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Video Game Industry Looks Like a Bomb


Analysts forecast a weak holiday season for the industry.

We can't know whether they're spending more time reconnecting with reality, but we do know this: Gamers aren't as interested right now about spending their hard-earned money on video games.

According to new estimates, the video game industry suffered a 13% drop in overall sales last month.

Kaufman Bros. analyst Todd Mitchell forecasts that game sales inched up just 3% to $1.49 billion versus a previous estimate of 10% growth. Mitchell predicts hardware sales nose-dived 33% to $810 million due to an industry-wide decline in average sale prices.

This news comes after market researcher NPD Group issued its own downbeat report. Last month, NPD said that total sales of video game hardware, software, and accessories tumbled 19% in October from the year-ago period to $1.07 billion.

The dramatic decline in demand, say analysts, is attributable to a few broad trends: For one, you and your neighbors just aren't convinced that the recovery is here and you can get back to spending and splurging.

Far from it, in fact. Consumers are more interested now in repairing their personal balance sheets. It's hard to blame them, as economists note that real organic personal income is hitting new lows and unemployment will likely remain high.

Given that cold reality, shelling out moolah on discretionary spending seems far less appealing to a whole lot of people.

Jesse Divnich, a video game analyst with research firm Electronic Entertainment Design and Research, spelled out a few other reasons for the deteriorating demand.

"The retail environment is certainly a lot more aggressive this year," the analyst told us. "We are seeing more promotions and steeper discounts, lowering the average selling price of a game."

But Divnich also pointed out another reason that gamers aren't buying like they used to: There has been a decided lack of innovation in the industry this year, he says.

"What innovations were made in the evolution of gaming this year?" he asks. "There weren't many. In 2007, we had the big introduction of Guitar Hero. The industry needs these innovations to spark consumer interest. It has to constantly release new titles that push the industry forward. In 2009, there really wasn't anything."

Looking ahead, Divnich predicts a weak holiday season for the video game industry.

"In 2008, the non-traditional gamers, the casual gamers, drove a significant amount of sales," he says. "Those consumers aren't around now. The music category continues to weaken. The fitness category isn't as big as it was. So we are resting more on the core of the industry, but that only grows about 8% per year."

The analyst predicts software sales, the best gauge of the industry's health, will decline 9% this year versus 26% growth in 2008.

Jim Yin, an equity research analyst at Standard & Poor's, thinks it will be even tougher for the hardware category. (See also, Peripherals Controlling Video Game Market)

"Most of the consoles, Xbox 360, Playstation 3, and Nintendo Wii, were all released several years ago so they are at the tail end of the product cycle," he says. "The early adopters have already bought the consoles and now they have all cut prices."

As for 2010, the analysts we chatted with this morning were split about what the video game industry will look like.

Divnich is expecting to see a bit of a bounce back, expecting a 10% increase in software sales. The move, he says, will be driven by the introduction of new titles as well as Microsoft's (MSFT) Project Natal, which is the company's answer to Nintendo's Wii.

"We expect that to be a huge catalyst to bring a lot of the casual gamers back in the industry," he says.

Yin isn't as optimistic. "The trends are negative," he says. "The industry is still too focused on the hard core gamers, meaning the male gamers between the ages of 18 to 35."

The analyst currently has no Buy recommendations in the sector. He has a Hold on Activision Blizzard (ATVI), THQ (THQI), and Glu Mobile (GLUU) and a Sell slapped on Electronic Arts (ERTS) and Take-Two (TTWO).
No positions in stocks mentioned.
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