A slew of video-game enthusiasts are counting the days until Dec. 25. That's when they can tear into the Xbox 360 gaming console from Microsoft (MSFT) that's been at the top of their holiday wish lists all year. Others are anxiously holding out for 2006, when Sony (SNE) and Nintendo release the new versions of their gaming consoles. But if the waiting is hard on consumers, it's taking an even bigger toll on the makers of games for the next-generation consoles.
People who expect to get their hands on a new console have little incentive to buy games for the existing versions, so they are putting off purchases until the new machines are released. The latest evidence of the fallout came on Dec. 20, when market leader Electronic Arts (ERTS) said third-quarter, fourth-quarter, and fiscal 2006 earnings will come in "well below" analysts' expectations and the company's own forecasts. EA Chief Executive Lawrence Probst declined to give a specific figure, though he told analysts on a conference call that third-quarter revenue could see "a mid-teens percentage decline" from the low end of their previous guidance of between $1.475 billion and $1.575 billion.
CRITICAL MASS OF FACTORS. The reason? Holiday sales "have been below our expectations," Probst told analysts. "Unfortunately, we have seen no improvement in the last 12 days -- sales have in fact further weakened in North America." Probst blamed markedly lower demand for video games on the older consoles, as consumers save money for newer technology next year. He also pointed to disappointing sales of the Xbox 360 and PlayStation Portable consoles.
Disappointing sales are a common theme in the gaming industry this holiday season -- and they're not over. On Dec. 14, No. 2 game publisher Activision (ATVI) said earnings will be lower in the next two quarters as well, resulting in a cut to full-year forecasts. Across the industry, game-software sales fell 18% in November, compared to the same period last year. "It is likely the industry will be down double digits on a percentage basis," Probst said in a statement.
Analysts are no more sanguine. Delays in the release of major titles -- such as EA's The Godfather, Nintendo's Legend of Zelda, and Square Enix's Final Fantasy -- have compounded consumers' reluctance and lower-than-expected shipments of Xbox 360 units. The result is a critical mass of factors contributing to a soft market this quarter, says Evan Wilson, analyst with Pacific Crest Securities.
GENERATION GAP. On Dec. 13, Citibank analyst Elizabeth Osur downgraded EA shares to hold from buy, after the company posted disappointing sales in October and November. Probst had already signaled a slump in previous conference calls, including when EA announced the purchase of Jamdat (see BW Online, 12/12/05, "Electronic Arts Dials a Deal").
The long lag between the launch of current-generation leader PlayStation 2 and the Xbox 360 only accentuates the slowdown in sales. "It's been a full five years since people have been able to get their hands on next-generation technology," says Wilson, noting that it has been one of the longest periods ever between game-console generations. "So there's much more pent-up demand than [during] the release of the last generation's cycle," when the PlayStation 2 replaced the Nintendo 64. Until more eager gamers can plug in, the publishers' dry spell is likely to continue.
Helm is a reporter for BusinessWeek Online in New York
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