Don't Expect More Consolidation From the Video Game Industry
Don't let the recent studio and publisher closures fool you; the game industry is growing, not contracting or consolidating.
IBISWorld analyst James Crompton said he expects industry entrants (new game companies) to exceed the number of consolidations.
"A lot of this is driven by social gaming and mobile applications that derive a lot of their revenue from advertising and they typically have low price points," Crompton told Benzinga.
"These larger mergers are less likely to happen, but certainly one can believe that some of these smaller social media game developers will be targets for acquisitions just because there's a lot of potential in terms of integrating them with social media."
Over the last five years (through 2013), IBISWorld estimated the game industry has experienced a decline of 1.9 percent on an annualized basis. Crompton expects Sony's (NYSE: SNE) PlayStation 4 and Microsoft's (NASDAQ: MSFT) Xbox One to help turn things around.
"These consoles that have recently come out are more heavily leaning toward providing a multitude of services rather than being just primarily video game systems," said Crompton, who referenced Netflix and Amazon Prime.
"These companies are really starting to embrace a lot of the social impacts of the Internet, and they're allowing their consumers -- and enticing them as well -- to spend more time on their consoles. This is also a reason why digital content delivery services have become more popular as well."
Don't Forget About Wii U
Wii U has had a difficult time at retail since it was released in November 2012. According to IGN, the company has to sell two million units per month for the next few months in order to reach its sales goal of nine million units by March 2014.
Crompton did not have any sales estimates for Wii U (or any other game system), but he believes that Nintendo's struggling console will slowly carve a niche within the market.
"Nintendo has been around for long enough to where gamers will purchase the system," he said. "They typically have lower price points. And Nintendo does have access to certain legacy characters (Mario, Zelda), so they do have offerings that are going to be unavailable to Xbox and PlayStation."
On the downside, Crompton noted that Wii U lacks the processing power of PlayStation 4 and Xbox One.
Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.
© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.