There Are Only Losers in This Game

Is it really any surprise that the traditional video gaming business continues to shrink?

Sales tracker NPD Group came out with its monthly industry report late last week, and August was another rough month. Physical retail sales tumbled 20%, fueled largely by a 39% plunge in hardware and a 7% slide in software.

You know that things are bad when the top-selling game -- THQ's Darksiders II -- belongs to a company with a $30 million market cap that had to execute a 1-for-10 reverse split this summer to retain its exchange listing compliance.

Oh, and it's not as if this is just a fluke. Industry sales tumbled 23% last August and 10% the August before that. Put another way, industry sales have tumbled nearly 45% over the past three years.

Bulls will argue that NPD's data is incomplete, and rightfully so. We're only looking at sales through traditional retailers. However, strength in online sales and digital delivery really only point to the changing of the guards as Zynga (Nasdaq: ZNGA  ) leads the way for social and casual gaming, where folks are willing to put up with ads and inferior games for the sake of killing time for free.

Zynga now has 306 million monthly active players across its growing universe of diversions, up 34% over the past year. No one is going to seriously entertain the debate of the merits of CityVille compared to Skyrim, but there's a serious shift in the way that mainstream gamers -- not the diehard core that will stick to console and PC games to the bitter end -- approach diversions.

After all, what does it mean when both Activision Blizzard's (Nasdaq: ATVI  ) World of Warcraft and Electronic Arts' (Nasdaq: EA  ) Star Wars: The Old Republic are both shedding players? Where are they going?

The country's two largest game makers are holding up far better than the industry itself, but largely because Activision Blizzard and EA have made serious inroads into digital delivery. Things aren't going as well for GameStop (NYSE: GME  ) , which continues to slash its store-level comps guidance with every passing quarter.

Will September be better? It could be. EA announced record first-day sales of Madden NFL 13 just after the close of NPD's four-week tracking cycle for August. Then again, anyone who's been following NPD's depressing data for the past three years won't be surprised if the industry fumbles the ball again.

Continue?
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The Motley Fool owns shares of GameStop. Motley Fool newsletter services have recommended buying shares of Activision Blizzard. Motley Fool newsletter services have recommended creating a modified stock repair position in GameStop and a synthetic long position in Activision Blizzard. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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