Image copyright Game Digital

Shares in video games Game Digital have plunged by more than a third after it said "challenging" conditions in the UK market would hit profits.

Game said there had been a faster-than-expected decline in sales of older games formats, while the switch to the newer Xbox One and PlayStation 4 consoles had been slower than expected.

It now expects underlying earnings of £30m for the half-year to 23 January.

That compares with earnings of £43m reported a year earlier.

Shares in Game Digital fell 77.75p, or 38%, to 128p.

Revenues fall

"The trading conditions in the UK video games market have been challenging," said Martyn Gibbs, the company's chief executive.

"The switch over from the older gaming formats to PlayStation 4 and Xbox One software has impacted profitability across the UK market.

"The extent of the impact of this switch over has only become apparent in December which has been compounded by lower year-on-year High Street and shopping centre footfall."

Analysis: Rory Cellan-Jones, Technology correspondent

This isn't just a story about gamers abandoning high street stores. Game has a big online operation and says it has a 60% share of digital downloads of console games.

Game says the big issue is the transfer from one generation of consoles to the next.

So what's going on? Are new titles just too expensive, or is it that players are sticking for much longer with games they already have? Perhaps the sheer depth and artistry of some games is proving almost too satisfying, harming the industry's bottom line because gamers don't feel the need for something new quite as often?

The other explanation could be that even if console gaming remains very popular, there is now a range of other ways for their owners to get their fix - from platforms such as Steam, to casual games played on smartphones and tablets.

But the games industry body UKIE insists the picture is much brighter than the Game profit warning might suggest.

The UK has a big and thriving games industry. In new areas like eSports and live-streaming it has shown that it can innovate with the best. But in a fast-changing landscape, you cannot count on predictable profits, as Game has discovered yet again.

Read Rory's blog in full

In the 21 weeks to 19 December, Game said that total revenues fell 6.7% to £466.8m, with UK revenues down 11.4% from a year earlier to £353.5m.

UK sales of products related to the Xbox One and PlayStation rose by £19m to £114.6m.

However, Game added this had been "more than offset by the unexpectedly steep decline in Xbox 360 and PlayStation 3 content sales" which more than halved, dropping by £30.8m to £23.4m.

The retailer also said sales had been "disappointing" since the start of the school Christmas holidays.

'Warning sign'

"UK sales have fallen off sharply in the past few weeks at the most critical time of year for Game," said analysts at Liberum.

"While a decline in old format sales was expected, the scale has surprised the company while the importance of Christmas trading has hugely magnified the issue."

Patrick O'Brien, retail analyst at Verdict, said Game's comments were a "big warning sign about the role of the console cycle".

Previously, he said, revenues surrounding new games consoles - including software - have peaked two to three years after their launch. However, the slower-than-expected pick up in sales related to the latest consoles suggests digital downloads are eating into traditional revenue sources.