Outlook: Gaming Industry Faces Declining Software Sales

Source: http://assassinscreed.ubi.com/

After the market close on Thursday, January 16, NPD is expected to release the December 2013 (five-week period ending January 4) U.S. retail video game software sales data. We expect console/handheld software sales of $1.53 billion, down 1 percent compared to last year’s $1.54 billion.

The comparison in December is quite easy (down 26 percent), and software sales for next-gen consoles likely largely offset declines in software sales for current-generation consoles in December. We believe the sizable software sales decline we saw in November was due to a difficult comparison from the debuts of Microsoft’s (NASDAQ:MSFT) Halo 4 and Ubisoft’s Assassin’s Creed III in November 2012 (with a shift of the newest Assassin’s Creed this year into October 2013), a sales decrease for the newest iteration in Activision Blizzard’s (NASDAQ:ATVI) Call of Duty franchise and Nintendo software sales well below our expectations.

Wallets were drained by spending on the two new consoles with supply constraints through November having a negative impact on software sales. The impact of next-gen hardware spending and supply constraints was more muted in December, and some current-gen software sales may have been deferred as consumers chose to wait to buy games available on both current- and next-gen consoles until they purchased their new consoles, contributing to a more positive trend for overall software sales.

Exhibit 1: Estimated Console/Handheld Software Sales (by Publisher)

By publisher ($ millions)

YoY                        MoM

Dec-13E          Percent change             Percent change

Activision Blizzard                       $460                 14 percent                             7 percent

Electronic Arts (NASDAQ:EA)         $240      46 percent                         42 percent

Nintendo                                                    $140     (20 percent)                       87 percent

Take Two Interactive (NASDAQ:TTWO)            $145      75 percent    55 percent

Ubisoft Entertainment                           $175                (33 percent)              67 percent

Five Covered Publishers                        $1,160                    7 percent            33 percent

Overall Industry                                      $1,527                  (1 percent)            41 percent

Publishers as percent of Market           76 percent

Wedbush Estimates

Source: The NPD Group/Retail Track and Wedbush Securities estimates.

The new release slate was limited in December, suggesting that high-profile releases from October and November should once again dominate software sales. We expect December console/handheld software sales to be led by November release Activision Blizzard’s Call of Duty: Ghosts, as well as October releases EA’s Battlefield 4 and Ubisoft’s Assassin’s Creed IV: Black Flag. In addition, EA’s sports titles, Take-Two’s NBA 2K14, Sony’s new release Gran Turismo 6 (PS3), and Ubisoft’s Just Dance 2014 should have proven to be popular stocking stuffers.

We expect hardware sales of 900,000 Xbox One units and 1.2 million PS4 units in their second month of release. On January 6, Microsoft announced Xbox One worldwide sell-through of over three million units before the end of 2013. Microsoft announced over one million consoles sold-through worldwide in the first 24 hours, and announced Xbox One sell-through of over two million units worldwide in 18 days.

On January 7, Sony announced cumulative PS4 sell-through of over 4.2 million units as of December 28. Previously, Sony announced that 1 million PS4 units sold-through in the first day of release and announced that worldwide PS4 sell-through had surpassed 2.1 million units as of December 1. For current-gen, we expect 550,000 Wii U units (up 19 percent year-over-year), 600,000 Xbox 360 units (down 57 percent year-over-year), and 500,000 PS3 units (down 21 percent year-over-year).

Last month, Wedbush Securities introduced its video game industry growth model through 2016, and made the model available to clients. The model has our hardware and software sales forecast for 2014-2016, as well as historical data from 1994-2013. We expect Sony’s and Microsoft’s new consoles to thrive over the next three years.

Michael Pachter is an analyst at Wedbush Securities. 

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