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Video Game Sales Get Split Decision

Activision and Take-Two won, but hardware shortages and price wars hurt the sector.

Santa brought a mixed bag of sales for video game software publishers, according to data released Friday.




Take-Two Interactive





all posted strong or better-than-expected results, according to Wall Street analysts, citing data from NPD Funworld. But overall video game software sales in the U.S. fell 1% in December from a year earlier, and market leader

Electronic Arts


saw its sales plunge 18%.

Analysts blamed the overall decline on a hardware shortage and the impact of a pricing war in the sports game segment. In recent days,

Electronics Boutique






Toys "R" Us


have all

warned of disappointing December sales due in part to not having enough units of



PlayStation 2,



Xbox and


DS to meet demand.

"Hardware shortages clearly had a noticeable effect on industry sales during the 2004 holiday season," said Merrill Lynch analyst Karen Russillo, in a research note issued Friday. "As a reminder, last year's sales grew 13%, and that was up against a pretty strong 2002 holiday season."

An NPD Funworld representative declined to comment on the data.

As with other consumer business, the fourth quarter in general and the month of December in particular are crucial to the video game business, typically generating the lion's share of sales. Software sales are also often driven by hardware sales, as consumers buy games to play on their new platforms.

But sales of video game systems fell sharply in December, according to NPD's data, as cited by analysts. PlayStation 2 sales, for instance, fell 50% from December 2003 to 993,000 units. Sony has faced shipping problems as it has moved to replace its original PlayStation 2 with a new slimmed-down version.

Sony's problems contributed to bringing down total sales of console systems by 34%, with Xbox and Nintendo's GameCube also contributing to the decline.

However, hardware problems weren't the only story. Industry leader Electronic Arts has been

battling Take-Two on the sports game front. Take-Two, partnering with


, has cut into EA's market share by offering its line of ESPN titles at less than half the retail price of EA's sports games. EA responded to the threat by offering a number of

promotions and, ultimately,

slashing the price of its games, such as

Madden NFL 2005


The end result of that effort was increased unit sales -- but decreasing revenue. Unit sales of


jumped 32% in December over the same month in 2003, but the dollars generated from those sales fell 20% over the same period a year earlier.

Despite strong sales of its recently released

Need for Speed Underground 2

title -- the best-selling console game in December, generating $86.3 million in retail revenue -- EA's overall retail sales fell 18% to $343 million. The results indicate that EA's third-quarter results will be toward the bottom of its guided range, several analysts said.

In October, EA

predicted it would earn $1.11 to $1.21 a share in its holiday quarter on sales ranging from $1.4 billion to $1.475 billion.

Although EA's sales for the quarter were down 16%, according to NPD, that doesn't mean the company's quarter is a loss, analysts noted. NPD's data do not include sales of PC games, and EA had two potential PC game hits in the quarter in

The Sims 2.0


Lord of the Rings: Battle for Middle Earth

. NPD's data also focus solely on U.S. sales, meaning it does not include overseas sales of

FIFA Soccer 2005


Need for Speed


Despite the reported sales decline, EA's December results were actually "in line to slightly ahead of expectations," Friedman Billings Ramsey analyst Shawn Milne said in his own research note on Friday.

(EA has not been a recent investment banking client of Friedman Billings Ramsey.)

Like those of EA,



results were disappointing to some analysts. Sales of the company's console titles fell 7% in December from the same period a year earlier. While the company's retail sales in the fourth quarter were up 80% over the same holiday period in 2003, Wedbush Morgan analyst Michael Pachter warned that Midway's revenue for the quarter was likely to fall short of his expectations. Pachter lowered his revenue outlook for the company from $93 million for the quarter to $78 million, and brought down his earnings estimate to 20 cents a share from 27 cents a share.

Midway's sales were "lower than the assumptions used in our model, given the weaker-than-expected performance of

Mortal Kombat Deception

, along with weak catalog sales," Pachter said.

(Midway was not a recent investment banking client of Wedbush Morgan.)

But not all the news was depressing. Indeed, Activision had a lot to cheer about in December. The company's retail sales were up 43% to $189 million in December, boosted by sales of its

Call of Duty


Tony Hawk Underground 2

titles. The company ended the holiday quarter with retail sales up 37% over the same period a year earlier.

Activision already

upped its forecast for its fiscal third quarter, but based on its December results, several analysts predicted it could beat even those raised expectations.

"Given the strong results, our revenue estimate for Activision may be a bit light," Russillo said.

(Activision has not been a recent investment banking client of Merrill Lynch.)

Like Activision, Take-Two and THQ also saw strong results in December. With its mega-hit

Grand Theft Auto: San Andreas

still posting strong sales totals -- the title was the No. 2 seller in December, garnering $75.9 million at retail -- overall sales of Take-Two's titles jumped 30% in the month to $128 million.

Meanwhile, THQ saw its retail sales jump 22% to $152 million. The company saw continued strength from its titles based on the recent

The Incredibles


SpongeBob SquarePants