Industry analysts expect strong holiday season

Game industry analyst Colin Sebastian from Schwab Soundview released a midsummer outlook for the rest of the calendar year today. Although publishers remain guardedly optimistic about their holiday lineups, Sebastian expects a strong holiday season and overall growth of 5 to 10 percent--possibly more--for the industry in 2004.

According to the report, many game publishers are cautious about their expectations for the 2004 holiday season because of a generally strong lineup and stiff competition all around. They do not want to see a repeat of the 2002 holiday season, when, besides the phenomenal success of Grand Theft Auto: Vice City, overly optimistic expectations were undermined by poor sales as well as what Sebastian called "lower quality titles." Even so, the report puts Electronic Arts and Activision in the top positions, with games such as The Sims 2 and Doom 3, respectively, driving sales.

On the other hand, retailers are upbeat about the holidays this year. Sebastian's forecast notes that heavy-hitting games, most notably Halo 2, Grand Theft Auto: San Andreas, and Gran Turismo 4, are on track for release before the end of the year. Addressing one of those titles, Sebastian said that "GTA San Andreas is bigger and better than the last version of the Grand Theft Auto franchise." Furthermore, imminent game releases, such as Doom 3 and Half-Life 2, should hold strong sales through the fourth quarter. Recent price reductions on the major consoles should also help hardware sales, especially if Microsoft or Sony were to release new holiday software/hardware bundles, the report states.

Sebastian sees premium pricing ($49) for games remaining intact, which will contribute to the 5 to 10 percent growth forecast for the industry. Analyst Tony Gikas at Piper Jaffry echoes Sebastian's statement. In a recent study, the Piper Jaffry analyst determined that game pricing "remains stable and competitive," with most retailers, including those online, barely differing in their pricing, and some aging games, such as 2003's Need for Speed Underground, still tenaciously holding at $49.99.

Sebastian expects that most top-tier games will continue to launch at that $50 price point, but both analyst groups expect overall prices to decline as the current consoles peak this year and decline into the next generation in 2005-2006.

In addition, Sebastian maintains that Electronic Arts and Activision are smart investments. "We continue to recommend ERTS and ATVI as these publishers are not expensive compared to historical valuation ranges, and the companies are positioned to gain market share in the transition period."

But as strong as he sees the back half of '04 being--calling 2004 "the peak year for current generation software sales"--Sebastian sees choppy waters ahead, predicting "flattish industry sales next year marking the onset of the console transition period."