Video Game Industry Recovery Depends on PS3, Wii Price Cuts, says Analyst

The U.S. game industry in June saw the biggest decline in nine years and analysts are now concerned that the weak economy is finally catching up with gaming. If the industry wants to have any chance of breaking the record sales pace it set in 2008, then a few things will need to happen, including hardware price cuts, says Broadpoint AmTech analyst Ben Schachter.

"Exiting 2Q09, two trends continue to impact the video game industry, 1) hardware sales remain weak, and 2) non-top 10 titles continue to be shunned at retail. The latter issue has been consistent since the holiday and we expect it to continue throughout the year. In other words, like last holiday, 2009 will again be sharply divided between the haves and the have-nots, the winners and the losers. Notably... 2Q industry software weakness has been disproportionately felt by the first-parties (down 28.4.% y/y) versus the five publishers we cover (down just 13% y/y). As for hardware sales, there is clear cause for concern around both the PlayStation 3 and the Wii. In our view, in order for the industry to recover in the back half of the year, we will need to see a $100 price cut for the Sony PS3 and a $50 price cut for the Wii. And while we expect both of these to be forthcoming this fall, industry expectations of price cuts have been wrong throughout this hardware generation," he said.

It could potentially be a tough holiday season for publishers, but Schachter expects Activision Blizzard to perform the best, thanks to Call of Duty: Modern Warfare 2, which most believe will be one of the top selling titles of the entire year. "...we view ATVI's pipeline of titles as giving it the best opportunity among publishers to have something to cheer about this holiday. We continue to believe that Modern Warfare 2 will be the best-selling title this holiday and will likely outsell CoD 4's 7mil units sold in CY'07 (in less than two months worth of sales). In addition, titles such as Tony Hawk, DJ Hero, and Wolfenstein could also show upside," he noted.

"While Music clearly will not be the growth driver of prior years, we believe ATVI's strategy of releasing multiple different Guitar Hero SKUs at multiple different price points is a smart way to manage the franchise in the current macro/retail environment. Also, perhaps most importantly, we expect Warcraft to continue to perform well and remind investors that we estimate Warcraft will account for ~26% of ATVI revenue in CY'09. In fact, we estimate that 75%-85% of ATVI's EBIT estimate is driven by WoW and CoD, both of which we have a high level of confidence will hit or beat expectations," he added.