Analyst: Game industry to shrink in 2006

Wedbush Morgan's Michael Pachter revises projections, expects a transitional slump before pronounced growth in 2007 and 2008.


It's barely a month into 2006 and clouds are already gathering in the gaming industry's financial forecast for the year.

In a note to investors titled "Flirting with Disaster: The Prequel," Wedbush Morgan Securities analyst Michael Pachter revised his projections for the gaming industry's next three years, saying the firm's previous projection of steady growth is out the window. Instead, Pachter expects combined software sales for the US and Europe to decline 3 percent over the course of 2006 as a result of the market's transition to next-generation consoles.

Pachter notes that during the three-month period leading up to the heavily anticipated November 22 Xbox 360 launch, console and PC software sales in the US were down 21.6 percent. Believing that consumers were holding off on making current-generation purchases in favor of waiting for next-gen products, Pachter thinks it's a trend that could repeat itself, specifically when Sony announces a launch date for the PlayStation 3. Currently Pachter expects that system to arrive in October, meaning the industry's transitional slump could last until late 2006. Pachter didn't pin a date on the Revolution's launch, but did say its 2006 software sales were expected to be about the same as the PS3's, so he still expects it this year.

However, the good news is that once the Xbox 360, PS3, and Revolution have established their user bases, Pachter expects pronounced growth in 2007 and 2008, so much so that the industry will end the next three years up almost 32 percent. That was above his previous predictions of a 29 percent increase from 2005 to 2008.

Gamers can also expect another round of price cuts, according to Pachter's note. He projected 2006 price drops for the redesigned PlayStation 2 (with $129 and $99 floated as two possible price points) and the Game Boy Advance SP (from $79 to $59). Pachter said the Sony PSP and Nintendo DS should also fall in price, although he gave no projection as to how substantial those cuts would be.

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