DJ Hero preorders augur weak sales - Analyst

Beyond Call of Duty: Modern Warfare 2, arguably Activision Blizzard's biggest release for the holiday quarter would have been Blizzard Entertainment's Starcraft II. However, in the lead-up to Starcraft II's eventual delay into 2010, analysts and investors skittered away from the publisher's stock, fearing the impact it would have on Activision Blizzard's full-year earnings.

Now, at least one analyst is once again less optimistic about Activision's earning prospects. But the cause has nothing to do with a delay and everything to do with the sales performance of the publisher's flagging rhythm game business. In a note to investors today, Cowen and Company's Doug Creutz reined in Activision Blizzard's estimates, cutting full-year revenue projections by 10.8 percent to $4.49 billion and lowering earnings-per-share guidance to $0.75.

"The largest factor in our estimate reduction is the recognition that the declines in the music genre earlier in the year were not temporary, and are likely to persist going forward," he said. "We have significantly reset our expectations for Activision's various music genre Hero franchises in 2009 and 2010."

Notably, Creutz drastically cut projections for Activision's newest rhythm game franchise, DJ Hero. Having previously expected DJ Hero to sell 1.6 million units through the end of December in the US, Creutz lowered those projections to 616,000 units, a 61 percent drop. Looking at first-year sales, the analyst trimmed expectations from 2.5 million copies to 950,000 of the turntable-equipped rhythm game.

"Despite some recent positive comments from company management about preorders, we remain very cautious about the title's prospects at launch," Creutz said. "A survey of online retailers indicates a demand profile that is well below what we would have expected to see just a few days before launch for a title that was destined to be a big (or even modest) hit."

Speaking with GameSpot, Wedbush Morgan Securities analyst Michael Pachter agreed with Creutz's downsized assessment of DJ Hero sales in the US through December. He also noted that his own projections indicate the game will sell 1.2 million worldwide by the end of the year, though this figure could rise depending on how well Activision markets the game.

Looking at Activision's broader rhythm game portfolio, Creutz scaled back projections by 54 percent, on the weakness of Guitar Hero 5's September launch and Band Hero's expected slow start. According to the NPD Group's September US sales report, Guitar Hero 5 finished behind MTV Games' The Beatles: Rock Band, selling just 499,000 units for the 360, PS3, PlayStation 2, and Wii. Creutz trimmed sales expectations for the game to 1.2 million units through December, a 51 percent cut.

[UPDATE] Electronic Entertainment Design and Research's Jesse Divnich offers a counterpoint to Creutz emphasis on preorder strength auguring total sales. Though the analyst notes that his sales projections are only slightly higher than Creutz's, he told GameSpot that preorder interest can be misleading, due to the game being targeted at a mainstream audience.

"Because the Hero brands target a larger mainstream audience, pre-order extrapolation to sales will always result in a large margin of error," Divnich said. "For a comparison, the Rock Band brand has a larger install base of core gamers, which resulted in 95 percent more pre-orders for Beatles Rock Band over Guitar Hero 5. However, Beatles Rock Band only sold 20 percent more units than Guitar Hero 5 domestically."

Divnich went on to say that DJ Hero preorders are about 35 percent below those of Guitar Hero 5. However, as with Pachter, Divnich believes that DJ Hero's sales success will be reliant on how heavily Activision markets its newest rhythm game franchise.

"You have to look at the American consumer, as a whole; like a child, it's all about instant gratification. And like children, we don't know what we want until someone tells us that we want it. In most cases that means the television. Case in point, The Snuggie was not the first of its kind; it's a design that has been around for years. The Snuggie, however, was the first to create a huge mass-marketing campaign around the product. Sales took off. The people buying The Snuggie are the same type of people buying DJ Hero and Guitar Hero. It's mainstream America."

Developed by FreeStyleGames, DJ Hero will be available later this week for the Xbox 360, PlayStation 3, PlayStation 2, and Wii. For more information, check out GameSpot's previous coverage.