Wedbush Morgan Weighs In On E3 Performance

In a research note sent out immediately following last week's E3 Expo in Los Angeles, Michael Pachter and his team at financial analysis firm Wedbush Morgan have weighed in on the state of the industry, noting that, as the next-gen battle intensifies, the situation is far from clear. The note's conclusion starts: "We think that the transition has begun, but believe that it is far from over. E3 was a hardware show this year, and early impressions of Nintendo’s Wii controller are likely to cause even more confusion among investors, as it is not yet clear whether any of the U.S. publishers are well-positioned to benefit from robust Wii sales." It continues: "Sony and Microsoft each fired cannon shots across the other’s respective decks, with each posturing its console as the most technologically advanced. In our view, the two consoles are indistinguishable from one another, save for Microsoft’s vastly superior online offering and for Sony’s likely industry dominant Blu-ray high definition DVD player. In the final analysis, the outcome of the hardware wars will hang on whether the movie studios embrace Blu-ray as the de facto movie standard. If so, perhaps the $100 – 200 higher price will be a bargain; if not, Microsoft should win the console wars without shedding a drop of blood." The note also particularly pointed out online-related issues, commenting: "We think that Microsoft has at least a three-year head start online, and if the market materializes as the company predicts, Sony has a steep uphill climb. We continue to believe that online gaming is important to only around 20% of the console market, so while online dominance is a nice advantage, it is likely not insurmountable." Wedbush Morgan's analysts preferred to demur when it came to singling out particular sales highlights for E3 2006, commenting: "The software shown at E3 was not sufficiently advanced to allow us to determine winners and losers. Other than Wii games, we saw little that impressed us beyond stunning graphics. A few of the PC games were really interesting, in particular Spore, but the Xbox 360 and PS3 games on display looked like high definition versions of console games released over the last two years. We expect further innovation in the next year, especially once publishers receive [more/final] development kits for the PS3, but this year’s software offering was underwhelming." Overall, the note ended on a down note for current video game publishers, commenting: "On balance, we think that publisher stocks will continue to be weak until there is greater visibility into the cost of development for next generation platforms. We think that investors remain skeptical about the potential for operating margin expansion in the next cycle given the large investment required to participate, and think that the potential for expansion into online, casual and mobile phone games adds to uncertainty."