Analyst: Prepare For Sluggish Spring, But No New Consoles Until 2013

Video game investors are bracing for a springtime slump, fearing software sales have hit their peak for the current console cycle -- and looking for new hardware launches. Not so fast, says Wedbush Morgan's Michael Pachter, who says it's largely tough year-over-year comparisons that shoved March NPD 17 percent down the slope -- last March, after all, saw the record-shattering release of Super Smash Bros Brawl. And last April, the industry surged under the might of Grand Theft Auto IV's unprecedented launch, which also drove hardware sales -- so the next NPD could be even tougher. This springtime decline is taking place in year four of our current console cycle -- when, in previous years, software sales generally saw their best performance, and that's part of what's making investors anxious. "We note that video game software sales typically peak in the year prior to the introduction of a new generation console, as many consumers begin to slow purchases in anticipation of purchasing a new console the next year," says Pachter. Ubisoft CEO Yves Guillemot recently warned publishers to start getting ready for the new hardware generation else be left behind, but Pachter believes previous cycles won't repeat themselves -- next year won't be the year this time, in other words. "We do not expect a 'new; console in 2010 (other than the long-rumored high definition Wii, which is likely to upgrade the Wii to current console technology)," he says. "We do not expect the 'next' generation to begin before 2013, if at all. We remain convinced that the publishers will resist the introduction of any video game hardware technology that requires a refresh of software, as the publishers have as yet to capitalize on the immense investments made in being competitive in the current cycle." Assuming the next console generation begins after 2013, Pachter estimates that software sales will keep growing 6-10 percent annually for another five years. And more time means steps along the learning curve for publishers, who'll be able to profit better by flattening R&D costs. "In brief, we think that investors have it wrong so far this cycle, and think that investment in video game publishers will bear fruit for many years," says the analyst. But when investors worry, share prices slacken, and Pachter cautions publishers' shares may stay depressed until the industry starts posting better NPD numbers -- even though most publishers have been setting and meeting guidance for consistent, if modest growth. "Comparisons remain difficult and low single-digit growth is likely through July, but we expect a return to double-digit growth in August," he says. And although it's difficult comparisons to 2008 that challenge March and April, Pachter warns "it would be naive to be pollyannish about the data." "Negative sales can only mean that consumers bought fewer games this year than last, and should the sales weakness continue in April, we expect many to see this as a signal that the recession is upon us," he says. Pachter is confident that the core consumer will keep buying, and more casual games, the introduction of the Wii Motion Plus in June, and the launch of EA Sports Active in May could "bring the Wii customer back to retail stores."