Analysts Anticipate 'Rebound' In October Results

After last month's NPD showed the games biz down six percent, the first decline in over a year, analysts are expecting much better performance for October. Industry watchers anticipate a "rebound" to the tune of 20-25 percent growth. If true, it could come as a game changer to the biz, as recent hesitance from retailers and investors alike has awaited October's sales results as a barometer of industry health in an economic downturn . While solid hardware growth is expected, plus more breathing room in Wii supplies, analysts expect the month's strong software slate to be the major driver of the month's improvement. "We note that the release slate in October was significantly better than last year's," says Wedbush Morgan's Michael Pachter, not surprisingly listing Guitar Hero World Tour, Rock Band 2, Fable 2, Far Cry 2, LittleBigPlanet, Fallout 3 and Saints Row 2 as the major hits. Pachter anticipates about $620 million growth overall for software sales. Conversely, analysts seem to agree that back catalog sales are weak across the board, offsetting the overall growth. Lazard Capital Markets' Colin Sebastian has also observed "mass market" titles weakening alongside catalog titles. EEDAR's Jesse Divnich observes, "In October and early November, we noticed more discounts/sales on video game products, which was likely the result of efforts to remove older back-catalog titles to make room for the increasing amount of new releases this holiday season." In the same vein, Pachter forecasts "signs of greater erosion" for PlayStation 2 games, pegging a 40 percent year-over-year decline for the last-gen system's games in October -- and expects it to continue as major game releases and discounts for PS2 games further decrease sales numbers. Analysts concur that hardware sales for Xbox 360 are likely to show an increase thanks to recent price cuts; Sebastian attended Sony's recent analyst day and came away with optimism toward the PlayStation 3, too. "Each platform remains on track to reach its North America sales targets," he says. "Sony also indicated that third-party development is now ramping for the PSP on the heels of higher unit sell-through trends." "We still do not expect hardware price cuts on the PS3 or PS2 until next year." And although PC software sales are down 21 percent through September, analysts like Wedbush Morgan's Pachter expect that Blizzard's upcoming Wrath of the Lich King expansion for World of Warcraft can single-handedly close the gap by the end of the year. Analysts still remain confident in the video game industry's ability to withstand a recession, but note that the economic weakness, compounded by disappointing results from Electronic Arts and mixed results from Nintendo, have done little to bolster investors' confidence. "We are neither qualified nor prepared to forecast the extent or duration of a recession, but it appears to us that the stock market has concluded that the consumer will abandon games along with all other expensive consumer discretionary products; we think that this logic is flawed," says Wedbush Morgan's Pachter. And although the analyst is encouraged by "extraordinary" software growth for 2008 as a whole, he nonetheless says that the most significant measure of industry health will be in October's hardware results. "We think that hardware sales are a leading indicator of consumer demand," says Pachter. "If hardware sales turn down in October, we will begin to consider that the video game consumer has been impacted by the looming recession." But this is an unlikely outcome, the analyst says, betting increased Wii supplies, Sony's marketing campaign for its PS3-exclusive LittleBigPlanet, and the rollout of Microsoft's New Xbox Experience will drive hardware sales to increase for the year. "If we’re right, investors should consider hardware demand a signal that the video game industry is resisting the effects of a recession," says Pachter.