January game sales slumber

Industry research group NPD Funworld has released its January sales figures, and anyone hoping that the industry would be turning the corner after a late-2005 slump was in for a rude awakening.

NPD's January numbers indicate that US console software sales were $357 million, down more than 5 percent from last year's $377 million January take. The number of games sold was actually down 11 percent, but that was partly made up for by a higher average selling price of games.

While their discount-resistant next-generation games might have helped offset slowing sales across the board, the PSP, DS, and Xbox 360 markets aren't growing as fast as they should be, according to Wedbush Morgan analyst Michael Pachter. Pachter specifically includes the portables under his definition of "next generation" in a note to investors analyzing NPD's January numbers. While he says the next-generation systems as a whole aren't ramping up sufficiently fast enough to make up for declining current-generation sales, the Xbox 360 seems to have been particularly disappointing to Pachter.

"It appears that history from 2000 is repeating itself," Pachter said, noting that Microsoft shipped 50,000 fewer Xbox 360s in January than it did in December. "Consumers were sold the promise of an incredible next generation console, the Xbox 360, and while Microsoft indeed delivered an incredible machine, few consumers have thus far been able to actually purchase one."

August 2005 was the last month that saw year-over-year software sales growth in the industry, and even that month's gain (from $337 million in August of 2004 to $338 million) was modest, to say the least. Perhaps underscoring how disappointing the holiday season was, Madden NFL 06, released in August, is still driving industry sales, selling more copies across all platforms than any other game in January.

That's not the only perspective to be gleaned from the top-sellers list. Trailing Madden in the number of copies sold were Need for Speed: Most Wanted, Call of Duty 2, MVP 06 NCAA Baseball, and Star Wars Battlefront 2, in that order. Of that group, MVP 06 was the only title released in January. By contrast, three of last year's best-selling titles for January, Resident Evil 4, Mercenaries, and The Legend of Zelda: The Minish Cap, were released that month.

Pachter's outlook for the near future isn't especially rosy, suggesting that the industry will face double-digit declines in software sales for the first half of the year, and that next-generation sales won't make up for the rapid erosion of current-generation sales until the PlayStation 3 and Revolution are launched. What's more, he suggests that many gaming stocks, which have generally been down of late, are still overvalued.

"We do not believe that investors have appropriately considered the risk of the console transition with share price stubbornness indicating to us that most investors think that the transition is behind us," Pachter told investors. "In contrast, we think that the transition has only just begun and believe that the worst of the transition lies ahead. We think that as the industry racks up double-digit monthly percentage declines for software sales, many investors may begin to question the health of video game publishers, and may begin to question whether these stocks make sound investments."

Pachter wasn't the only analyst to weigh in on the numbers with a note to investors. Michael Wallace and Stephen Tam with UBS Securities also predicted a tough start to the year as the generational transition continues to impact sales, though they predict a slightly cheerier longer-term outlook, with an expected 3 percent growth in software sales for the year. Meanwhile, FBR Research's Shawn Milne said he expected the interactive entertainment sector to bottom in the first half of the year, and noted that rapidly declining sales of PlayStation 2 hardware (down 45 percent last month compared to January 2005) raises the possibility of a spring price cut for the system.