Why Activision Blizzard Inc.’s “Destiny” Couldn't Stop Video Game Sales From Plunging 35%

Activision Blizzard (ATVI) and Bungie's Destiny just topped the charts in NPD Group's September sales figures, which shouldn't come as a surprise since the game has dominated gaming headlines since its launch in early September.

Destiny. Source: Bungie.

Destiny has sold 6.5 million copies across the PlayStation 3, PS4, Xbox 360, and Xbox One, according to sales tracking site VGChartz, but it couldn't prevent industrywide video game sales from plunging 35% year over year to $501.6 million in September. That decline initially seems odd for two reasons. First, hardware sales soared 136% to $432.7 million, indicating that people are buying a lot of consoles but not as many games. Second, many investors expected year-over-year software sales to be positive, since many gamers put off purchases in September 2013 ahead of the launches of Microsoft's (MSFT -1.84%) Xbox One and Sony's (SONY 0.37%) PS4 last November.

However, if investors dig deeper into the numbers, they'll see that a 35% drop in video game sales is actually nothing to worry about.

Making sense of NPD's September numbers
The first thing investors should recall is that Take-Two Interactive (TTWO -1.76%) last September launched Grand Theft Auto V, which has sold nearly 33 million units worldwide. The strong sales of that single game were enough to make year-over-year comparisons difficult.

Also note that NPD's sales figures include PC games. Over the past year, the PC hasn't been a popular platform for triple A games. Electronic Arts' Titanfall only sold 340,000 copies on the PC, compared to 2.2 million units on the Xbox One and 950,000 copies on the Xbox 360. Ubisoft's (NASDAQOTH: UBSFF) Watch Dogs only sold 200,000 copies on the PC, compared to 6.4 million copies on the PS3/PS4 and nearly 2 million copies on the Xbox 360/One. Those figures indicate that PC software sales, not console software sales, are dragging down the numbers.

Meanwhile, the software tie ratio (the number of games purchased per console) remained healthy across all the major consoles:

Source: VGChartz.

The PS4 is the best-selling eighth-generation console, but its tie ratio is lower than the Wii U and Xbox One. That's probably why Sony was quick to point out that the PS4 was the top platform for copies of Destiny sold through Oct. 4, which fueled a 90% year-over-year increase in revenue at its PlayStation Store.

The future of Destiny
For Activision Blizzard, selling 6.5 million copies of Destiny at $60 apiece translates to roughly $390 million in gross sales, which is in line with earlier reports that it had sold through $325 million worth of games within the first five days of availability. Assuming that Activision keeps about half of that -- after retail costs, distribution fees, and platform royalties are deducted -- it would equal about $195 million in revenue for the company in a single month.

Source: Bungie.

While that haul would represent a success for most companies, which often spend $100 million with their production and marketing budgets on a single game, Activision CEO Bobby Kotick previously claimed that the game cost $500 million to develop and market. It's unclear how accurate that claim is, since Bungie's Eric Osborne contradicted Kotick's claim in a GamesIndustry International interview, but it's safe to say the company hasn't broken even on this massive game yet. That's bad news, considering that Destiny recently dropped out of the five top-selling games in the world and ranked eighth (PS4) and 10th (Xbox One) for the week ending on Oct. 4.

Destiny sales might bounce back during the holiday season, but it probably won't enough to make it the "best-selling new video game IP in history," as Kotick boldly claimed in February. However, it has a clear shot at finishing 2014 as the top-selling console game, as long as heavy-hitting holiday releases like Ubisoft's Assassin's Creed: Unity (Nov. 11), Microsoft's Halo: The Master Chief Collection (Nov. 11), Nintendo's (NTDOY -0.82%) Super Smash Bros. for Wii U (Nov. 21), and Activision's own Call of Duty: Advanced Warfare (Nov. 3) don't steal its thunder.

Foolish thoughts
Video game industry investors shouldn't fret over a year-over-year decline in software sales. Hardware sales and tie ratios remain healthy, which both indicate that the holiday season could be profitable for game makers. But at the same time, investors should realize that Destiny's dominance of September sales isn't as impressive as it seems, and highlights the risks of betting on expensive triple A titles.