Flat Video Game Sales in July

Video games achieved better results in July 2010 after a lackluster June month. Improving hardware sales were partially offset by sluggish software sales in the month.

According to the research firm NPD, U.S. retail sales of hardware, software and accessories decreased 0.5% year over year to $846.5 million in July. However, this excludes Activision Blizzard’s (ATVI) most recent release, StarCraft II, for personal computers (PC). NPD does not include sales from PC games in its monthly game sales data.

For the month of June, retail sales of hardware, software and accessories in the U.S. decreased 6.0% year over year to $1.1 billion.

According to Activision, within 48 hours of its release, StarCraft II sold more than 1.5 million. Including the game, industry sales almost increased 4.0%, according to NPD.

Hardware sales were $313.8 million in July, up 12.0% year over year, attributable to robust sales of Xbox 360 from Microsoft Corp. (MSFT). The new slim format of Xbox 360 has gained immense popularity among video game players.

We expect further transition from old systems to the new one as the holiday season sets in, and major publishers such as Activision and Electronic Arts (ERTS) release their new titles in the latter half of 2010.

Xbox 360 sold more than 443,000 units in July whereas Nintendo sold approximately 254,000 Wiis. Sony Corp. (SNE) sold more than 214,500 units of PlayStation 3 (PS3).

However, software sales remained weak year over year. Despite an easier year-over- year comparison, software sales fell 8.0% to $531.3 million, excluding StarCraft II, primarily due to a lack of significant new releases. However, it was in line with the analysts’ expectations for a drop of 7.5% to 15%.

Electronic Arts’ NCAA Football 11 release was the top-selling title with over 666,000 units sold on the Xbox 360 and PlayStation 3. Microsoft’s Crackdown 2 held the number two position with approximately 209,000 units sold in the month of July.

The other two games in the top 4 list were Nintendo’s Super Mario Galaxy 2 (193,000 copies) and Take-Two Interactive Software Inc.’s (TTWO) Lego Harry Potter Years 1-4 (142,000 copies).

Sales of video game accessories decreased 2.0% year over year to $129.3 million.

Total industry sales year to date fell 8.0% year over year to $7.51 billion.

Second Half Video Game Sales

Although most industry analysts expect flat to negative growth for 2010, we tend to differ on the basis of a plethora of new releases in the second half of 2010 and strong hardware sales on the backdrop of the upcoming holiday season, which could boost sales in the second half.

We believe third party publishers such as Electronic Arts and Activision Blizzard enjoy a healthy product portfolio. Electronic Arts is scheduled to release new Medal of Honor in October and Activision Blizzard will release its new Call of Duty: Black Ops in November. Both the games are in the action genre with a strong fan following and have received satisfactory pre-release reviews.

Moreover, Microsoft is scheduled to release Halo: Reach in September. We also believe game sales in the second half should benefit from the launch of motion control devices — Natal from Microsoft and Playstation Move from Sony.

The video game industry continues to thrive on evolving technologies, as the major players are keen to grab market share with new quality releases, making the video game industry highly competitive. Leading companies such as Sony Corp, Microsoft Corp, Nintendo, Activision Blizzard, Take-Two Interactive Software Inc. and Ubisoft actively compete in this market.

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

With the advent of smartphones, iPad, iPhone and PDAs, buying and installing games and applications have 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. These new avenues will likely boost earnings growth of the video gaming companies over the long run.

We therefore remain positive for the video game sales next year with a slight pick up in the second half of 2010 on the backdrop of strong new releases, contract ramp ups, and increased new gamers. However, intense competition and a weak industry trend may act as headwinds for the entire industry in the near term.

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