Physical Video Game Business Continues to Deteriorate

Below is more evidence the core business at $GME is deteriorating. $GME derives 50% of their profits from the “trade-in” segment. Basically, I buy a game there and when I m done, I trade it in and get credits that I can then use to buy new or used games. But, what happens when gamers go mobile? The trade in business dries up. To date $GME has yet to come up with a viable long term fix. See this post for more detail

The article below shows how new games sales are continuing to fall (less games to trade) and more and more gamers go mobile. According the NPD, mobil gamers outnumber physical gamers. This is a trend that will continue (see Blockbuster and DVD) futher deteriorating $GME’s core business. Not only is $GME losing the trade-in business, the mobile gamers spend less so that losing a physical gamer means that even if they stay with $GME for mobile (evidence here they aren’t) the per customer spend is less.

Earier in the month I wrote:

The company has made $.71 YTD and expects $.32 (middle point of guidance) in Q3 for a total of $1.03. That means Q4 must deliver $2.17 to hit the middle point of their annual guidance ($3.10-$3.30).

That will be quite a trick seeing as they made $1.61 last year in Q4. They are below results from ’11 YTD ($.71 vs $.78), have guided Q3 well below the $.39 they earned in Q3 last year but are magically going to grow Q4 EPS 35%. Anyone want to explain that to me?

$GME has not yet YTD lowered guidance for any of their quarters despite being below Q1 & Q2 so far and guiding Q3 below last year. Yet, the macro environment they operate continues to deteriorate. Mystifying…

Emphasis mine:

SAN FRANCISCO (Dow Jones)–U.S. sales of videogame products fell more than a fifth in August, a research firm said Thursday, continuing a disturbing trend that has plagued the industry throughout this year. Sales of new videogames, consoles and accessories in U.S. retail stores fell 20% to $515.6 million, down from $647.2 million the same time a year ago, according to survey data from NPD Group. Anita Frazier, an NPD analyst, said in a statement the sales represented roughly half of overall spending on games. Sales of Internet-delivered content, micro-transactions and mobile applications are not included in NPD’s monthly reports. Frazier said it those channels amounted to $391 million in sales, while rentals and used-game sales rang in at $104 million.

Ms. Frazier added that the number of gamers who were associated with mobile games had overtaken traditional gamers as one of the largest customer segments for videogames. She warned, however, that mobile gamers spend less on average than traditional ones. “You can’t talk about the gaming market without taking into consideration the growth in the number of mobile gamers on smartphones and tablets,” she said. The top-performing game of the month was THQ Inc.’s (THQ) “Darksiders II.” Nintendo Co.’s (7974.OK, NTDOY) “New Super Mario Bros. 2” and Square Enix Holdings Co.’s (9684.TO) “Kingdom Hearts 3D: Dream Drop Distance” rounded out the top three. Both games were likely bolstered by the mid-August release of Nintendo’s 3DS XL, a larger version of its two-screen handheld videogame console that can display three-dimensional images without the need for specialized glasses. In its first seven days on the market, NPD said the device racked up enough sales to represent 44% of Nintendo’s 3D-handheld receipts for the month.

Last month, NPD said it expected the 3DS XL would boost sales alongside Electronic Arts Inc.’s (EA) “Madden NFL ’13,” which landed on store shelves in time to be tallied with September’s sales data. Overall, however, videogame sales fell nearly a tenth to $237.7 million from $261.8 million a year prior. Videogame hardware sales were far worse, falling 39% to $150.6 million from $248.4 million. NPD said none of the platforms that were available on the market last year saw an annual sales increase. However, Ms. Frazier added, the 3DS and Sony Corp.’s ($SNE, 6758.TO) PlayStation 3 did show sales growth when compared to July of this year. “The current hardware systems are showing their age, so it goes without saying that it would be great to have new systems breathe life into traditional retail industry sales,” she said. Nintendo plans to release its new home console, the Wii U, later this year. Sony and Microsoft Corp. ($MSFT), which makes the Xbox 360, so far have not announced any details about their plans for successor devices.

The lack of new hardware, as well as new games in general, has hurt the industry, Ms. Frazier added. “One factor contributing to the softness we have seen in retail content sales so far in 2012 has been the decline in the sheer number of new titles,” she said. “What we’re seeing impact August results is the domino effect of the light release schedule from earlier in the year. That lack of new releases has had a significant impact on subsequent months’ sales.”