Analyst: Price Cuts To Drive Hardware Demand In 2009

Alongside the recession, the video game industry has steadfastly posted gains. Hardware growth in January was significant, according to NPD results -- a 17 percent boost alongside a more modest 10 percent growth in software. Analysts say that a widening hardware install base is the strongest sign yet of a healthy industry -- and yet game stocks continue to languish, driving exceptionally risk-conscious behavior and wide-ranging layoffs at major publishers. Why? Wedbush Morgan's Michael Pachter says that investors are cautious because Electronic Arts, Activision, THQ, Ubisoft and Nintendo all posted financial results below expectations, worrying investors even if industry fundamentals seem strong. "We think that hardware sales should be viewed as a leading indicator of consumer demand for video game software," Pachter says. "Next generation hardware sales were solid in January, signaling that the video game consumer has yet to be impacted by the recession." As long as Nintendo keeps boosting the amount of Wii supply in the pipeline, hardware sales will continue to show year over year increases into the first half of 2009, the analyst says. "In the second half of the year, we expect Sony to cut price for the PS3, and if the cut is deep enough, we expect Microsoft to respond (either with bundles or with a price cut of its own)," Pachter suggests. "If we’re right, hardware demand will remain strong all year, and investors should consider hardware demand a signal that the video game industry is resisting the effects of a recession."