Analyst: Summer Declines Could Be More Than Just Tough Comparisons

The industry's blamed tough year-over-year comparisons for several straight months of worse-than-expected NPD declines, but Cowen Group analyst Doug Creutz is concerned it may be more than that. The industry is taking a hit from revenue comparisons to the period which, last year, saw the release of record-breaking blockbusters like Grand Theft Auto IV, Super Smash Bros. Brawl. However, it may be that the industry's finally starting to see the repercussions of a belt-tightening consumer. Overall 2009 is down only 12 percent from the same time in 2008. But June saw the biggest gap yet, with software down 29 percent year over year for a total 31 percent tumble to $1.17 billion, including hardware. "Although the month featured challenging new release comps, we are concerned that the weakness may also reflect increasing pressure on the consumer, particularly given the recent negative pre-announcement by Take-Two," says Creutz. Worries About Major Publishers Take-Two recently lowered its estimates not to reflect its delay of BioShock 2 into fiscal 2010, but also made note of worries about the economy, pointing out hesitant initial sell-in from retailers and lagging catalog sales. The analyst is also slightly concerned about Electronic Arts. Though he says the publisher's Fall portfolio is "stacked" and likely to perform well, he calls the publisher's strategic, increasing focus on the Wii platform "particularly concerning", making him less confident about the publisher's next year than he is about the present one. Why? Because Creutz sees Wii software growth hitting a downturn, and says sales of the hardware are "collapsing." And if there is economic pressure on the industry, this segment will be hardest-hit: "We believe the casual gamer is the one most likely to pull back in an increasingly pressured consumer environment," he says. Another Poor Season For EA's Core Porfolio? He also fears the packed holiday release slate will damage EA in the same fashion it did last year, when its portfolio for the period couldn't compete with the stiff competition. This year, EA will have the Call of Duty, Guitar Hero, Assassin's Creed, Mario Bros and Halo franchises to contend with, and may get "squeezed out." "Looking at EA’s release slate for the remainder of the year, we see very few titles (aside from EA’s venerable sports franchises NCAA Football, Madden NFL, and FIFA) that appear to us to fall in that top tier," he said. "Titles such as Saboteur, Need for Speed, Dead Space Extraction, and Army of Two appear to us to be more likely to duplicate the disappointing performance of EA’s core gamer lineup from last year, particularly in an environment of increasingly discriminating consumer spending." Activision Not Immune, Either Even though Creutz, like many other analysts, is counting on Call of Duty: Modern Warfare 2 to be the number-one title of the Holiday season, Creutz is dialing back his forecast for Activision, too. Not only is he counting on underperformance in retail in general, but he's assuming delays: Activision has already moved Singularity out of 2009, but Creutz expects to see StarCraft 2 and Guitar Hero: Van Halen get the bump, too. "Neither title was ever officially confirmed for 2009 and we think it is prudent at this point to assume they are shipping in 2010," says Creutz. Only THQ gets a slight upgrade in its fiscal year estimates from Creutz, thanks entirely to UFC Undisputed 2009's "stellar" retail performance continuing to defy expectations, enough to offset any negative impact from the economy. We Aren't Out Of The Woods Overall, Creutz no longer believes the industry will post growth in 2009 when all is said and done. Having planned on a 3.5 percent increase year-over-year, the analyst now says growth is expected to be flat. "We are becoming more concerned that rising pressure on consumer spending due to increasing unemployment, negative wealth effects, and contracting credit may be impacting video game spending in an increasingly meaningful way," says Creutz. "Although we have always viewed video game spending as one of the consumer areas likely to hold up the best in a recession, due to video gaming’s excellent price/value proposition, the current recession is clearly worse than any in the history of the industry." Positive trends are expected to return in the next couple of months, he concludes, but not right away -- he estimates July will be down 20-25 percent, and August down 10-20 percent.