Analyst: Negative growth in '05 a possibility

360 launch--and subsequent shortages--not enough to turn tide as one analyst sees the potential for negative growth this year.


Wedbush Morgan senior analyst Michael Pachter wasted no time in alerting the industry to his outlook of the remaining 39 days of 2005.

"Recent lower than expected reviews of key holiday releases, a supply shortage of Xbox 360 units, price cuts on several new games, the lack of a price cut on current generation hardware, and a weak consumer environment leaves us questioning whether sales will rebound sufficiently to drive growth for the full year," Pachter wrote in a memo to investors today.

This on the heels of the high drama surrounding the launch of the Xbox 360. Talk about popping the collective game industry's bubble.

Earlier in the year, Pachter was the company of analysts who saw year-on-year revenue growth that hovered somewhere around 10 percent. Then last month, he bumped that growth estimate to positive 6 percent. But now, given Pachter's latest round of number crunching, growth of any kind may be in jeopardy.

"Total US video game software sales year-to-date are down 2 percent compared to last year," Pachter stated, "and significantly lower than our up 6 percent estimate."

Drilling down to the company-by-company forecast, the analyst said he did not see "significant risk" of preannouncement or weaker-than-expected results for the publishers his firm covers. However, he did reiterate that even on this granular level, "we are no longer confident that we will see significant upside to results."

Bullet-pointing his assessment, Pachter sees the following four major influences that are turning the retail skies bleak: the early discounting of software prices at retail (which indicates softer demand on the part of buyers); a "pattern of lackluster reviews" for games he had thought would have netted better review scores; the no-show price cut for the PS2--something Pachter had anticipated; and his new, reworked estimate for Xbox 360s he sees Microsoft getting to market. Pachter is now forecasting only 1 million units reaching the channel before the end of the year, down from previous estimates of 1.5 million.

"This [Xbox 360] shortfall alone could cause a shift in holiday software sales from positive to negative territory."

In conclusion, Pachter said he saw little likelihood of a positive catalyst significantly impacting the industry's cash flow over the next five weeks. Any light at the end of the tunnel, according to Pachter, burns with the intensity of a single match, if even that.

An opportunity he does address is one that may appear should the share price of game stocks go even lower than they are now. "We would opportunistically add to positions in Activision, Atari, Electronic Arts, GameStop, and THQ," he said. "Particularly should any of these five stocks decline in value before year-end."

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