For Investors, This Game Is Unwinnable

The migration away from traditional video games continues.

Sales tracker NPD Group came out with its monthly industry report late last week, and it was another doozy. Despite last month's debut of Activision Blizzard's (Nasdaq: ATVI  ) Diablo III and Take-Two Interactive's (Nasdaq: TTWO  ) Max Payne 3, the sale of new video games in physical form plunged a whopping 28% in May. NPD notes that there were also 27% fewer new titles introduced last month, but that's merely an industry reaction to waning gamer interest. Stuffing the channels with new diversions isn't going to kick this industry out of its three-year slump.

Accessory sales inched higher, but hardware sales plunged 39%. Diehard gamers are apparently either through buying consoles and handhelds, or they're holding out for the next generation of gaming systems.

Microsoft (Nasdaq: MSFT  ) managed to claim a positive spin here, arguing that it's still selling more Xbox 360s than its two console rivals combined, but there's no reason to get excited. Microsoft is simply situating itself in the presidential suite of the sinking Titanic. The view may be divine, but the icy waters are swallowing everybody.

It doesn't come as much of a surprise, then, that GameStop (NYSE: GME  ) hit a multiyear low last week. Digital sales have been a bright spot, but that merely means software publishers and console makers are making direct connections with gamers.

There will continue to be a market for the blockbuster games that diehard gamers crave, but the industry continues to shed the mainstream players who used to be responsible for record sales results. This game isn't over, but it's not winnable for the traditional gaming companies.

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The Motley Fool owns shares of Microsoft, Activision Blizzard, and GameStop and has written calls on Activision Blizzard. Motley Fool newsletter services have recommended buying shares of Activision Blizzard, Microsoft, and Take-Two Interactive Software, creating a bull call spread position in Microsoft, writing covered calls on GameStop, and creating a synthetic long position in Activision Blizzard. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


Read/Post Comments (5) | Recommend This Article (3)

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  • Report this Comment On June 18, 2012, at 10:18 AM, StampMan43 wrote:

    Wait, what? I didn't realize Diablo and Max Payne were intended to be game-changers. Of course profits are dropping. Look back. The games that people flock to buy come out in fall and early winter. As a gamer, I don't even consider buying games until around October, just because that's when the good ones start releasing to prepare for Christmas. If new game releases are down 27%, of course sales are gonna be down almost equally (28%). There are just fewer games to buy and like I said, it's all to do with the way the industry revolves around Christmas. The lack of common sense is strong with this one.

  • Report this Comment On June 18, 2012, at 11:47 AM, TMFBreakerRick wrote:

    StampMan, this is comparing May 2012 to an already weak May 2011. Of course it matters.

    And you will find that October-November have also been weak for three straight years despite the Call of Duty presence.

  • Report this Comment On June 18, 2012, at 12:07 PM, StampMan43 wrote:

    I apologize for hasty judgment.

  • Report this Comment On June 18, 2012, at 3:37 PM, donzorco wrote:

    If this is more an indictment of Gamestop that's fine, but make sure the casual reader appreciates the emphasis on PHYSICAL. Of the 4+ million copies of Diablo 3 sold (on the first day!), quite a large number were in DIGITAL, not physical, form. And since it broke records for the most copies sold in a 24 hour period, I'd hardly worry about the status of the industry in general.

    The prevailing sentiment of (and I'm not accusing the author of this necessarily) 'the video games industry as we know it is over, go play Farmville,' is likely very untrue. In the not too distant future investors who are able to find value amongst the key players here will be rewarded. I'd start with ATVI, a company that is increasingly relying on and posed to capitalize on digital revenue streams. I emphasize this because it's easy to think ATVI, TTWO, and EA are the same. They're not.

    Fool away - don

  • Report this Comment On June 18, 2012, at 4:08 PM, Scerabi wrote:

    For anyone investing in video game companies, the comment above this needs to be MEMORIZED.

    The NPD numbers are only useful for companies that sell physical games like Gamestop, etc... As game makers like ATVI and EA set up digital game distribution channels this eats away from the need to drive to a store to purchase a video game. NPD does not count digital sales (origin (EA), battle.net (ATVI), valve (a 3rd party), etc...).

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