Analysts: Recession can't keep game industry down

Pachter, Divnich, and Schacter say strong software sales indicate games will continue double-digit growth in 2008, February continues to ride holiday 2007 storm.

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Yesterday, the NPD Group issued its monthly report on the gaming industry's cumulative performance in the US. Shocking to those who followed analysts' predictions of 20 to 34 percent software growth from the day before, publishers raked in software sales of nearly $669 million in February, amounting to a 47 percent spike compared to the same period last year. On the whole, the industry grew by 34 percent to $1.33 billion in hardware, software, and accessory sales, with the top five products for the month being Call of Duty 4 (Xbox 360, 296,000 units), Devil May Cry 4 (360, 295,000), Wii Play with Remote (Wii, 289,000), Devil May Cry 4 (PlayStation 3, 234,000), and Guitar Hero III (Wii, 223,000).

Today, several industry analysts issued their mea culpa for dramatically understating software growth, and offered some insight on how the rest of the year will play out with respect to the gaming industry's extremely positive performance in February. According to UBS Investment Research analyst Benjamin Schachter, the industry is still basking in the holiday 2007 lineup.

"While new releases during the month, such as Devil May Cry 4 (Capcom, 529,000 units across two platforms) and Xbox 360 exclusive Lost Odyssey (Microsoft, 204,000 units) sold well," noted Schacter, continuing, "overall software dollar growth continues to driven primarily by the big hits from the 2007 holiday, including Call of Duty 4, Guitar Hero 3, and a nice showing from Rock Band (in terms of dollars, Rock Band on the Xbox 360 was the number one title, a milestone for this franchise). In fact, 7 of the top 10 selling games in terms of dollars were released in calendar year 2007."

With Microsoft touting the fact that it captured 39 percent of "this generation's ecosystem," despite selling the lowest number of consoles for the month, analyst Jesse Divnich of prediction market the simExchange pointed out that the publisher's lead in tie-ratio is correlated to a game's online component.

"We originally projected that the software ratio between the Xbox 360 and the PS3 version of Devil May Cry 4 (DMC4) would be 1.61-to-1 in favor of the Xbox 360," observed Divnich. "We considered that ratio to be proof of a closing gap between the sales ratio of Xbox 360 to PS3 games sold for multi-platform titles. Actual results were much better than expected with a sales ratio of only 1.26-to-1 in favor of the Xbox 360. These results reiterate our original interpretation of the prediction market that DMC4 was likely a hardware driver for the PS3 in February."

The prediction market also believes Mario will score a headshot on Call of Duty 4 in March, with Super Smash Bros. Brawl expected to bump Infinity Ward's shooter out of the top slot after four straight months of dominance.

Both Divnich and Wedbush Morgan Securities analyst Michael Pachter noted that February's tally further reiterated the point that the gaming industry is poised to continue to thrive, despite a flagging US economy. "Many economists warned that the United States economy is currently in a recession or on the verge of one," noted Divnich. Irrespective to that, the video game industry continues to post record growth and although no leisure/entertainment sector can be considered 'recession proof,' the video game industry continues to prove to be one of the very few industries to have the least elasticity to the current economic environment."

Agreeing, Pachter noted, "The sales figures reflected dramatic growth in unit volumes year-over-year, suggesting that sales are widespread and that the video game industry is resisting the onslaught of a recession." Pachter attributed the industry's 47 percent spike to average sale price, which stood at $39.46 for the month, a 20 percent year over year rise. The prolific analyst also noted that 19 games sold more than 100,000 units in February, up from 10 last year.

Looking ahead, Pachter believes February serves as a good indication for what is in store for the industry in the coming months. "We expect industry sales to be strong for the next several months, with a strong release schedule early in the year allowing sustainable double-digit sales growth," he said. "We currently forecast full year growth of 19 percent, but think our estimate may be conservative."

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