The video game industry in 2010 was a tale of two seasons. For the first three quarter's of the year, business was mediocre. Down the stretch into the holiday season, it turned promising. Whether it's enough to revive an industry that's been hemorrhaging sales for the last couple of years is impossible to predict at this point. However, it is important to note that console makers Microsoft (Nasdaq:MSFT), Nintendo (OTCBB:NTDOY) and Sony (NYSE:SNE) achieved significantly higher console sales this year because of steep discounting. Video game developers can only hope this translates into increased sales. Time will tell.

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Flat Sales In 2010
According to retail research firm NPD Group, video game revenues in 2010 will be flat, improving upon the 8% decline in 2009. Going into the holiday season, it wasn't looking good and then the industry delivered the best November on record, up 8% - and video game executives were suddenly smiling. Especially happy with the penultimate month was Activision Blizzard (Nasdaq:ATVI) CEO Robert Kotick, whose game title "Call of Duty: Black Ops" sold 8.4 million units and became the seventh best-selling video game of all time. While the November push did little to alter total revenues year-over-year, the title's success helped improve its earnings per share dramatically in 2010.

Despite this impressive showing, Kotick argued at the Reuters Media Summit in early-December that investors don't understand his company's business model. He's certainly entitled to his opinion but Activision Blizzard closed the year trading at more than three time's sales. That's rich for a company that's supposedly misunderstood. (For more, see How To Use-Price-To-Sales Ratios To Value Stocks.)

The Hands Have It
Video game maker's future appears to lie in the hands of gesture-based accessories like the Microsoft Kinect and Sony Move. Microsoft launched the Kinect November 4 and 2.5 million units sold in the next 25 days, 2.5 times quicker than the iPad debut. The two devices along with the Nintendo Wii, introduced in 2006, are expanding the marketplace beyond hardcore gamers. Approximately half the Xbox 360s sold in November were bundled with the Kinect and those people are going to need games to play. It's too early to tell who'll benefit most from this change in the video game market but Jeffries and Company estimate the Kinect will add $600 million to Microsoft's bottom line in 2010. That number should grow in 2011 and beyond. (For more, see Video Game Industry Betting On A Turnaround.)

Bottom Line
Two trends took hold in 2010, one good for traditional video game developers and another not so good. The good is the expanding marketplace created by the Kinect, Move and Wii. Not so good is the proliferation of free online games at Facebook and other social media sites. To understand where the market is heading, all one needs to do is look at video game financing from 2009. Of the top 10 deals, most were for online games like Farmville, and so on. I can't imagine 2010 was any different. Video game makers didn't figure out how to combat this problem in 2010. They better in 2011, if they want to remain relevant. (For more, see The Best-Selling Video Games Of All Time)

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Tickers in this Article: MSFT, NTDOY, SNE, ATVI

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