Where Have All the Gamers Gone?

Last month was brutal for the video game industry. Retail-sales tracker NPD Group reports that hardware, software, and accessories sales fell a staggering 34% in January relative to the first month of last year.

Diehard gamers will argue that January lacked meaty releases, but that is typical for this time of year. Developers like to get their more popular titles out in time for the holiday shopping season.

However, let's take a closer look at what's been happening in January since the industry began its slide three years ago. Industry sales fell 4% in January 2011, and that was after a 13% slide in the prior January.

Why aren't developers taking advantage of the January lull? Why aren't holiday hits bleeding into the new year the way they used to?

NPD's data is incomplete. It lacks online retailer and digital downloads. Industry leader Activision Blizzard (NAS: ATVI) reported last week that digital revenue is now accounting for a little more than a third of its business, and nearest rival Electronic Arts (NAS: EA) has been snapping up mobile gaming specialists.

This doesn't mean that the business isn't changing. This doesn't mean that the video game industry is healthy.

Three years ago, Activision Blizzard was a three-headed beast with the success of its Call of Duty, Rock Band, and World of Warcraft franchises. Well, Rock Band was unplugged, and World of Warcraft keeps bleeding night elves.

You have to give the gamers credit for now. Activision Blizzard has found a way to keep growing in this climate, even though its stock has been mired largely in the pre-teens since its ill-advised two-for-one stock split four years ago. Even retailer GameStop (NYS: GME) -- the one company that should be bearing the brunt of NPD's bleak retail checks -- hasn't been totally crushed. It sees comps declining by just 1%-2% in the fiscal year that ended in January. Then again, that guidance came just 10 days into January. The full extent of the bleak month had yet to unravel.

It's not just the games that are a problem.

Microsoft (NAS: MSFT) sold just 270,000 Xbox consoles last month according to NPD, a far cry from the 381,000 it moved last January. New games do move hardware, but are gamers generally fatigued as they wait out whatever the box makers have in store for them next?

Casual gaming and mobile gaming may be the butts of diehard gamer jokes, but those simple diversions are clearly growing in popularity. They have altered the value proposition of full-blown games, and won over the masses that don't live and die by annual Call of Duty releases.

Traditional video game companies aren't going anywhere, but they do need to get going.

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At the time this article was published 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 theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Motley Fool owns shares of GameStop, Activision Blizzard, and Microsoft. The Fool owns shares of and has written calls on Activision Blizzard.Motley Fool newsletter serviceshave recommended buying shares of Activision Blizzard and Microsoft; writing covered calls in GameStop; creating a bull call spread position in Microsoft; and creating a synthetic long position in Activision Blizzard. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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