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Recession Is Child's Play for Video Games

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Yet another escapist pastime benefits from downturn.

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The consumer's obituary has been written: John Q. Public maxed out his credit card on one too many Abercrombie & Fitch fleeces. He is survived by his flatscreen HDTV.

But my contrarian streak tells me that one type of consumer will rise from the ashes like Zelda when he finds a new shield. Like Super Mario when he eats a mushroom. Like Sonic the Hedgehog when he collects enough chaos emeralds. You get my point: Video games have long been regarded as recession-proof. Though that perception is being tested in this putrid retail environment, it's held true - so far.

According to NPD, US video game sales fell 7% in September from the previous year. However, last year's number was inflated by the monster launch of Halo 3. Through last August, video games sales were 32% ahead of last year's record-breaking revenue, bringing in $10.6 billion in the United States.

Video game hardware and software could reach $22 billion in sales by the end of the year. Last year, it was $18 billion.

"It appears that the industry is not affected by the economic woes," NPD analyst Anita Frazier told Investor's Business Daily recently.

As long as there are college students and freshman dorms, video games will be popular. In my first year of college, I spent more hours playing Nintendo (NTDOY) 64's James Bond: GoldenEye 007 with my neighbors than I did at the library. (It still gets my vote for best video game.)

Today, you can substitute that with Halo on Microsoft's (MSFT) Xbox. Video gamers aren't a niche community any more: What was once an underground hobby is now firmly ensconced in the mainstream. Heck, there are even professional video-gaming leagues now.

And it's not just for teenagers. Mark Penn's 2007 book Microtrends revealed that the average age of gamers is 33. And moms over 45 are one of the fastest growing groups of computer game players. This means that gamers are willing to pay more for the products.

Video games are more impressive and interactive than they were when I was playing 8-bit Contra on Nintendo. Two big franchises are racking up huge sales these days - Activision Blizzard's (ATVI) Guitar Hero and Electronic Arts' (ERTS) Rock Band. In anticipation of the holiday shopping season, EA just launched Rock Band 2; next week, Activision will unveil Guitar Hero: World Tour.

But the stocks of the software companies can be hit-or-miss based on the changing preferences of gamers. I think a stable investment would be the place where people shop for games, such as retailer Gamestop (GME). Gamestop operates more than 5,000 stores and has sealed its dominant position this decade with key acquisitions in a booming market. The company recently bought French video-game retailer Micromania to grow its international reach.

Though Gamestop's stock is near its 52-week low, I wouldn't write its obituary just yet.
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No positions in stocks mentioned.

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