Analyst: Console Price Cuts Not Driving Demand

As the games industry braces for what it hopes is the last month in a string of successive monthly declines in NPD results, console price cuts have been a bright spot on the holiday horizon, making many analysts optimistic that a strong hardware season could correct a slumping 2009 in the end.

In fact, analysts, software publishers and retailers alike had called for hardware price reductions for months, urging that the industry's overall health depended on them. And early results from the side of the PlayStation 3 Slim, which received a $100 cut and a hardware redesign, seem promising.

The Slim launch brought PS3 its best hardware week ever in Japan, while in the UK it brought an elevenfold increase week over week in the console's sales. Not until next month's NPD results will the clearest picture of the U.S. launch be available, but these early signs suggest a visible positive shift.

But Kaufman Bros. analyst Todd Mitchell says that the recent PS3 and Xbox 360 price reductions "did not create a huge surge in demand." Despite analyst rumblings that Nintendo is now in the toughest spot, facing declining Wii sales and, for the first time, notable price pressure, Mitchell says it's likely to be the DS and Wii that led U.S. hardware sales for August.

The analyst also notes "misgivings about the performance of key titles," specifically Madden NFL 10, which the analyst believes is "tracking below plan" -- even though he expects its Xbox 360 and PS3 SKUs, respectively, will take the top two spots on August's software charts.

And although the fourth quarter is expected to show improved results for the game industry once the summer slump is finally in the rear-view, Kaufman thinks that 2009 will show negative comparisons in the end.

"We are now lowering our full-year 2009 outlook for overall industry sales as measured by NPD to $20.2 billion, a decline of 5 percent from $21.3 billion in 2008, from our prior forecast of $20.7 billion, which would have represented a decline of 3 percent," he says.

Explains Mitchell: "We think video games appear to be entering a deflationary cycle. Underlying growth in the category remains robust, but consumers are spending less on the category per hour of playtime. Weak demand trends are being exacerbated by cautious retailer sentiment and tighter inventory cycles."

Software volumes are falling, so retailers will have to discount more aggressively, says the analyst, and the summer of "anemic" sales will make investors cautious about the industry for some time yet.