Updated from July 14

The video game industry may finally be seeing a light at the end of its long, troubling tunnel.

Following months of weak results, retail sales of game hardware and software jumped in June, according to new data from industry research group NPD, cited by various financial analysts. In a development that may bode well for the industry's long-term future, the strong results were driven by sales of new game systems such as Microsoft's ( MSFT) Xbox 360 and Nintendo's DS.

Shorter term, the jump in sales is likely good news for the major game publishers, such as Electronic Arts ( ERTS) and Activision ( ATVI). Indeed, in reaction to the news, analysts raised their sales estimates for a number of publishers.

"We are encouraged by the results," wrote Citigroup analyst Elizabeth Osur in a research report on Thursday night. "However, we caution that despite likely positive earnings revisions across the Street for the June quarter, publishers are not yet out of the woods," added Osur, whose firm has done investment banking business for EA in the last year.

Despite Osur's caution, investors reacted positively on Friday. In recent trading, shares of THQ ( THQI) were up nearly 7%, while those of EA, Activision and Take-Two ( TTWO) were up about 4% each.

Shares of game retailer GameStop ( GME) were the only sour spot for the sector, off about 15 cents, or less than 1%, to $39.19 in recent trading.

And there was certainly reason for cheer. Overall U.S. retail sales of video-game hardware were up 48% last month from June 2005, according to NPD. Over the same period, overall software sales rose 15%.

During the first six months of this year, game-software sales have totaled $2.33 billion, down just 1% from the same period last year, according to NPD data cited by Wedbush Morgan analyst Michael Pachter. Analysts have been expecting a far steeper drop, but sales in two of the last three months have actually been higher than in the comparable months last year.

There was good news in particular about new game hardware. Nintendo, which began shipping an updated version of its DS handheld last month, saw its share of total hardware units sold rise to 47% of the market from 32% a year ago, according to Osur, citing the NPD data. Sales of Microsoft's Xbox 360 sales rose 26% sequentially last month from May to some 277,000 units, according to Friedman Billings Ramsay analyst Shawn Milne, citing the same data.

All those new hardware units helped boost software sales. Sales of DS games generated $51.7 million at retail, up a whopping 264% from June a year ago, according to Milne's report on the NPD numbers. Sales of games for the Xbox 360, which wasn't on the market a year ago, rose 40% sequentially to $66 million, according to Milne and NPD. Sales of games for Sony's ( SNE) PSP handheld, another relatively new system, rose 33% year over year, to $39.8 million.

But the industry also got some good news about games for older consoles, the sales of which had been in a nosedive. Sales of games for Sony's PlayStation 2, the dominant game machine over the last console cycle, were up 9% year over year, to $153.4 million, according to NPD as cited by Milne. Meanwhile, sales of games for Nintendo's GameCube, which was a distant also-ran to the PlayStation 2, rose a solid 20% from last June to $43 million.

The overall sales numbers meant good things for individual publishers. EA had predicted that its sales would fall 7% to 18% in its first fiscal quarter, which coincides with the second calendar quarter. But U.S. retail sales of its games were up 26% over that period, according to Milne's report on NPD's numbers. Although the two numbers aren't directly comparable -- EA's revenue reflects worldwide wholesale figures rather than one market's retail sales -- the strong results in its most important market should bode well for the second quarter, analysts said.

EA's sales were driven by strong sales of FIFA World Cup 2006, which represented nearly 18% of the total retail sales of the company's games, according to Pachter's report on the NPD numbers, as well as sales of Fight Night 3 and the latest version of Need For Speed.

Activision and THQ, likewise, did well. The two companies' individual outlooks called for revenue to fall 40% and 20%, respectively, in their second quarters. But U.S. retail sales for the period are up 3% at Activision and flat at THQ, according to NPD's numbers cited by Milne.

The only major publisher that appears to be underperforming is Take-Two Interactive, whose fiscal third quarter ends later this month. Retail sales of the company's games fell 3% in June from the same period a year before. While retail sales of the company's games rose 10% last month, analysts, on average, are expecting the company's sales to rise about 40%, according to Thomson First Call, indicating the company's results may be falling shy of expectations.

Things could certainly continue to be rocky for the industry. Like most consumer businesses, the video game industry garners the bulk of its sales in the holiday quarter. Last year, game sales didn't really fall off a cliff until last fall, as gamers started to focus on upcoming game systems.

Game publishers have seen soft sales, rising costs and deteriorating bottom lines as they prepare for the new generation of game systems. Analysts generally don't expect industry sales to pick up for good until next year after Sony and Nintendo release their new consoles.
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