Video Games Face Ho-Ho-Horrendous Season

NEW YORK ( MainStreet) -- Video game sales got a little push from motion controllers last holiday season, but the video game industry's going to need a software power-up if it wants any presents under the tree this year.

There's already a chill over video game console and accessory sales as holiday shopping begins. Last December, spending on Nintendo's Wii, Microsoft's ( MSFT) Xbox 360 and Sony's ( SNE) PlayStation 3 consoles decreased 16% from December 2009, according to market research company NPD Group. Accessory sales jumped 10% last year as more casual gamers danced awkwardly in front of Microsoft Kinect motion capture devices and swung orb-topped PlayStation Move motion wands like would-be Gandalfs as each item sought a share of the Wii's jittery, jumpy fan base.
Slumping consoles such as the PlayStation 3 and so-so software sales need new titles to lifts gamers' holiday spirits.

Much as the Guitar Hero/ Rock Band frenzy of years before left gamers with closets full of unused peripherals, excitement over the Kinect and Move has lost momentum. Overall video game accessory sales were down 14% in September -- the last month for which NPD Group had figures available -- from September 2009, when the Move was just released and the Kinect was still more than a month away.

The platforms' parent companies have responded with as many cheat codes as possible to help drive demand. Nintendo dropped the price of its Wii by $50, to $149, back in May and packaged it with the popular Mario Kart Wii instead of the well-worn Wii Sports. Not to be one-upped, Sony dropped the price of the PS3 to $249 from $299 back in August and put it just a bit closer to the $199 cost of a base-model Xbox 360.

"I think Wii will still be No. 1 in December, as it has the lowest price point, and the big box guys tend to offer big gift card promotions with any console," says Michael Pachter, video game expert and managing director of equity research at Wedbush Securities. "A $149 Wii with a $50 gift card from Wal-Mart ( WMT) makes it a pretty easy decision."

Facing attacks and peril from all sides like its mustachioed plumber figurehead Mario, Nintendo could certainly use the boost. By introducing the next-generation, high-definition Wii U at the Electronic Entertainment Expo this summer, Nintendo effectively made the Wii's current incarnation a lame duck and any revenue from it a bonus at any price. Meanwhile, Nintendo's once-dominant DS handheld gaming devices are on the defensive as increasing pressure from Apple ( AAPL) iOS and Google ( GOOG) Android portable devices and their cheap-to-free game apps squashed DS market share decreased from 70% in 2009 to 57% last year.

As a result, Nintendo's bare-bones DS Lite had its price whittled to $99 back in June just to generate interest. The new Nintendo 3DS, meanwhile, had its price slashed from $250 when it was released in March with little software support to $170 in July with promises of a Star Fox 64 release in September, a Super Mario 3D Land in November, Mario Kart 7 in December and Kid Icarus: Uprising next year.

"The 3DS had a rough start, but with the new price drop and the pending release of some of Nintendo's biggest characters such as Super Mario 3D Land, we have faith that 3DS should see an uplift in sales," says Jesse Divnich, vice president of capital research and communications at video game market research firm Eedar.

Just like every gamer needs to learn the hard way that an invincibility star won't save Mario from certain death if he falls into a pit, Nintendo and its competitors have learned that great software is the only way to avoid a holiday video game slump. The consoles are off to a great start with such titles as Microsoft's Gears of War 3, Warner Interactive's ( TWX) Batman: Arkham City, Sony's Uncharted 3: Drake's Deception and Electronic Arts' ( ERTS) Battlefield 3 already released.

"Even though year to date performance of the new physical portion of the industry is down 5%, more than half of industry sales in this channel are still to be realized in the back four months of the year," Anita Frasier, analyst for market research firm NPD Group, said back in September. "Given the strong release schedule in the coming months, new physical retail sales could still be flat to slightly up once full year sales are tallied."

Divnich says the shift to high-definition gaming on the PS3 and Xbox and the release of such long-awaited titles as Activision's ( ATVI) Call of Duty: Modern Warfare 3 next week; Bethesda Softworks' Elder Scrolls V: Skyrim on Nov. 11; and Capcom's Ultimate Marvel vs. Capcom 3, THQ's ( THQI) Saints Row: The Third and EA's Need For Speed: The Run should help beef up software sales. He and Eedar predict that holiday software sales this year will be flat compared with last year, which is just fine by companies since sales of downloadable content for those games are set to grow by 20% or more.

"Software is going to be particularly strong, likely spilling over well into 2012," Pachter says. "This isn't just Battlefield and Gears, it's Legend of Zelda: Skyward Sword, Uncharted, Elder Scrolls, Batman, Saint's Row, Assassin's Creed: Revelations, Need for Speed, Dance Central 2, Just Dance 3, WWE '12, and a little game called Call of Duty."

Yet retailers and gamers alike only need to look back to last holiday season to see that Call of Duty alone isn't enough to blast the industry into holiday consumers' homes. Despite a huge showing by Call of Duty: Black Ops last year, holiday software sales declined 8% from the same period in 2009, when Call of Duty: Modern Warfare 2 was on its way to becoming the second best-selling video game in U.S. history. Game geeks will insist that's the difference in quality between Modern Warfare software developer Infinity Ward and Black Ops developer Treyarch, but it's also a reminder of the fragile, fickle nature of the software market.

It's also indicative of an increasingly fractured gaming world where software isn't strictly bought at GameStop ( GME) or on Amazon ( AMZN) anymore. Digital downloads make up a growing share of all software sales and, of that digital market, roughly 50% of all content gets downloaded to a smartphone, tablet or other mobile device. Physical video game software sales still accounted for $2.4 billion in holiday spending last September, but aging consoles and steady streams of mobile game apps are pushing the video game industry to either give gamers more for their money or face fewer happy holidays ahead.

" Many question the long-term viability of traditional physical media, but given the overwhelming anticipation for all the great AAA content in the pipeline, I believe the final results will indicate that there is still plenty of life and demand in the traditional physical media space," Divinich says. "At the end of the day, consumers are always willing to pay a premium price for premium content, and with 2011 producing some of the biggest releases, we remain unconcerned about the viability of the traditional physical media format this holiday season."

-- Written by Jason Notte in Boston.

>To contact the writer of this article, click here: Jason Notte.

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Jason Notte is a reporter for TheStreet. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, Time Out New York, the Boston Herald, the Boston Phoenix, the Metro newspaper and the Colorado Springs Independent. He previously served as the political and global affairs editor for Metro U.S., layout editor for Boston Now, assistant news editor for the Herald News of West Paterson, N.J., editor of Go Out! Magazine in Hoboken, N.J., and copy editor and lifestyle editor at the Jersey Journal in Jersey City, N.J.