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For Video Game Makers, Bad News Could Mean Changes

Chris Morris, Special to CNBC.com
Thursday, 9 Sep 2010 | 10:23 AM ET

Video game publishers aren’t fooling themselves. They know August is going to be the latest in a string of awful months for the industry.

Madden 2010
Source: EA
Madden 2010

Sales numbers will be released roughly two hours after the market closes Thursday – and they’re expected to be grim. Michael Pachter, managing director of Wedbush Securities, predicts software sales will drop 6 percent compared to 2009 to $445 million. Colin Sebastian of Lazard Capital Markets is expecting things to be even worse - forecasting a 10-15 percent decline.

Hardware sales, while seen as a less important indicator of the industry’s overall health, will likely be higher, however, driven by increased demand for the Xbox 360.

Electronic Arts’ “Madden NFL 11” is likely to lead the pack, with Take-Two Interactive Software’s “Mafia II” possibly having a decent showing as well. Otherwise, sales of titles released in previous months are expected to fill out the charts. One likely winner—the year’s surprise smash “Red Dead Redemption.”

Investors will be looking closely at the “Madden” numbers, though. The franchise, which is responsible for as much as 10 percent of EA’s annual revenues, has been showing signs of weakness in recent years. The company hopes a revamp in this year’s edition will begin to turn things around.

Year to date, only two months in 2010 have outperformed 2009’s sales. (At present, the industry overall is 8 percent behind last year’s pace, with software sales down 13 percent.)

That’s despite the fact that sales last year were lower than 2008—the first time that has happened since 2002. The video game industry has never had two consecutive years of lower sales, though many industry observers fear that will be the case this year.

While few hold out much hope for August, September is expected to bring the industry back to positive territory, with Microsoft’s “Halo: Reach” a safe bet to hit blockbuster status. The release of Sony’s PlayStation Move motion controller could give the PS3 and its titles a bump as well.

There’s no major imminent launch for Nintendo , though. Late next month, the company is expected to unveil the on-sale date for its 3DS, a handheld gaming system that projects stereoscopic 3D images without the need for special glasses. Most analysts think that will be early next year in the United States.

Unfortunately for publishers, many investors look to the Wii for guidance on the video game industry and the lack of immediate growth there could affect shares across the sector.

“We think that software sales for the Wii will be down 30 percent year-over-year, driving most of the decline,” says Pachter. “Investors are likely to remain skeptical about the health of the software industry so long as Wii software sales continue to comp negatively.”

The heavy focus by publishers on the Xbox 360 and PlayStation 3 for holiday titles could turn investor heads, though, he acknowledges.

While these monthly sales figures from The NPD Group are seen as the barometer of industry health by investors, they are incomplete and do not include PC data.

That’s normally not a significant issue, but, as it was in July, it could be a factor to keep in mind once again this month. “Starcraft II: Wings of Liberty,” a PC exclusive from Activision-Blizzard, may well have outsold all console titles once again last month.

As of Sept. 1, the company reports the game has sold 3 million copies worldwide. That puts it pretty much on par with “Red Dead Redemption” which, so far, is the console world’s best selling game of 2010.

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