Playing the Video-Game Group

While some market participants keep close watch on the Fed minutes and assorted economic reports, I find another set of information infinitely more interesting. That's video-game sales data, which were recently reported by market researchers NPD Group.

The Latest Snapshot

For November, software sales rose 15%, while hardware sales rose 36%, both essentially in line with expectations. Software sales were driven by Microsoft (MSFT - commentary - Cramer's Take) Xbox 360 titles like "Gears of War" and "Call of Duty 3," as well as Sony PlayStation 2 titles like "Final Fantasy XII" and "Guitar Hero 2."

Hardware sales were again dominated by Nintendo (NTDOY - commentary - Cramer's Take), which sold a combined 1.56 million units of its DS and Game Boy handhelds, again taking lunch money from the more technologically advanced Sony PSP, which sold 412,000 units.

Over in the land of next-generation hardware, the Xbox 360 sold 511,000 units, a nice month-over-month gain catalyzed by the aforementioned "Gears of War." However, it was actually outsold by the Sony PlayStation 2, which moved 551,000 units. Both the Sony PlayStation 3 and Nintendo Wii were in short supply, and software sales for both consoles were fairly weak, with the exception of the new "Legend of Zelda: Twilight Princess" Wii game, which likely crowded out a lot of other Wii titles. In addition, the fact that many Wii buyers were purchasing the console just to flip it likely hit software sales.

But as a whole, the industry seems to be producing fewer games. That's because development budgets are rapidly rising, thanks to the sophisticated nature of the Xbox 360 and PlayStation 3. This is creating a big obstacle for larger software publishers, namely Electronic Arts (ERTS - commentary - Cramer's Take); with such a huge library of games, the chances of a small number of titles creating a huge financial impact aren't very good.

On the flipside, look at a smaller company like Activision (ATVI - commentary - Cramer's Take), which had excellent November numbers on the backs of "Guitar Hero 2," "Call of Duty 3" and "Marvel: Ultimate Alliance." (This stock is a holding in the Breakout Stocks newsletter, so I should note that I switched to a neutral stance on it Friday morning for various reasons, including some concerns over its 2007 lineup, particularly the fate of the upcoming "Transformers" game.)

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In keeping with TSC's editorial policy, Michael Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Comeau is a research analyst at TheStreet.com. In this role he performs stock analysis for TheStreet.com Breakout Stocks, and is also a regular contributor to RealMoney.com. Prior to his arrival at TSC in June 2004, Comeau worked as a Consultant to Toyota Motor North America, performing in-depth research on automotive industry issues, primarily in the areas of alternative engine technologies, competitive analysis and macroeconomics. His primary market interests include consumer technology, specialty retail, and small-caps. Comeau received a bachelor's degree in Finance from Brooklyn College, and has completed Level 1 of the CFA program.. He appreciates your feedback; click here to send him an email.