By Dan Gallagher
After two months of disappointing sales data, the video-game
sector is looking for a fresh spark as it prepares to show off new
games and possibly new devices that might energize business in the
later half of the year.
The Electronic Entertainment Expo, or E3, kicks off in Los
Angeles next week. The annual event is used by game publishers and
makers of consoles and related equipment to show off new products
for the coming year. Much of the talk leading up to this year's
event have centered on new hardware, such as 3D motion-sensor
controls and innovative handhelds, as well as possible price
reductions for existing consoles.
While the event's organizers have promised a bigger show this
year than the last few outings, this year's E3 still comes at a
touchy time for the sector, which is finally showing some of the
strains of the slowing economy - as well as the challenge of
topping last year's record-breaking growth.
Most analysts covering the business have remained positive on
its long-term outlook, despite some recent speed bumps.
"Following two months of disappointing data and a weak industry
forecast from many publishers and retailers, there are many
concerns that this video-game cycle (which began in 2005/2006) is
coming to an end, with the coming years dominated by significant
declines in hardware and software sales," analyst Todd Greenwald of
Signal Hill wrote to clients Wednesday. "We strongly disagree with
this thesis, and while E3 may not completely disprove it, it may
provide some signs that the industry is alive and well."
Investors also seem to be keeping their hopes up. Shares of the
four largest game publishers have risen by an average of nearly 30%
so far this year, well ahead of the Nasdaq's 6% gain for the
period. But like most other stocks, the sector remains well below
its levels from this time last year.
Some analysts believe the stocks may make further gains
following the conference. "Stocks in the sector historically
perform better over the spring/summer following E3, and we expect
there will be a few catalysts again this year," Colin Sebastian of
Lazard Capital Markets wrote in a report Thursday.
Justin Post of Bank of America said stocks could face some risk
if news coming out of the event is considered disappointing - or
unsurprising.
"With most software title releases for [fiscal 2010] already
announced, and with a material price cut for [the PlayStation 3]
($100+) unlikely, we do not expect any real impact from the show on
fiscal-year 2010 financial expectations, which could leave some
disappointed," he wrote in a note Thursday.
Back-end Loaded
After a solid performance throughout the last year, the
industry's sales figures for March and April have been
disappointing.
According to data from the NPD Group, U.S. sales of game
software fell 17% in March and 23% in April from the same periods
the year before. Most of the drop was blamed on a tough comparison,
as last spring saw the unusual release of some of the year's
biggest blockbusters, including "Grand Theft Auto IV" and "Super
Smash Bros. Brawl."
But April also saw a sharp slowdown in the sales of consoles,
suggesting that gamers were finally starting to curtail spending in
the wake of the slowdown. The three next-generation systems - the
PlayStation 3, Xbox 360 and Wii - all saw sales fall more than 40%
compared with the previous month.
Analysts say the problem is mostly one of comparisons. Most of
the hotly anticipated titles for the current year are coming out in
the fall, so investors are hoping sales will recover in the coming
months.
"Right now, we are in a very soft spot in the release slate,"
said Eric Handler, game analyst for MKM Partners. "The lineup this
year is more heavily weighted to the back half of the year."
Price Cuts Unlikely
One question building buzz going into E3 this year is
anticipation for makers of game consoles to reduce their
prices.
No one faces this question more than Sony Corp. (SNE) The
company's PlayStation 3 remains the most expensive console on the
market, with the basic unit costing $400. In its earnings report
earlier this month, the Japanese electronics giant predicted that
it would sell 13 million units of the PS3 this year - about 30%
above its sales last year.
Analysts say the only way Sony can hit that target is to cut its
price - by a significant amount. "Price elasticity is not such that
a $50 price cut is going to get a 30% increase in sales," said
Michael Pachter of Wedbush Morgan Securities. "They need to do
something that's going to drive demand."
Nintendo (NTDOY) is also beginning to face pressure to trim the
price of its Wii. The popular device has maintained the same $250
price point since its launch in late 2006 - an unheard-of track
record for the industry. But cracks have begun to appear even in
the Wii's business. U.S. sales have slid by 55% over the last two
months, according to NPD data.
"I think the current retail price points on the consoles are a
bit long in the tooth, given where we are in the cycle," Dan
DeMatteo, chief executive of video-game retailer GameStop Corp.
(GME), said in an interview. "If the console manufacturers' goals
are to reach the numbers they have published, that certainly
implies price cuts."
But while some investors may be anticipating price-cut news out
of E3, Wedbush's Pachter and other analysts believe such moves will
not be made until later in the year.
"A price cut doesn't buy you a lot in the summer, so why leave
that money on the table?" Pachter commented.
The console makers themselves are signaling that no price
reduction is imminent. A Sony representative said there are "no
current plans" to lower the price of the PS3. Reggie Fils-Aime told
The Wall Street Journal on Wednesday that the company "is not
considering any type of price cut."
Devices, Games In The pipeline
As far as pre-show buzz goes, Microsoft Corp. (MSFT) is the main
focal point.
The software giant, which also makes the Xbox 360, is rumored to
have some new gaming products in the pipeline. According to a
report by The Wall Street Journal earlier this month, the company
is developing a type of video camera for the Xbox that would allow
players to control the game with their body movements.
Other reports around the gadget blogs have the company launching
a handheld game device modeled after its Zune digital-media player.
The company actually launched a new version of the player on
Wednesday, but that device is not designed for gaming.
Microsoft is holding a press briefing for the media on Monday
morning. A representative for the company would not comment on the
recent rumors.
Sony is also rumored to have a new version of its handheld PSP
that it may unveil - one that removes the disk drive in favor of
using wireless downloads to store and play games.
Among game publishers, Electronic Arts Inc. (ERTS) has disclosed
a large slate of titles it plans to highlight at E3. Among the most
anticipated are a fantasy title called "Dragon Age: Origins" from
BioWare studios, and several titles geared exclusively for the Wii,
including new iterations of popular franchises like "Dead Space,"
"Need for Speed" and "Spore."
Rival Activision Blizzard Inc. (ATVI) plans to show off some of
its fall slate, including new updates to the popular "Guitar Hero"
franchise; a new music title called "DJ Hero" and a revamped
addition to its "Tony Hawk" skateboard franchise that will include
a new skateboard-shaped controller. The company also will
demonstrate the industries most highly anticipated title of the
year, "Call of Duty: Modern Warfare 2," which is slated for release
in early November.
In addition, Activision will lift the wraps on new properties
such as "Blur," a new racing game developed by Bizarre Creations,
and "Prototype," a new shooter title.
Take-Two Interactive Software Inc. (TTWO) is expected to show
off the first sequel to its popular "BioShock" game, while THQ Inc.
(THQI) may show some of its new "Darksiders" property. Ubisoft is
expected to showcase its coming "Avatar" game as well as "Assassins
Creed 2," which is expected to launch in November.
-Dan Gallagher; 415-439-6400; AskNewswires@dowjones.com
