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Analyst: In Poor Economy, Retailers React, Big Publishers Gain, Smaller Ones Lose
Analyst: In Poor Economy, Retailers React, Big Publishers Gain, Smaller Ones Lose Exclusive
October 27, 2008 | By Leigh Alexander

October 27, 2008 | By Leigh Alexander
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More: Console/PC, Exclusive



Warning signs have appeared to suggest the global economic crisis may impact video games at retail, says Lazard Capital Markets analyst Colin Sebastian, who says he's "cautiously optimistic although sales are a little uneven."

Echoing recent statements by Ubisoft CEO Yves Guillemot, Sebastian agrees retailers are being more cautious about their upfront inventory purchases, relying more heavily on reorders for games that sell well.

The analyst says that in the current climate, launch sales of games are generally strong -- but tend to drop off rapidly. "We interpret this trend to suggest that the core market remains healthy, while more casual/mass market consumers are spending more cautiously or waiting to make purchases closer to the holidays," he says.

This affords greater sales weight to major publishers like Activision, Electronic Arts and Ubisoft, with their seasonal blockbuster-type titles, suggests Sebastian -- to the detriment of the smaller publishers.

"Naturally those titles selling particularly well will receive reorders," he says. "In contrast, there will be incremental pressure on smaller publishers as well as moderate or weaker-selling software."

Additionally, the analyst expects unilateral price cuts across the board from retailers to try and drive traffic to stores.

All told, however, Sebastian remains optimistic about the strength of the video game industry alongside other forms of entertainment media even in an unfavorable economy, noting steady hardware sales despite the fact that game consoles are more expensive than any other products in the sector.

Sony and Microsoft remain on track, the analyst adds, also pointing to Ubisoft's increased guidance at the close of its strong second quarter.

The leading publishers also have plenty of cash on hand: "Electronic Arts has $2.7 billion ($8/share), Activision Blizzard has $3 billion ($2/share), THQ has $282 million ($4/share), Ubisoft has $339 million ($5/share) and Take-Two has $339 million ($4/share)," Sebastian estimates.

A global economic downturn would have hit the games industry much harder either very early or very late in the console lifecycle, Sebastian says, a period where companies must allocate large investments to developing for new hardware platforms.

"Instead, we are midway through the current cycle, and even if the industry feels the consumer pinch, a prolonged economic downturn could ultimately extend the length of the cycle as hardware manufacturers become less inclined to spend heavily on expensive new platform development," he concludes.

Sebastian pegs "must-have" core titles like Gears of War 2, Resistance 2 and Fallout 3 alongside lower-cost back catalog used games and the most popular of the mass market titles -- Wii Fit, Rock Band and Guitar Hero

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Comments


Patrick Dugan
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I'd like to see more data on how new forms of distribution and higher critical premiums on some games are driving those titles' sales performance. Saying that Gears of War 2 is going to do fine isn't that interesting, of course the blockbusters are going to stand out as the pond waters recede. But if you look at how film did in the 30s and 70s you'll see that recessions also encourage more creative successes (I know, it's a cliche'd medium to compare to, but in this financial sense there's a solid correlation) . So, I'd be interested to see how many Braid-type successes there are, as well as how those successes are doing in terms of gross volume and profit margin.

Paul Lazenby
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I truly wish the Games Industry would find more credible people to prophesies on the state of our world. Both Sebastian and Pachter have made so many ridiculous and baseless 'predictions' over the years that they have lost most any credibility they once had - the latter Pachter actually once stated that COD4 was set in Iraq and would have its sales seriously hurt do to this issue - we all see how accurate that was.

How about doing a digital roundtable asking how the downturn will affect the companies of the top 5 independent publishers? Even though I know they blow smoke, I'd trust them more than these guys...


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