Analyst: 360 to maintain lead, PSP to pull ahead

UBS's Mike Wallace thinks Microsoft and Sony will win the next-gen console and handheld wars, predicts 3 percent spike in 2006 software sales.

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Citing the start of the next-generation console transition and the lack of a Halo 2 or San Andreas-level blockbuster, many analysts predicted game sales would shrink in 2005. And while US retailers sold $10.5 billion of combined gaming hardware and software--6 percent higher than in 2004--taken alone, software revenue did slide 3 percent, from $6.25 billion to $6.06 billion.

Now, more and more analysts are beginning to predict what 2006 has in store for the game market. The latest expert to join the chorus is Mike Wallace, the lead game analyst at the Wall Street investment firm UBS. "We expect US software sales to grow 3 percent in 2006 (up from a 3 percent sales decline in 2005)," he said in his most recent report. "This is up from our prior view of flat sales in 2006, with the year-over-year increase mainly due to 2005 being weaker than expected."

Wallace believes the increase will be fueled by the debut of the second and third next-generation consoles. "The launch of Sony's PlayStation 3 console later this year, along with the launch of Nintendo's Revolution console, should represent the official start of the new cycle," he said. He also agreed that the PS3 will miss its previously announced spring launch window and will go on sale across the Pacific first. "We think a summer launch [in Japan] is more likely, with the US and Europe launches still expected in Q4," he said.

As for which console will win the first round of the next-gen war, Wallace thinks that Microsoft's decision to launch first will pay off. "We are projecting meaningful sales of Microsoft's Xbox 360 (4 million units) in the U.S. this year," he said, going on to forecast that the PS3 and Revolution will sell around 1 million units each by the end of the year.

By contrast, the Xbox 360 sold only 607,000 units by the end of December 2005, thanks to widespread shortages. That said, Wallace predicts that the current drought in supply of the console will end in the spring. "Xbox 360 hardware supply continues to be constrained, which will probably hurt industry sales over the next few months," he said. "However, this situation should improve throughout the course of the year, as Microsoft works out its manufacturing issues with the console."

Looking farther ahead to 2007, Wallace believes the 360 will maintain a sizable lead over its rivals. "We are projecting the Xbox 360 and PS3 console installed bases to exceed 10 million units and 7 million units in the US that year, respectively, while the Revolution installed base should surpass 3 million units." He also said that a slowdown in PlayStation 2 sales will be somewhat ameliorated by a price drop from $149 to $99, most likely around E3 in mid-May.

As for other platforms, Wallace believes Sony will also cut the price of the PSP--a move that will lead it to pull ahead of the DS in overall sales. "The next-generation handheld installed base should also start to represent sizable numbers in 2007, as we expect the PSP and DS installed bases to reach 15 million units and 10 million units that year, respectively." However, Wallace stated that Nintendo's Game Boy Advance will give it an edge in the overall handheld market in 2006, saying "ongoing sales of GBA should be driven mainly by the continued popularity of the Game Boy Micro."

Peering even deeper into his financial crystal ball, Wallace thinks that the game industry will continue to grow at a healthy pace. He predicts that in 2008, the combined installed base of all three next-gen consoles (PS3, Xbox 360, and Revolution) will exceed 38 million units and will climb to a whopping 52 million units in 2009.

As for the portable market, he projects that there will be 34 million next-gen handhelds (that is, the PSP and DS) in gamers' hands by 2008, with the number rising to 43 million the following year. He did not give figures for the Game Boy Advance's installed base in those years.

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