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Are Weak Madden Sales Signaling Trouble in Gameland?

Try as it might, the video game industry just can’t catch a break this year.

Xbox 360
Source: Microsoft
Xbox 360

Sales are down 8 percent year-to-date from 2009’s disappointing numbers. Even the most optimistic analysts are now saying that the best investors can hope for is a flat year. And this week has brought new signs that could indicate further weakness—specifically for Electronic Arts and game retailer GameStop .

Just one week after its flagship franchise hit the streets, EA is already seeing retailers dramatically discount this year’s installment of “Madden NFL”. Amazon, Wal-Mart and GameStop have all dropped the price from $60 to $50.

One possible way to interpret that is the 2010 version of the game hasn’t been selling at the same pace as the 2009 version (which, incidentally, failed to match the 2008 numbers). That’s troubling, since EA relies heavily on Madden for up to 10 percent of its annual revenues.

Admittedly, there were concerns about this year’s game prior to its launch. Pre-orders were flat and Colin Sebastian, an analyst with Lazard Capital Markets, noted that the 2010 installment was “a ‘show-me’ story … People who are tired of what ‘Madden’ has become are saying ‘I know some of my fiends are going to pick it up and I’ll see what they have to say first.'”

The price cuts could indicate the initial word of mouth was fair to middling. Critics have given the game fairly high marks—Metacritic.com, which compiles game review scores, gave “Madden NFL 11” a ranking of 85 out of 100. User scores on that same site, though, only rank it 5.3 out of 10.

Admittedly, the game has only been out for slightly over a week—and it’s a title that typically has a long tail at retail. It will be November (when EA is next scheduled to report earnings) before we get a solid sales comparison of this year and last year’s “Madden.”

"This is the lowest-ever growth rate we have seen in this category." -Sterne, Agee & Leach, on used video game sales., Arvind Bhatia

It’s also possible these price cuts have little to do with the game’s initial sales and could be the first round in this year’s price wars between the retail giants. During holiday 2009, Amazon and Wal-Mart slugged it out for consumer loyalty, with book and video game prices often at the center of the battle. GameStop, which is typically slower to react to price wars, was ultimately forced to join in the fray.

GameStop’s probably not eager to see another price war this year, but it seems to be anticipating one. In its earnings report Thursday, the company lowered its profit outlook, saying it expects to earn 35 cents to 38 cents a share in the third quarter, down from a prior forecast of 38 cents to 41 cents.

More troubling from the most recent earnings, though, was the underperformance of used game sales. While higher (they climbed 1 percent over a year ago), they fell far short of analyst expectations of a 5 percent jump.

“This is the lowest-ever growth rate we have seen in this category,” said Arvind Bhatia of Sterne, Agee & Leach. “We suspect this reflects the general weakness seen in new software sales and perhaps the impact of various publishers’ initiatives to curtail used sales.”

Used game sales typically make up more than 50 percent of GameStop’s revenues. Because publishers don’t see a dime of income from them, though, they’ve recently been exploring ways to fight back.

Several publishers, including Electronic Arts, Microsoft , Sony and THQ, have changed the way they handle new product sales. Consumers who buy the game new find a one-use code included that unlocks a game’s online multiplayer mode or, sometimes, important levels of the game.

People who purchase a used copy, however, that want access to those elements must pay an additional fee directly to the publisher—usually in the range of $10 (but sometimes as much as $20), which is generally about the same amount they save by buying used.

GameStop, for its part, says it doesn’t think the publisher’s moves have had much of an impact, since only 25 percent of used game buyers bother to play online.

The video game industry is expecting things to pick up in September, with the launch of “Halo: Reach” and Sony’s PlayStation Move controller. Investors will be watching both carefully, though. If either falls far short of expectations, the effect on stocks in the shaky gaming sector could be ugly.