Video Games Get Stumped

Weak sales reared their ugly head again in the video game industry. Market research group NPD just released its September figures, and sales of hardware and software combined fell 24% compared to last year. The factors driving the fall include the end of the current console era, a move toward mobile gaming, and a lull in new big titles before the Christmas season. Investors are left wondering if this is a sea change in gaming, or if it's only a temporary setback, while the gaming world waits for new material.

What the report said
NPD's report only covers retail sales, which means that digital downloads are left out of the equation. That means that a large portion of the fall could be due to sales that aren't being reported. On top of that, companies like Activision Blizzard (NAS: ATVI) and EA (NAS: EA) are increasingly moving to a subscription-based service. Of the top 10 games sold in September, at least four feature additional content that can be purchased in-game, or monthly subscription fees.

But looking at the list, it's clear that the current era of video games is coming to an end. Of the 10 games, 10 are sequels. November should see the launch of new games, as we move into the holidays, and it also marks the beginning of the next generation of consoles. Nintendo's (OTC: NTDOY) Wii U hits shelves on November 18, and should provide the beginnings of a revival in the gaming industry. While the console is launching with a number of familiar faces, like Mario and Sonic, they'll be appearing in new material, along with some old favorite settings.

NPD also highlighted the strength that EA is currently seeing with the launch of its 2013 sports series. Five of the top 10 games in September came from EA and of those, four were new sports titles. Activision Blizzard's only showing came from its World of Warcraft expansion, Mists of Pandaria.

On the hardware side, sales fell 39%, with Microsoft's (NAS: MSFT) Xbox 360 coming out on top again. The console has led the industry in sales for the last nineteen months, although this month will probably be the last time it sees the top spot. The Wii U should replace it in November, and from then on, we'll see a flurry of new machines. The NPD did highlight that September was a better month for hardware than August, but a large part of that is likely due to seasonality, and is not indicative of a change in the declining trend.

Does it mean anything?
Because of the changing face of video games, it's not clear that the NPD report is damning in any way. In light of that fact, I think the best way to look at these reports is to spot smaller trends, and look for hidden strengths. EA seems to be the clear winner in September. Its Madden NFL 13 title topped the list, and this version of the game has outsold last year's by 11%. In addition to the strong sports showing, EA rounded out the list with its Battlefield 3 title. The game was released last year, but is still seeing strong unit sales.

That's a double win for EA, as the title features a premium pass that can be layered on top of the normal purchase. The pass gives users access to additional content, and generates a healthy $49.99 for EA. Through the company's last quarter, it reported having sold 1.3 million of the premium passes.

Activision Blizzard is also faring well. Its newest expansion hit number seven on the top ten for September, and it was only released on September 25th. While the expansion isn't going to increase subscriber numbers much, it will keep those already subscribed pumping cash into the system. The company has to hope the hook is set deep, though. This week a hacker attacked World of Warcraft and caused an uproar, killing off players left and right. Activision Blizzard responded quickly to the attack, but the bad publicity stuck, with TIME magazine running an article with the headline "Apocalypse MMO: Death Becomes World of Warcraft."

The bottom line
I like EA's chances over the holidays and I think the company's one-time purchase pass is an interesting take on the subscription system that's become so popular recently. While Activision Blizzard will continue making bank off of World of Warcraft, I don't think that it has the draw to pull in new subscribers forever. As the gaming world moves toward mobile, the company is going to need to create some fresh content to keep itself relevant.

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Fool contributor Andrew Marder has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard and Microsoft. Motley Fool newsletter services recommend Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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