The video-game software industry looks to be on the rebound. U.S. retail sales of games for consoles and handheld systems rose 17.5% in August, according to data from market research group NPD that was cited in a research report by Wedbush Morgan analyst Michael Pachter. That was better than at least some analysts expected, and it marked the third straight month -- and fourth out of the last five -- of year-over-year growth. The recent growth spurt followed a prolonged period of sales declines brought on by the industry's transition to a new generation of video-game technology. "While it is too early to call an 'end' to the console transition, the sales strength over the last few months suggests to us that consumers are far less concerned about the transition than they have been in prior console cycles," Pachter wrote in a research report on Friday. "We continue to expect monthly year-over-year declines ... for current generation software sales, but we have consistently seen positive signs that next generation software sales growth can more than offset these declines," added Pachter, whose firm has not performed recent investment banking business for any of the major hardware makers or U.S. video-game publishers. Investors seemed to cheer the good news. In recent trading, shares of the top four independent U.S. publishers -- Electronic Arts ( ERTS), Activision ( ATVI), THQ ( THQI) and Take-Two Interactive ( TTWO) -- were each up at least 2.5%. Shares of THQ led the pack, rising 7.6%.
As Pachter indicated, the overall sales increase was driven by demand for games for Microsoft's ( MSFT) new Xbox 360 console, and for the latest handheld game systems, Sony's ( SNE) PlayStation Portable and Nintendo's DS. Software sales for those platforms rose to $148 million last month from just $32 million a year earlier. Among the top-selling next-generation titles were EA's Madden NFL 07, for both the Xbox 360 and the PSP, and Nintendo's Super Mario Brothers for the DS. Sales of games for older consoles, such as Sony's PlayStation 2, Nintendo's GameCube and Microsoft's Xbox, fell $56 million, or 18%, from the same period last year. But that was less than Pachter expected. And, notably, sales of PlayStation 2 games -- the dominant game platform during the last console cycle -- actually rose year over year. "We believe that this is attributable to continued strong demand for PS2 hardware, as well as continued release of highly anticipated and sought after games for this console," wrote Pachter. But the sales data looked good from other perspectives as well. Total unit sales of games were up 15% last month, while the average selling price of games was up 2% to $33.14. From an individual publisher basis, the leaders in terms of sales gains during the month were Midway Games ( MWY), THQ and Activision. Retail sales of Midway's titles rose 133% in August from the same period last year, led by games such as Ant Bully and NBA Ballers. THQ and Activision's retail sales jumped 43% and 23%, respectively.
The big loser last month was Atari, whose retail sales fell 26% year over year. Despite the overall bullishness of the report, there were some reasons for caution. The bulk of video-game software sales occur in November and December; poor results in those months can sink the whole year. That was the case last year, and it could happen again this year, given that both Sony and Nintendo plan to introduce new consoles this holiday season. Both consoles are likely to be in limited supply in December -- as the Xbox 360 was last year. If that's the case, consumers could choose to wait to buy a console and games until the new machines are more abundant. Regardless of what happens this holiday season, August represented yet another month of disappointing sales for Microsoft's Xbox 360. Pachter for one had predicted that the company would sell between 200,000 and 300,000 consoles last month, but the sales came in at the bottom of that range, according to the NPD data he cited. Because of supply constraints, Microsoft shipped fewer than expected Xbox 360s during the holiday season last year. The company resolved those supply issues this spring, but has seen relatively tepid demand since. Indeed, Pachter said that retail sales of the Xbox 360 have totaled just 2.4 million units thus far in the U.S. And he predicted that the company will likely have sold only 5 million Xbox 360s by the end of the year. "We caution investors about overly optimistic estimates for unit sell-through of games released for that platform," Pachter said.