Video Game Sales Up in Feb, Software Sales Dismal - Analyst Blog

Video game software sales continued to disappoint in Feb 2014. Software sales declined 9.0% to $318.0 million according to Venturebeat.com, which tracks video games market research firm NPD's monthly data. However, according to The Wall Street Journal (also quoted NPD data), software sales actually declined 11.0% to $328.0 million in February.

Although the difference between the sales figures is immaterial, it is easy to note the fundamental problem that is crippling sales. Games for new consoles from big players such as Electronic Arts EA and Activision Blizzard ATVI have failed to offset the plunge in retail unit sales for older hardware.

NPD cited few game releases in the month as another reason behind the dismal software sales. Moreover, gamers continued to spend on new consoles from Microsoft MSFT and Sony SNE, which further affected software sales. Hardware sales soared 42.2% year over year to $347.0 million.

Total retail sales increased 9.0% year over year to $887.0 million. NPD figures do not include digital and online sales.

Activision's Call of Duty: Ghosts retained the #1 position. The Lego Movie Videogame from Warner Bros.' subsidiary TT Games grabbed the #2 position, pushing Take-Two Interactive's TTWO NBA2K14 to #3 spot.

Nintendo announced that it sold 200K and 180K units of 3DS role-playing game Bravely Default, and Wii U's Donkey Kong Country: Tropical Freeze, respectively. The strong performance from Donkey Kong Country: Tropical Freeze drove Wii U sales by 25.0% from the year-ago period.

Microsoft announced that it has sold 258K Xbox Ones in February. Per NPD, Sony's PlayStation 4 sold more units than Xbox One, but earned less revenues in dollar terms. On a month-over-month basis, most of the hardware consoles achieved double-to-triple digit growth in the month.

Digital Games Sales

According to market research firm Super Data, the highly anticipated launch of EA's Titanfall (finally hit stores on Mar 11, 2014) negatively impacted digital game sales in February. This, coupled with sluggish social gaming performance, overall digital sales declined 5.0% month-over-month to $959.0 million. However, on a year-over year basis, digital sales jumped 17.0%.

Revenues from social games decreased to $167.0 million in February. Zynga's ZNGA Farmville dropped to #3, while International Game Technology's DoubleDown Casino grabbed the #2 position.

Average revenue per user of King Digital's Candy Crush Saga remained almost flat at 58 cents in both January and February, while Supercell's Clash of Clans increased from $1.29 to $1.34 during the same period.

Downloadable content (DLC) revenues surged 23.0% year over year to $291.3 million. Revenues from free-to-play games jumped approximately 27.0% from the year-ago quarter to $584.8 million.

Our Take

We expect video game retail sales to improve slightly in 2014 due to strong unit sales of new consoles from Microsoft and Sony.

Although we expect retail software sales to increase in 2014 (due to new game releases), the long-term outlook remains bleak. According to PwC, worldwide console game sales are expected to grow 4.2% to $26.0 billion in 2013 and 6.4% in 2014. However, this is much slower than the 28.0% growth reported in 2007, after the release of Xbox 360 and PlayStation 3 consoles.

We believe slow software sales growth reflects the ongoing consumer transition to smartphones and tablets. We expect increasing revenues from mobile and DLCs to drive digital revenues, going forward. Mobile has strong growth potential due to improving gaming quality, which is a major factor behind higher user spending.

Among the traditional gaming companies, we believe EA, Activision and Take-Two Interactive have significant growth opportunities due to their innovative product pipeline in the near term. However, market fragmentation remains a major near-term headwind.

We believe Titanfall will boost EA's sales in March. The game's exclusive availability on Xbox One will boost the consoles' unit sales, driving Microsoft's near-term revenues.

Currently, Microsoft has a Zacks Rank #2 (Buy). Take-Two has a Zacks Rank #2 (Hold), while EA and Activision carry a Zacks Rank #3 (Hold).