industry's health, it's important to remember that they 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 publishers' bottom line – and are a growing force.

NPD is expected to begin adding digital sales information to its reports in the coming months.