Analysts react to February figures

Industry watchers weigh in on which numbers are actually important from the latest peek at an industry in transition.

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Industry-tracking group NPD Funworld released its February US sales figures on Friday, and the general results were more or less as expected. Unable to compete with a February 2005 that saw continued strong sales of Grand Theft Auto: San Andreas, Halo 2, and Resident Evil 4, last month's game software sales dropped 13 percent from the year before. A handful of industry analysts provided their takes on the numbers in notes to investors today.

Friedman Billings Ramsey analyst Shawn Milne pointed to Electronic Arts' performance in the quarter as particularly strong, noting that the company produced four of the five best-selling games of the month (Fight Night Round 3, Need for Speed Most Wanted, Madden NFL 06, and NBA Live 06), and was one of the few publishers to match its sales from the year before. Milne also noted that EA commanded a larger slice of the pie with a 24.7 percent market share during the month, up from 21.4 percent a year ago.

Michael Wallace with UBS Securities addressed the possible arrival of PlayStation 3 details this week as being particularly significant as to where the industry goes from here.

"We think confirmation of the PS3 shipping this year will help the game stocks while a delay into 2007 could lead to the game stocks testing bottoms, which could provide some good buying opportunities," Wallace wrote.

He also noted rapidly declining software sales for current-generation systems, with Xbox games dropping 39 percent, PlayStation 2 titles falling 33 percent, and GameCube software down 31 percent. The Game Boy Advance was the worst hit of the bunch, seeing a 44 percent drop in game sales from the previous year. Only the DS sold more games this February than last. Its numbers jumped 126 percent.

Webdbush Morgan Securities analyst Michael Pachter told investors that the sales declines should stabilize as the Xbox 360 supply catches up to demand (he expects the system to be "widely available" in April), but he thinks the six-month slide of game sales is going to continue.

"We think that March poses a particularly difficult comparison of +31 percent last year, when the PSP launched in the US. We think that March sales will be down at least 20 percent or more this year, bringing year-to-date software sales down at least 14 percent."

As bad as the industry might look to investors right now, Pachter thinks it's going to get worse before it gets better.

"We think that the transition has only just begun, and believe that the worst effects of the transition lie ahead. We think that as monthly software sales decline by double digits over the next few months, many investors may begin to question the health of video game publishers, and may begin to question whether these stocks make sound investments."

While Pachter has gone on the record as saying 2007 will be big for the industry "no matter what," he thinks many people have underestimated the transitional woes it will encounter getting there. He added that things should turn around once the Revolution and PS3 are out (which he believes will happen in September), when the game sales of three next-generation systems and the PSP and DS will more than make up for the declining current generation.

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