updated 1/15/2007 4:17:08 PM ET 2007-01-15T21:17:08

A strong December capped off a record year for the video game industry, with U.S. sales of software, hardware and accessories up 19 percent to $12.5 billion in 2006, according to market research firm NPD Group.

Last year saw the long-awaited launch of new gaming systems from Nintendo Co. Ltd. and Sony Corp., but older systems dominated both software and hardware sales due in part to a scarcity of next-generation consoles.

In December, the most crucial month for video-game sales, Nintendo sold the highest number of consoles, followed by Sony and Microsoft Corp. The portable Nintendo DS sold 1.6 million units in December, and has sold 9.2 million since its launch in 2004.

Sony's PlayStation 2 came in second, still running strong six years after its release. It sold 1.4 million units during December amid widespread shortages of its successor, the PS3, which sold 490,700 units in December, and 687,300 since its November launch.

The Wii, Nintendo's playful next-generation console, sold 604,200 units in December, and 1.1 million since it was released Nov. 19, two days after the PS3. Microsoft's Xbox 360, launched a year ahead of rivals Wii and PS3, sold 1.1 million units in December, with 4.5 million since its release.

In all, hardware sales surged 43 percent to $4.6 billion in 2006 and software sales rose 6 percent to $6.5 billion. Sales of accessories jumped 19 percent to $1.5 billion for the year.

Total U.S. sales rose 28 percent to $3.7 billion during December, including a 59 percent jump in hardware sales to $1.6 billion and a more than 5 percent increase in software sales to $1.7 billion. Sales of accessories, which include controllers and memory cards for gaming systems, rose 47 percent to $451 million.

Next-generation software — for the Xbox, the Wii and the PS3 — made up 16 percent of total video game sales in December, said Prudential analyst John McPeake in a note to investors.

Microsoft's shooting game "Gears of War" for the Xbox 360 was the best-selling console game during the month, selling 815,700 copies. Activision Inc.'s rock-star simulation game "Guitar Hero II" for the PS2 followed, and Electronic Arts Inc.'s "Madden NFL 07" football game for the PS2 came in third place. For the year, "Madden NFL 07" for the PS2 was first with 2.8 million sold, followed by Nintendo's "New Super Mario Brothers" for the DS and "Gears of War" for the 360.

"Total software sales growth slowed as industry heavyweight EA posted its third consecutive month of year-over-year decline in U.S. retail video game revenues," McPeake wrote. Excluding EA, the overall software industry would have expanded nearly 9.6 percent in December, above the actual 5.4 percent growth, he added.

Games for the Wii captured 4 percent of the U.S. software market, the analyst noted, with "Legend of Zelda: Twilight Princess" selling more than 519,000 units during December.

But games for the PS3, which at $500 and $600 retails for well above the $250 Wii and remains hampered by shortages, captured just 2 percent of the U.S. software market, McPeake said, adding that "Resistance: Fall of Man" was the top selling PS3 title, with over 216,000 units.

McPeake called Activision and THQ "better investment opportunities" than EA, although he added he expects the latter to gain market share as more people upgrade to new consoles. EA, the analyst said, was the top-selling third-party publisher for the PS3 — its games accounted for 33 percent of software sold in the U.S. for the system.

The analyst said Activision's strong December sales, up 18 percent year-over-year, could mean a "substantial upside" to the company's sales guidance of $600 million and to McPeake's estimate of $613 million.

"'Guitar Hero II' for the PS2 continues to blow away our estimates," the analyst wrote, predicting that Activision's upcoming fiscal year should represent one of its strongest new title release years in its history.

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