Blowback from the Japanese crisis is threatening to drain the life from video game stocks. Hot titles and periphery sales might have to stage a rescue or the big three console makers could be forced to cut system prices sooner rather than later. (For background reading, see The Best-Selling Video Games Of All Time.)

Tutorial: The Industry Handbook

Console Wars
Even before the catastrophe in Japan, this year has already been a tough one for most game publishers. Following several downbeat months, the closely watched software sales number fell 5% in February. Although that beat expectations, the flagging growth pattern reflected a relatively lackluster 2011 for new gaming titles. Sustained growth in hardware sales is needed to support software sales, and hardware had been under pressure. (For related reading, see 5 Video Game Stocks To Power Up Your Portfolio.)

That was until the gaming industry got something of a reprieve as hardware sales surged 22% in February. Periphery sales of Microsoft Corporation's (Nasdaq:MSFT) successful Kinect motion controller resulted in a surprisingly strong month for hardware. The Kinect controller bundled with the Xbox 360 boosted the average console sale price. Total industry sales increased 3% year-over-year to $1.36 billion.

But with the yen hitting an all-time high against the dollar, Sony's (NYSE:SNE) PlayStation 3 and Nintendo's (OTC:NTDOY) Wii will be negatively impacted. So will Nintendo's highly anticipated 3DS system, which is set to debut later this month.

Publishers Gearing Up
Improving hardware sales is a major catalyst for software. Upcoming gaming titles - like "The Legend of Zelda: Skyward Sword", which uses the Wii's MotionPlus sensor - will try to capitalize on February's strong peripheral sales. Software sales have lagged this year because there hasn't been a major new game rush. Capcom's "Marvel Vs. Capcom 3: Fate of Two Worlds" was the lone February release that shot up the charts.

Holdovers have accounted for a large percentage of game sales in 2011. Activision Blizzard's (Nasdaq:ATVI) "Call of Duty: Black Ops" rode its fourth consecutive month at the top to become the best-selling game of all time. The success of "Black Ops" pushed Activision to its highest level in 2010 by the end of December, although Activision's shares are now down 15% year-to-date. Still, Activision has made shareholder friendly moves with the recently announced $1.5 billion stock buyback program and 10% dividend boost, which now yields 1.5%. Only Konami (NYSE:KNM) offers a better yield in the publisher space at 3.2%.

Meanwhile, Electronic Arts (Nasdaq:ERTS) is up 12% since the beginning of January. Only "Grand Theft Auto" publisher Take-Two Interactive Software (Nasdaq:TTWO) has outperformed ERTS over the same period, having risen 22%. EA has a blockbuster in the making with "Star Wars: The Old Republic", which will compete directly with Activision's "World of Warcraft" series. With "The Old Republic" and its flagship "Madden" franchise, in addition to recently released "Dead Space 2" and "Bulletstorm", ERTS' diverse game portfolio is becoming very attractive. Moreover, ERTS is aggressively developing titles for the growing mobile market. The company's abnormally cautious full-year guidance issued back in February was actually a net positive for the stock as the company has a track record of over-promising. (For more, see Video Game Industry Betting On A Turnaround.)

The Bottom Line
Software publishers are in position to build on February's hardware sales growth. Forthcoming 2011 releases like "The Old Republic" and Microsoft Games Studios' "Gears of War 3" are potential blockbusters. Add in the growing market for downloadable content, online, mobile and social gaming, and the gaming industry may just have the ammunition to ward off any ill effects from the crisis in Japan.

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