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Video Game Giants Need Cheat Codes

February proved to be another cruel month for the video game industry.

Sector tracker NPD Group reports that software sales fell 15% compared to February 2009. Console sales suffered an even steeper 20% hit, though that dip can be explained by price cuts implemented heading into last year's holiday season. On a unit basis, Microsoft (Nasdaq: MSFT  ) and Sony (Nasdaq: SNE  ) actually gained ground. Nintendo's (OTCBB: NTDOY.PK) Wii was the only console to sell fewer units.

NPD's findings aren't perfect. The researcher doesn't track all retail outlets. However, its data showing monthly sales through most of the past year seems to match the bleak results posted by software developers and specialty retailers in recent quarters.

The industry should be cheering the uptick in Xbox 360 and PS3 console sales, but why isn't there a corresponding spike in software? Take-Two Interactive's (Nasdaq: TTWO  ) BioShock 2 was the top seller last month -- moving 750,000 copies across platforms -- but it could have been better.

Earlier this month, Take-Two announced that it had shipped 3 million copies of BioShock 2 since its early February release. Why is NPD showing so few units as being sold? Is NPD's data that incomplete, is the game a bigger hit abroad, or are there a lot of shrinkwrapped copies sitting unsold?

And what's the deal with gamers spending less on software since last March -- with only a few monthly exceptions?

I have a few theories, and the industry won't like them:

  • Thanks to the same online multiplayer platforms that the console makers created, gamers can milk a lot more out of a single game purchase. My teen son still spends gobs of time over the weekend playing Activision Blizzard's (Nasdaq: ATVI  ) Call of Duty: Modern Warfare 2 with his classmates, even though the game is several months old. In other words, gamers can buy fewer titles.
  • The upswing in PS3 and Xbox 360 sales may also be related to their abilities to play back movie discs or stream them online through Netflix (Nasdaq: NFLX  ) . In other words, consoles are no longer just game systems.
  • Social gaming on Facebook and casual games for smartphones provide cheap or free diversions. Is this a substitute for deeper console games? No, but the "time suck" involved is the real problem. If folks are spending more time on Facebook or on their iPhones, they have less time to get through console games.

These aren't just grim scenarios -- they're growing trends. And right now, the trends aren't shifting in the industry's favor.

Disagree with me? Let me have it in the comment box below.

Microsoft is a Motley Fool Inside Value recommendation. Take-Two Interactive Software is a Motley Fool Rule Breakers choice. Activision Blizzard, Netflix, and Nintendo are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Activision Blizzard. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz loves playing video games but he doesn't own shares in any of the companies mentioned in this story, except for Netflix. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 12, 2010, at 3:16 PM, SkipDialogue wrote:

    Another thing that's important to remember about NPDs is that Walmart doesn't report. That'll skew the results a bit, probably more than usual since parents (and by extension, gamers) are really price sensitive these days and will likely spend less time at the mall and more time at Wallyworld.

  • Report this Comment On March 13, 2010, at 11:18 AM, Varchild2008 wrote:

    Video Game Giants don't need Cheat Codes... They just need to acquire Facebook Game Developers, and produce games for mobile phones.

    They are doing just that and this type of digital download gaming has gone up 25% according to ATVI's last earnings report.

    It will take sometime but earnings from video game giants may infact benefit from this trend in the long term even though they might be hurting in the short term.

  • Report this Comment On March 13, 2010, at 1:42 PM, stockju wrote:

    From a pure technical pattern standpoint, we like ATVI. ATVI shows great MACD divergence pattern, which took almost 120 days to finally cross the baseline MACD line.

    In early November 2009, ATVI made lows on both MACD and Price. Since then, ATVI hit 52 week low in Feb 2010; but, interestingly enough, MACD kept inching up during this period. Currently, this stock has crossed MACD baseline and subsequently hit the first resistance. However, from a technical standpoint, we expect this stock to go further up from this point onward. Since 02/10, the S&P 500 index has returned around 6.5%, and again, ATVI saw about a 10.33% gain during that time. ATVI also has a strong buy rating (23 of 27 analysts) from all market analysts.

    sincerely, team

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