Video Game Sales Slide in June

After tepid gains in May, video game sales again declined in June 2010. However, this fall was in line with the Wall Street analysts’ expectations.

According to research firm NPD, retail sales of hardware, software and accessories in the U.S. decreased 6.0% year over year to $1.1 billion. Software sales declined 15.0% year over year to $531.3 million, considerably weaker than the analysts’ expectations.

Historically, the first quarter (April, May and June) has always been the seasonally weak quarter for the Video game industry. We believe the lack of new game releases, especially from the big third-party publishers such as Electronic Arts Inc. (ERTS) and Activision Blizzard Inc. (ATVI) led to the disappointing results.

Take Two Interactive Software Inc.‘s (TTWO) title Red Dead Redemption, which was released in May, remained the top seller for the month of June, followed by Nintendo’s Super Mario Galaxy 2.

Red Dead Redemption sold more than 963,000 units for Microsoft Corp.’s (MSFT) Xbox 360, and Super Mario Galaxy 2 sold more than 548,400 units for the Nintendo Wii.

Two games released in June 2010 made to the Top 10 seller list of the month: Toy Story 3 released by Walt Disney (DIS) for Nintendo DS handheld ranked #7, and Warner Brother’s release The Lego: Harry Potter: Years 1-4 ranked #9.

Despite weak software results, hardware results were encouraging. According to NPD data, hardware sales inched up 5.0% year over year to $401.7 million, primarily driven by a strong demand for Xbox 360 and Sony Corp.‘s (SNE) Playstation 3.

Microsoft launched a new small and sleek Xbox 360 model with more storage space in the month of June at a lower price, driving better results, according to NPD analysts.

PlayStation 3 sold more than 304,000 units for the reported month while Xbox 360 sold nearly 452,000 units. Nintendo Co.’s Wii sold 510,700 units for June.

On a half-yearly basis, total industry sales fell 9.0% to $6.66 billion, compared with the same period a year ago.

However, according to NPD, industry sales will be around $20.0 billion for the full year 2010, which will likely be driven by the upcoming strong holiday sales season.

We believe third party publishers such as Electronic Arts and Activision Blizzard enjoy a robust product pipeline, scheduled to release in the second half of 2010. The following table highlights the most anticipated games in the next six months, which could pull up video game sales for the full year 2010.

Source: Electronic Entertainment Expo

We believe game sales in the second half should also benefit from the launch of motion control devices — Natal from Microsoft and Playstation Move from Sony.

The video game industry is highly competitive. Leading companies such as Sony Corp, Microsoft Corp, Nintendo, Activision Blizzard, Take-Two Interactive, and Ubisoft actively compete in this market.

Diversified media companies such as Disney, Time Warner (TWX) and Viacom (VIA.B) are also expanding their software game publishing efforts, which are expected to intensify further competition going forward, in our view.

The gaming industry is going through a major transition. With the advent of smartphones, iPad, iPhone and PDAs, buying and installing games and applications has become quite simple for gamers.

According to research firm DFC Intelligence, the mobile gaming industry is expected to grow to $11.7 billion by 2014.

We believe the success of online and social gaming will have a major impact on gaming companies, as they finally make a switch to Internet-based gaming from the more conventional gaming.

We believe these new avenues will boost earnings growth of the video gaming companies in the long run. We expect video game sales to pick up in the second half of 2010; however, increasing competition, declining quality and a slow-to-recover global economy may act as headwinds for the entire industry in the near term.

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