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Analyst: Prepare For Sluggish Spring, But No New Consoles Until 2013
Analyst: Prepare For Sluggish Spring, But No New Consoles Until 2013 Exclusive
May 1, 2009 | By Leigh Alexander

Video game investors are bracing for a springtime slump, fearing software sales have hit their peak for the current console cycle -- and looking for new hardware launches.

Not so fast, says Wedbush Morgan's Michael Pachter, who says it's largely tough year-over-year comparisons that shoved March NPD 17 percent down the slope -- last March, after all, saw the record-shattering release of Super Smash Bros Brawl.

And last April, the industry surged under the might of Grand Theft Auto IV's unprecedented launch, which also drove hardware sales -- so the next NPD could be even tougher.

This springtime decline is taking place in year four of our current console cycle -- when, in previous years, software sales generally saw their best performance, and that's part of what's making investors anxious.

"We note that video game software sales typically peak in the year prior to the introduction of a new generation console, as many consumers begin to slow purchases in anticipation of purchasing a new console the next year," says Pachter.

Ubisoft CEO Yves Guillemot recently warned publishers to start getting ready for the new hardware generation else be left behind, but Pachter believes previous cycles won't repeat themselves -- next year won't be the year this time, in other words.

"We do not expect a 'new; console in 2010 (other than the long-rumored high definition Wii, which is likely to upgrade the Wii to current console technology)," he says.

"We do not expect the 'next' generation to begin before 2013, if at all. We remain convinced that the publishers will resist the introduction of any video game hardware technology that requires a refresh of software, as the publishers have as yet to capitalize on the immense investments made in being competitive in the current cycle."

Assuming the next console generation begins after 2013, Pachter estimates that software sales will keep growing 6-10 percent annually for another five years. And more time means steps along the learning curve for publishers, who'll be able to profit better by flattening R&D costs.

"In brief, we think that investors have it wrong so far this cycle, and think that investment in video game publishers will bear fruit for many years," says the analyst.

But when investors worry, share prices slacken, and Pachter cautions publishers' shares may stay depressed until the industry starts posting better NPD numbers -- even though most publishers have been setting and meeting guidance for consistent, if modest growth.

"Comparisons remain difficult and low single-digit growth is likely through July, but we expect a return to double-digit growth in August," he says.

And although it's difficult comparisons to 2008 that challenge March and April, Pachter warns "it would be naive to be pollyannish about the data."

"Negative sales can only mean that consumers bought fewer games this year than last, and should the sales weakness continue in April, we expect many to see this as a signal that the recession is upon us," he says.

Pachter is confident that the core consumer will keep buying, and more casual games, the introduction of the Wii Motion Plus in June, and the launch of EA Sports Active in May could "bring the Wii customer back to retail stores."

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Alan Rimkeit
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2013 seems reasonable. All Sony has to do is make a console with another Cell processor in it (or maybe two more), add a next gen video card, put in that new fangled motion control system that Sony is making, because you know they will, and POOF! PlayStation 4 is made. Easy and cheaper than before.

I don't know what Microsoft is going to do because if they put in any more of what is in the 360 into their next system it will catch on FIRE.

Nintendo? More of the same with double the power I would guess. That would be easy.

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I completely agree with Keichel. (old games with better looks) Personally, I think 2013 should be a good year to begin thinking about a new console launch rather than actually launching in that year.

Mark Morrison
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2011 is the latest the next new console comes out IMO, probably a 361 (and maybe in late 2010). why would 1st party change their MO of maximizing dollars and market share at the expense of any/everyone else. why would first party wait until 2013 a this point? to be polite to each other? are they becoming sensitive to consumers needs? if they wait too long they'll miss the final days of box product on the shelf and not be able to validate the royalties they bring in from the current model, which includes physical cogs.

Mark Morrison
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@CK, therein lies the absurdity in all of this hardware tomfoolery. the best answer to your question is that microsoft wants to stay ahead of the others and keep their market share. (btw- msft does not lose money on their overall game initiative.)

can you please post the link that shows msft is still losing money on the console? i have yet to see current data that supports this assumption. tx.

i think we can also assume that the next xbox uses the same manufacture/dist. pipeline as the 360 currently, so the process has gotten cheaper to fabricate and deliver their hardware.

again, i believe msft's game groups net huge dividends for microsoft, not just literally, but also strategically.

Peter Dwyer
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@mt m

Microsoft isn't loosing any money on the 360. In fact it hasn't been loosing money on it for a while now.

The reason that the next gen will start or at least get some real legs in 2012 is that, that is the time this generation will start to feel old in the gamers minds. The new hardware isn't going to be more than a combination of better visuals and some more motion based controls.

The real difficulty for the big 3 is going to be convincing consumers that the new devices have enough new features to offer, to warrant upgrading at all.

Mark Morrison
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@PD, thanks for confirming what I knew. MSFT has not been losing money on 360 for some time. I was giving CK the benefit of the doubt if he had some new data. i'm still open minded if someone can provide valid data to counter what i have read in the past, but msft has been very strong in successful hardware tactics to strategy.

it's my belief that consumers don't not drive the console changes. games yes, consoles no. this is exclusively a 1st party battle over platform dominance. msft does not want to lose what it has gained in core and now medium game customers.

your'e spot on the tech. though IMO. not many advances to be incorporated at this point: better visuals, faster processing, and perhaps new peripheral inventions. that being said, i think we'll begin to see the pre-awareness for a new battle this summer. next 360 is end of 2010 at the latest IMO.

it's more about what companies put on the shelves versus what the consumer actually wants IMO. add to that, the fact that kids always have to have the latest and greatest. we won't be waiting much longer unfortunately.

Stephen Horn
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I think I agree with Pachter's assessment that a new console won't come out until 2013, if only because 2013 seems like the soonest a new generation of consoles could come out at a $300-$350 price point and have appreciably better hardware than all of the current generation consoles. I might expect to hear announcements about consoles in 2012.

I also agree with Ubisoft's CEO, however - the current generation of development should have taught us that we'll need to start pre-production on the next generation's games (if not full production) relatively soon if we intend to have titles around the launch window of the next generation.

I'm looking forward to seeing the next generation of consoles. I'm curious to see what the various platform vendors will do to adapt to the changing video game marketplace (perhaps to try and steal some of the Wii's audience), and I wonder if the next generation will, in fact, be the last generation for a long while.