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Video Game Sales Collapse, Suggesting One Lousy Console Cycle

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The video game industry had a dreadful holiday season as consumers tossed money at the new powerhouse gaming platforms of Apple and Google.

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Yesterday, the market-research firm NPD reported that U.S. video-game industry sales dropped by a whopping 21% in December 2011 as consumers opted to toss their money at the new powerhouse gaming platforms -- Apple (AAPL) iOS and Google (GOOG) Android.

Now, I've been arguing here on Minyanville that the old-school video-game industry has already seen its best days (see: "Modern Warfare 3" Will Mark the End of the Video Game Console Era) because of the shift in dollars toward the aforementioned mobile platforms, as well as social outlets like Facebook and Zynga (ZNGA).

We can argue the correlation vs. causation issue all day, but the numbers are clear. Consumers are buying less and less of the old stuff, and more and more of the new stuff.

There have been countless bullish data points regarding Android and iPhone demand from the likes of Google, Broadcom (BRCM), Best Buy (BBY), AT&T (T), and others. (See: Broadcom Joins AT&T and Best Buy in Piling Up the Ammunition for Apple Bulls)

And what's happened in traditional game land?

In December of last year, over in Japan, sales of the new Sony (SNE) PS Vita handheld collapsed almost instantly after release. (See: Sony's PS VIta Victimized by Apple iPhone, Android) This echoed the poor initial sales of the Nintendo 3DS, which spurred an unnaturally early price cut back in July. (See: Nintendo Joins the Long List of Apple Victims)

On January 9, key video-game retailer GameStop (GME) issued a lousy holiday sales update.

So while it was obvious the holiday season wouldn't exactly be joyful, NPD's data release made it clear that the video-game business just ain't what it used to be.

Defenders are pointing to an aging console lineup, but that doesn't hold much water. As I noted in November 2011:

One could argue that weak sales of consoles and games simply means that we're late in the cycle, where things normally slow before the next generation comes.

However, that would indicate a pretty weak cycle, considering that life-to-date sales of the Nintendo Wii, Sony PS3, and Microsoft Xbox 360 now stand at 194 million units, or 15% below the combined sales of last generation's consoles.

Names like Electronic Arts (ERTS) and Activision (ATVI) dominated past cycles, but it simply appears that the population of people willing to shell out big bucks for traditional consoles and games is either stagnant, or shrinking.

And remember, the industry received two significant boosts to the gaming market in recent years: the Nintendo Wii, and music games like Guitar Hero. Both unquestionably boosted the casual-gaming market, and yet this cycle still hasn't outperformed the last one.

Stocks reflect this. Three of the five major U.S. video game stocks -- EA, Take-Two Interactive (TTWO), and THQI (THQI) have significantly underperformed the S&P 500 (^GSPC) since the release of the Microsoft (MSFT) Xbox 360 in November of 2005. Only Activision and GameStop have outperformed, the latter barely so.


(Click to enlarge)

Now, as far as the stocks go -- I still view the industry as a value trap across the board. There is no growth in this business and I'm wary of shrinkage in the E's of the P/E ratios the bulls like to throw around.

Perhaps, when we have word of new consoles on the way, expectations will have truly bottomed out and there will be opportunities on the long side -- but for now I'm steering clear.

Twitter: @MichaelComeau

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The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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