Sorry Mario, your profits are in another castle

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Game Over: Nintendo, EA and Old School Video Gamers Stumble

September marked the 10th consecutive month that retail sales of video games and related video game hardware has declined. This time around it was a wrenching 24% decline in video game sales to just $848 million from over $1.1 billion a year earlier.

What’s more, past reports show video game sales down from $1.2 billion in 2010…  which was a drop from 2009.

In short, Mario keeps busting those bricks but no coins are popping out.

Video game stocks have taken a beating as a result. Year-to-date Electronics Arts (NASDAQ:ERTS), the company behind the blockbuster Madden football games, is down over 36%. And icon Nintendo (PINK:NTDOY) is down 3% despite the launch of its first new video game console in almost six years.

Why the drop off? Well, for the same reason there’s trouble for many media stocks, from the New York Times Co. (NYSE:NYT) to Barnes & Noble (NYSE:BKS) to Yahoo! (NASDAQ:YHOO).

In a word, “mobile.”

Video games have moved away from televisions and computers too as consumers do more with their smartphones and tablets. This is not just disrupting the landscape of the gaming business, but also the profitability since big-ticket hardware like controllers and console boxes aren’t necessary anymore.

The result seems to be a secular decline in profits for the entire video game industry despite strong interest generally in the product, and a struggle to meet the changing landscape of mobile gaming.

It’s a brave new world, where anyone who can create a game that works on the Apple (NASDAQ:AAPL) iPhone or Amazon (NASDAQ:AMZN) Kindle Fire could potentially tap into a best-seller. That’s good for those who know how to write code … but bad for the big guys.

Consider that a tiny company called OMGPOP was able to generate a staggering 20 million downloads in just five weeks for its Draw Something game earlier this year — and that Zynga (NASDAQ:ZNGA) quickly dished out some $200 million for the upstart soon after. Or consider that Rovio, the maker of cult sensation Angry Birds, rejected a plush $2.25 billion offer from Zynga a few months earlier because it thought it was doing just fine on its own.

The irony, of course, is that video game sales are far from dead. Interest is huge not just from the typical youth segment but also from the generation that grew up with Atari, Coleco and Commodore 64 gaming systems 40-some years ago. Demographic research shows that in the U.S., 65% of folks play video games in some form and that the average gamer is 35 years old.

That’s to say nothing of the booming international market for video game sales, particularly in China.

And it’s worth noting that traditional video game makers have big brands and have certainly managed to create new hits in the last few years. About five years ago, Activision Blizzard (NASDAQ:ATVI) tripled from its 2006 lows to its 2008 highs thanks to its Guitar Hero games becoming a pop culture sensation. And Take-Two Interactive (NASDAQ:TTWO), the brains behind ultraviolent smash hit Grand Theft Auto, soared from a low of around $10 a share in 2006 to over $27 by mid-2008.

But media companies across the board, from television to books to music to video games, are learning that it doesn’t take much to knock the old leaders from their perch and replace them with hungry upstarts who have the next big thing.

Investors need to remember this. Because while video gaming is alive and well in 2012, the biggest names next year may be companies you’ve never even heard of today.

And by the way, even if the old guard buys those hip new kids on the block… well, there’s no guarantees that even that is enough. That aforementioned OMGPOP at Zynga has already resulted in a roughly $100 million writedown on the deal.

That’s how fast the video game sales picture changes. Even a megahit from just a few months ago is no guarantee of future success or profitability going forward.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a position in Apple but no other stocks named here.

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Comments
  • Seen

    Could you please do a little research before writing this garbage.

  • ayeandus

    I agree because its whats happening to me. A hardcore gamer for 20 years. I have owned and played out almost every major console including failures like atari Jaguar and 3d0. And I still love and respect games They are works of art in a lot of ways it’s just too many parts 2s part 3s and not enough new innovative games like in the nineties… kind of like music. I find myself too often playing old school songs And reaching for my tablet And having a great time. Not enough games and too much business and that’s why I agree with this because I know I’m not the only one. Mass effect, modern combat2, N.O.V.A3, Batman TDKR. And developers put different little spins on them to make them work on tablets

    • thetroothhertz

      “…too much business” ??

      Look at the way this guy writes. If retards like this are jumping on the mobile bandwagon that should tell you something.

      short-term (4-5 yrs) trend at best. Mobile gaming is the definition of a bubble.

      Old school game publishers like Activision have true brand equity.

      • nerisdetum

        I don’t think it’s a bubble… but I think the market will be consolidated into a few huge names within the time range you’re predicting the bubble to pop. Then, a few indie developers will remain who create their best games for their own companies, but still do contract work for the big names.

        There is still a lot of untapped market for mobile gaming (Asia, developing nations, etc). As capabilities of tablets grow, the shift will become more prominent. Console gaming will be completely different 10 years from now.

  • Raymond Grier

    What a bunch of garbage. We all know the slump is due to predictable console-turnover. I’d love a new iPad but I’m not trading in my Wii for one, much less to play games that run on a phone. The people writing these articles are no analysts and I’m tired of them attacking my stock picks because they have nothing better to write than bad fiction.

  • nerisdetum

    Apparently the author doesn’t understand that all consoles are on the back legs of the lifespan, and thus, interest in purchasing games by consumers peaked a long time ago, and interest in developing new games for these systems is all but dead.

    Nintendo’s new system will add a jolt to the industry, and should provide a lasting spark up until the next-gens from Sony and MSFT are announce/released next year. There is a lot of opportunity as far as investing is concerned, to be the contrarian in the video game industry. Bearishness by analysts, who I would assume really know nothing about gaming and do not understand the mind of a “hardcore” gamer, generally reveals opportunity for those who do understand.

    Mobile gaming will continue to grow, but that doesn’t mean traditional console/PC gaming will die immediately.