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Video Games May Test ‘Recession Resistant’ Label

Investors in the video game sector might want to brace themselves. The coming months may be a little hairier than expected.

Wii
AP
Wii

It all started when March sales of video game hardware, software and accessories came in 17- percent lower than the same month a year earlier. The April numbers could be even worse.

The economy’s not entirely to blame here – it’s just as much the fault of a blockbuster 2008. Last March saw the release of Nintendo's "Super Smash Bros. Brawl," which ended up becoming one of the year's best-selling games. And Take Two Interactive Softwarereleased “Grand Theft Auto 4” in April, which doesn’t bode well for next month’s comparisons.

While March sales were down more than many analysts were predicting, some industry observers say what we’re seeing is just the normal course of the industry’s evolutionary cycle.

“A slowdown at this point is kind of expected,” says Billy Pidgeon, an analyst with Game Changer Research. “We’re starting to see some saturation among the enthusiast/hardcore population. At this point what needs to happen to provide a boost are some aggressive price cuts and blockbuster titles.”

We’ll likely get more insight about both price cuts and holiday titles in about a month, when the industry gathers for its annual trade show. Sony is widely expected to lower the price of the PlayStation 3 – and if it fails to by June, analysts are confident it will do so before the fourth quarter. Microsoft cut Xbox 360 prices last year and isn’t widely expected to do so again this year, though it will likely continue to bundle hot games with systems through 2009.

Video games are typically one of the safe havens for investors in economic downturns. The industry, though, is hardly “recession proof”, as many have called it. Recession resistant, perhaps, but it’s not immune to reduced spending.

While analysts are universally optimistic about the sector, there are some wild cards in the months ahead that could make the difference between a flat 2009 and a positive year.

The gaming industry was revitalized with the introduction of the Nintendo Wii, as lapsed gamers and people who were never interested in the space suddenly found themselves clamoring for both hardware and games to play on the system.

Software purchases in March, though, were flat—even when you take “Super Smash Brothers” out of the equation. This raises the question of whether the casual gamer is now buying fewer games overall—or is simply waiting for the next big thing.

“It’s possible the recession is hitting the Wii households,” says Michael Pachter, senior vice president of research for Wedbush Morgan Securities. “They may be saying we’re now only buying games as gifts, maybe around the holidays, instead of all the time. If they’re buying less software overall, that’s a problem.”

The true test will come with the June release of Wii Motion Plus, an accessory that will increase the accuracy of the Wii controller. Several games that use the enhanced technology will also be introduced at the launch.

“I think Wii Motion Plus is really going to drive a lot of sales,” says Pachter

Price points are another area to watch. While hardware price cuts may be necessary to bring in new buyers, they will impact earnings, which would rub off on stock prices. For third-party publishers, software prices on stand-alone games are likely to hold steady, but some of the specialty titles that boosted 2008 revenues are at risk.

Playing Guitar Hero
Fiskfisk
Playing Guitar Hero

The music genre, for instance, isn’t the powerhouse it was a year ago, which could have implications for Activisionand its “Guitar Hero” franchise. Electronic Arts could suffer as wel,l if “The Beatles: Rock Band” proves to be too pricey for the mass market. (Both “Guitar Hero: World Tour” and “Rock Band 2” currently charge $190 for bundles that include the game and instruments. The premium bundle for “The Beatles: Rock Band” will cost $249.)

Even Nintendo could see some pricing impact, as “Wii Fit,” which the company couldn’t keep in stock last year, reaches a saturation point and its $90 price becomes vulnerabe to discouting.

Of course, the biggest wild card will be the games themselves. While the annual titles – such as EA’s “Madden” – are known quantities, industry watchers don’t yet have a lot of insight into what publishers are planning to release during the holiday season. A handful of smash games could save the year.

“What I’m looking for at the end of the third quarter is a lot of momentum,” says Pidgeon. “I think we’ll see a lot of business pick up in the late third quarter, going into the fourth quarter – and I think that’s going to come from blockbusters.”