Video Game Sales Plunge 22%: Should Investors Worry?

Industry tracker NPD Group recently released itsvideo game sales figures

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Image Source: Getty Images

Hardware sales

Sales of hardware plunged 42% year-over-year to $181.5 million due to the saturation of the console market. Sony's (NYSE: SNE) PlayStation 4 and Microsoft's (NASDAQ: MSFT) Xbox One are both nearly three years old. Sony has sold 42.5 million PS4s to date, according to industry tracker Vgchartz, while Microsoft has sold just 21.8 million Xbox Ones.

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    Both companies will try to generate fresh sales by launching upgraded versions of the aging consoles -- the PS4 Neo and Xbox Scorpiorecently slashed the price of the Xbox One to $250. NPD reported that average console prices fell 15% annually during the quarter, yet those price cuts failed to boost unit sales, which declined 32%.

    Gamers seem to be delaying new purchases until those new consoles arrive, or they drive down prices of first-gen PS4s and Xbox Ones even further. Sony's upcoming launch of its PlayStation VR headset in October might boost sales ofthe PS4, but Microsoft hasn't announced any VR headsets for its system yet..

    Software sales

    Home console and handheld software sales fell 20% annually to $402.7 million, while sales of physical and digital software on Steam also dropped 20% to $27.8 million. Those steep declines were attributed to tough year-over-over comparisons due to a single game -- Time Warner(NYSE: TWX) andWB Interactive'sBatman: Arkham Knight -- which was released last June.

    Batman: Arkham Knight. Image Source: WB Interactive

    Batman: Arkham Knight generated five times as much revenue in June 2015 as WB's best-selling title this June, Lego Star Wars: The Force Awakens, which ranked third in overall sales. Arkham Knight, the fourth main installment of the Batman: Arkham series, has sold 5.2 million copies so far on the PS4, Xbox One, andPC platforms. The strong performance of WB Interactive's games indicates that it's becoming a disruptive challengerActivision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ: EA) in the U.S. market.

    Nonetheless, Activision still dominated this June's software sales charts with its new multiplayer shooter Overwatch, which hassold 1.75 million copies since launching in May. Activision had two other titles in the top ten -- Call of Duty: Black Ops III at number eight and Destiny: The Taken King at number nine.

    Blizzard's Overwatch. Image Source: Blizzard

    The second best-selling game was Take-Two'sresilient Grand Theft Auto V, the 2013 hit which was rereleased for the Xbox One, PS4, and PC in late2014 and early 2015. That massive hit has sold 58.81 million copies worldwide so far. Take-Two's NBA 2K16 ranked seventh. Electronic Arts(NASDAQ: EA) fared worse than all those publishers with just a single game cracking the top ten -- Mirror's Edge Catalystat number five.

    Why investors shouldn't worry

    A 22% drop in video game spending looks scary, but these declines are common in the cyclical gaming market. Console cycles last for about five to seven years and generally consist of a big surge in the beginning followed by waning sales propped up by updates like the Neo and Scorpio. Hardware sales usually become less relevant as a console ages, since they generate lower profits than software sales. Since we're in the third year of the eighth console generation (Xbox One, PS4, Wii U), that slowdown was expected.

    In software, sales are generally stronger in the holiday quarter, when publishers line up their "triple A" releases. The June release of Arkham Knight was a strategic shift for WB, which released its previous two Arkham games in October. That move was clever, since it helped WB escape the shadow of bigger releases last year, but it also made this year's numbers look much worse than they actually were.

    For now, investors should ignore all that noise. Instead, Sony and Microsoft investors should see if their upcoming console upgrades generate fresh hardware sales. Investors in publishers like Activision should see if newer franchises like Overwatchconnect with gamers, while older ones like Call of Duty and Destiny continue generating strong sales.

    In other words, it's smarter to compare publishers' games to their own portfolios, instead of comparing them to hit titles from the competition -- or broad industry sales figures from NPD.

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