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Strong NPD Meets Mixed Reception As Stocks Fall
Strong NPD Meets Mixed Reception As Stocks Fall
November 14, 2008 | By Leigh Alexander

November 14, 2008 | By Leigh Alexander
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With many analysts and execs awaiting October's NPD results as the litmus test for the game biz's long-term health in a downturn, the strong month means the industry can loosen its belt and heave a sigh of relief, right?

Not so much. Shares of major game publishers took a hit this morning -- as of press time, Electronic Arts is down over 9 percent, while Activision Blizzard appears to have slipped almost 13 percent.

The big three console makers are all down by single-digit percentages, too -- even Nintendo, whose solid hardware and software sales alike claimed big wins in October NPD, though all U.S. stocks are down significantly today.

Why? Because a strong month for the industry can't alleviate investor concerns about the publishers' missed earnings estimates; Activision and EA in particular didn't meet the expectations of analyst groups like Wedbush Morgan, and this morning Merrill Lynch downgraded ratings for the two leading publishers from Buy to Neutral.

"Recent data points indicate that consumer shopping is trending more negatively in November," Merrill Lynch analyst Justin Hall said in a research note printed by Barron's, expecting anxiety over consumer spending and pressured prices will "keep a lid on the stocks over the holidays."

But while none may rest easy yet, other analysts still reacted positively to the NPD numbers -- both Cowen Group's Doug Creutz and Wedbush Morgan's Michael Pachter used the phrase "recession-resistant" as they responded to the results.

"We note that October was at the height of pessimism concerning the economy, and yet it still had very
solid sales growth," says Pachter.

He says this growth implies that on a fundamental level, the downturn hasn't affected video games, but the fact that publishers missed their expectations is still significant.

Still, Pachter looks to hardware sales as the key barometer -- noticing that with Xbox 360 hardware sales beating his expectations and PS3 sales lighter than he'd thought, "we believe there were some substitution of Xbox 360 for PS3 purchases," he says.

"We believe that solid hardware sales should imply continued software sales strength through the holidays, and continue to believe that the video game software sector remains highly recession-resistant."

Cowen Group's Creutz says October NPD results "should help allay concerns that holiday game sales will suffer due to economic weakness."

"Given the undeniably positive October results, we continue to expect industry sales to remain healthy though the holiday season," he adds.

But with October -- and its stronger-than-usual title lineup now in the rearview, Pachter looks to November.

"The real test of the recession’s impact on video game consumption will come in November, when gift givers may begin to show signs of feeling the economic downturn."

Interestingly, Take-Two's shares see a modest 3 percent increase as of press time; investors may be heartened by Board chairman Strauss Zelnick's explanation yesterday of the company's strategy to release fewer, stronger titles and explore alternative business models -- and his willingness to be more blunt about his concern for the holiday season.


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Comments


Dave Endresak
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Christian, I think that's more or less what they state at the end of the article when they say that November will be an even greater test of the trends.



However, the fact remains that the entertainment industry in general and electronic gaming in particlular are more recession-proof than many other industries. The caveat to this historical trend is that it is relative rather than absolute. Also, the entertainment industry tends to be contract-driven rather than steady, salary-driven. In this respect, it's probably more analogous to the construction industry or professional athletics, although the latter is still related to entertainment (but we're really talking about the people working in the industry, after all).



I think the analysts are simply explaining and restating their oft-observed viewpoint that even when consumers spend less, games and other entertainment tend to be at the bottom of the "cut" list due to the overall cost-to-value ration.

Chris Remo
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Christian,



Those are definitely worrying, but they seem to be more the result of problems internal to the various publishers, not because of external economic factors. I think we'd be seeing those same layoffs and closings right now regardless of the state of the larger economy; a lot of these publishers have had it coming for a while now.

Rick Carr
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There are different parts to the video game industry. ERTS and ATVI are susceptible to the success of their games relative to other games, and other consoles--ie, the Wii. Year over year, the video game industry is growing, and Gamestop, for example, is poised to take advantage of the increase in console and game sales.

Jill Duffy
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It seems to me that most analysts have so far only commented on how consumer spending will affect the video game market, and that's fairly predictable. But what about the overall health of major corporations, mostly publishers? What happens when their investments hurt? What happens when investor confidence affects their ability to secure huge sums of money? This economic crisis is huge (this ain't no "downturn"), and it's not just consumers who will cause changes in the markets -- it's banks and corporations, too.



Another factor is the time it takes for a game to reach market. Games currently on the market or due out soon will be at the mercy of consumer spending, but other titles still in development could have their budgets slashed or could be canned completely.

jaime kuroiwa
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As a child of the 80’s who lived through a recession – and a Bush presidency as well (hmm) – this report comes as no surprise. The demand for entertainment/escapism will always prevail, as music, movies, and TV have done. At the same time, the “traditional” game publishing industry, as we’ve seen with print media, is going to shrink. The downside is that studios will close and titles will get cancelled due to a publisher’s “refocus.” The upside is that the people from those studios will find their outlet in digital distribution, and we consumers will still be able to get our content. For those who grew up during the 80’s, although you may look back on it with some regret (or disgust), some of the greatest, most innovative music, movies, and TV shows of all time came from that decade.



History will repeat itself, as it is already beginning to show.


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