Analyst to game industry: We're in the money

Banc America Securities (BAS) analyst Gary Cooper is making quite a reputation for himself. In February, while the elite at Take-Two Interactive were staring squarely into the investigative headlights of the Securities and Exchange Commission--who was looking into the ongoing accounting practices at the company--it was Cooper who suggested that the Grand Theft Auto publisher jettison its chairman, Ryan Brant.

Cooper cited the game publisher's accounting troubles and Brant's pattern of personal stock sales as justification for a departure. It wasn't long before Brant relinquished his rank.

This week, Cooper made additional waves in the industry, predicting a back half of the year like no other.

In a research document titled "Let the Battles Begin: A Look Ahead to the Upcoming Battles in the Video Game Industry," Cooper turned his attention to the second half of 2004. He is predicting that the industry will "witness the largest sales of video games in any six-month period in the history of the video game industry."

Cooper and coauthors Eric K. Brown and John P. Newell are predicting that GTA: San Andreas, Halo 2, Gran Turismo 4, and Metal Gear Solid 3 will lead a pack of solid sellers (including Doom 3, Half-Life 2, and Metroid Prime 2) toward unmatched sales and revenue figures. With a flourish, he is calling this group of sales leaders "Murderer's Row."

"The question," the analysts continue, "is what impact will Murderer's Row have on the many, many other games that are scheduled to be released this fall? ... Are there any other games out there that can survive Murderer's Row?"

One company that is implied to be in position to endure some pain is Electronic Arts. Looking back, EA owned a 24 percent market share of the holiday 2003 sales, according to BSA. This year, the scenario looks less cheery. "Competition will provide a challenge for EA to repeat its dominance," say the analysts. "We expect EA to lose 2 to 4 percent of its console market share in the fall of 2004." On the brighter side (for EA) is the analysts' prediction that its PC business will likely be "meaningfully higher," led by The Sims 2.0 and The Lord of the Rings: The Battle for Middle-earth.

Cooper attached some impressive sales numbers to the games of Murderer's Row. He expects GTA: San Andreas to sail through the 5-million-units-sold mark in the US, but catches himself midstream, saying, "Halo 2 could possibly be the event of the year, with preorders possibly even greater than those for San Andreas."

Implicated as "losers" in the game report are companies including "Acclaim, Midway (except for Mortal Kombat), Atari, Eidos, Vivendi (apart from Half-Life 2, if it is released) and even Microsoft (except for Halo 2)." Companies with "well-known brands," which include Activision (Call of Duty, Tony Hawk, Doom 3) and THQ (WWE, The Incredibles, SpongeBob), "should be able to withstand the onslaught of Murderer's Row."

A number of other key findings include Cooper's prediction that Def Jam: Fight for New York "represents the future for this genre" and that the game's "more developed story, licensed music and characters, and enhanced gameplay (not to mention some serious advertising from EA) should lead to very strong sales."

In the sports genre, the analysts see "several major risks" associated with the ESPN 2K5 $19.99 price point. It may "convey a message of a lower-quality product" and that there is "no turning back to a $49.99 price point (or $39.99 or $29.99 for that matter) after this year." Cooper says that "if this new strategy does not work, Sega and Take-Two may be out of the sports games business for good given all the gross profit dollars the company is leaving on the table with such a low price point."

Still, Cooper thought the ESPN-branded football game from developers Visual Concepts might "double or even triple the 400,000 units that last year’s edition has sold to date."

On the hardware front, the analysts continue to play up the drama, calling 2005 the "Year of the Handheld." And in spite of many unknowns (price, release date, software price point), the analysts expect "solid growth in 2005" for the sector. They acknowledge the "raucous reception" the DS came in for at E3 but question whether the devise is bound for greatness once released.

Ultimately the handheld sector is turning into a horse race. "Every attempt to dislodge Nintendo’s near-monopoly status in the video game industry has been met with failure," Cooper says, "but this attempt will be made by Sony, the current goliath of console gaming." If the PSP battery can hold sufficiently to provide a nominal number of hours for gameplay and movie watching, and if the price tag doesn’t push consumers' comfort zone, Sony has a chance.

Bottom line: Hold on to your hats over the next six months. "This fall’s lineup could prove to be the largest and most competitive in the 30-year history of the video game industry."