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Video Game Industry Braces for Ugly Earnings Season

The third quarter of 2009 was a fairly horrendous one for the video game industry as year-over-year sales plummeted amid a lack of "must have" games. Now, as earnings season draws near, game makers are about to face the consequences.

Madden 2010
Source: EA
Madden 2010

The recession, of course, shoulders part of the blame for the bad quarter, but as the industry tracks toward its first year-over-year sales decline since 2002, other reasons for the slump are becoming clearer.

Some are pretty obvious. Last year saw a strong slate of games that resonated with audiences, including "Wii Fit" and "Grand Theft Auto IV," so the comparisons were tough to begin with. Delays among some of this year’s big games haven’t helped either.

But it’s the system that caused the boom in video games—the Nintendo Wii—that is also causing some of the current agita. Nintendo's gaming dynamo was largely responsible for the industry’s big gains last year, both in hardware and software sales. But after an astonishing run at retail, the magic has seemingly worn off. That has hurt the industry numbers on the whole.

You can’t pin poor earnings on Nintendo, though. Very few publishers have been able to capitalize on the Wii’s popularity. Electronic Arts found a bit of gold with its “EA Sports Active” title and Ubisoft has a moderate hit in its “Raving Rabbids” franchise, but few others have really made a dent.

The suffering music genre plays a bigger role on the bottom line of companies like EA and Activision. Though titles like “Guitar Hero” and “Rock Band” account for 9 percent of the industry’s software sales year-to-date, they are behind 2008’s pace by 40 percent.

“The genre is past its prime,” says Broadpoint.AmTech analyst Ben Schachter.

Activision bears the brunt of this slowdown—and it may feel further pain. “DJ Hero,” the company’s effort to expand the genre beyond the world of plastic guitars and drum sets, is only seeing modest sell-through at retail. Its high price point (suggested retail is $120) is proving a tough pill for consumers to swallow.

What Analysts Expect This Week

Near-term sales data isn’t expected to cheer up investors. After year-over-year drops of 29 percent and 16 percent in July and August, the video game industry eked out a 1 percent gain in September—but analysts are calling for a double-digit decline again for October.

November should be strong, with Activision’s “Modern Warfare 2” and Ubisoft’s “Assassin’s Creed 2” leading the pack—with that surge extending into December.

As for earnings this week, here’s what analysts are expecting:

Activision (reports Thurs. Nov 5)—Analysts are looking for the publisher to report results that are in-line with expectations. And despite the gloomy overall state of gaming, they do not expect Activision to change its full-year guidance, thanks to the excitement surrounding the upcoming “Modern Warfare 2”

THQ (reports Wed. Nov 4)—The publisher had no major releases in the July-Sept. quarter, so catalog sales will drive the numbers. Generally, analysts are looking for THQ to come in slightly below consensus, with revenue likely in the $94-$95 million range and earnings between $(0.46) and $(0.49). No analyst sees upside for the stock this year, but many are hopeful for next year.

Ubisoft(reports Wed. Nov 4)—Broadpoint.AmTech’s Schachter expects revenue to be down 53 percent year-over-year and down 1 percent quarter-over-quarter for the French publisher. There’s optimism for the company’s “Assassin’s Creed 2,” but it also bet heavily on the gaming tie-in to “James Cameron’s Avatar,” which has not collected noticeable buzz to date.

Electronic Arts(reports Mon. Nov. 9)—Both Schachter and Lazard Capital Markets’ Colin Sebastian raise the red flag for possible further restructuring at the one-time leader of the gaming pack. It’s also possible the company could lower guidance for FY 2010, given disappointing sales of “Madden” and “Need for Speed”. (Consensus is currently $0.90 vs. the company’s guidance of $1.00.)

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