Holiday Sales Puzzle Video Game Industry
BY PATRICK SEITZ
INVESTOR'S BUSINESS DAILY
Signs pointed to a great holiday season for video game sales. So far, the signs were wrong.
Video game sales are failing to meet expectations, a turn of events that has analysts scratching their heads � and downgrading the stocks of game publishers.
The lack of a must-have video game is one reason for disappointing sales, analysts say. They also say newer games have a longer life, thus delaying new purchases.
Whatever the reason, the results look bad. Soundview Technology and Morgan Keegan on Monday downgraded game maker Take-Two Interactive Software Inc. (TTWO) Analysts such as Arvind Bhatia of Southwest Securities Inc. went from a video game bull before Thanksgiving to a bear the next Monday after checking how retail sales went over that four-day holiday weekend.
He's downgraded all the big third-party game publishers, including Electronic Arts Inc. (ERTS) and Take-Two.
On Thursday, consumer electronics retailer Best Buy Co. (BBY) reported that comparable store sales for video game software fell by "the low double digits" for the quarter ended Nov. 29.
Most industry executives and analysts expected strong video game sales this season, thanks to lower-cost game consoles and a larger installed base of game consoles since last year. Sony Corp.'s (SNE) PlayStation 2 console and Microsoft Corp.'s (MSFT) Xbox console sell for $179 this year, 10% less than last year. Nintendo Co.'s GameCube sells for $99, 33% less than last year.
"But what I'm seeing and hearing is probably a precursor to a difficult holiday season," Bhatia said. "We're all scratching our heads saying, 'How is it possible that the installed base is up so much from last year and yet software sales are not up . . . not even close?' "
One reason could be the lack this year of a "Grand Theft Auto: Vice City." Take-Two's blockbuster hit of last year, for PlayStation 2, lifted the entire industry, says Stewart Halpern, an analyst with RBC Capital Markets. It helped sell PS2 hardware and got people to buy other games while they were in the stores, he says.
Some analysts think improved game quality is behind the sales slowdown. It takes longer to master a game or get tired of it today, says Paul Kaump, an analyst with Dougherty & Co. It may take 100 hours to get through one playing of "Grand Theft Auto: Vice City," he says.
Sports titles like EA's Madden NFL and NBA Live have "terrific replay value," he said.
Kaump did retail checks at the Mall of America in Bloomington, Minn., and saw slow sales at the video game shops during and after Thanksgiving weekend. Kaump had downgraded the video game sector in mid-November after retail tracker NPD released its October video game sales figures. The NPD numbers showed sales fell 14.7% in dollars vs. October 2002. Year-to-date sales were up only 1.5%. That news sent many video game stocks falling, and some haven't recovered.
Kaump says the major video game publishers implied 8% to 10% revenue growth for the year. To do that, they'd need to hit 16% or 17% growth in November and December, he says. That, says Kaump, is highly unlikely.
Also hurting revenue comparisons is the fact that average selling prices for games are falling, he says. That tends to happen as a generation of game hardware matures and older games are sold at lower prices.
Another possible reason for the disappointing sales this season is that Sony and Microsoft made only modest price cuts on their PlayStation 2 and Xbox, the No. 1 and No. 2 game consoles, respectively.
Game publishers and retailers hoped for bigger price reductions, perhaps to $149 or even $99, says Billy Pidgeon, an analyst with the Zelos Group. It looks like it will be May before Sony and Microsoft next cut console prices, he says.
Many casual gamers could be waiting for cheaper consoles, as well as hard-core gamers looking to get a second or third console, he says.
Demand for cheaper consoles could boost Nintendo's GameCube, Pidgeon says.
And Nintendo continues to do well with its portable Game Boy Advance device, which dominates the handheld game player market, he adds.
The games expected to sell well this holiday season are sequels and those based on movies and other licensed material, Pidgeon says. These range from Sony's "SOCOM II: U.S. Navy Seals" and Activision Inc.'s (ATVI) "Tony Hawk's Underground" to EA's "The Lord of the Rings: The Return of the King."
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