Analysts expect decline in 05/06, but industry sources remain optimistic

A new report from analyst firm Piper Jaffray is predicting that the growth of the video game industry will slow significantly in the "transition" years of 2005 and 2006, as the arrival of new hardware causes overall sales declines.

The company's market overview of the games industry, released last night, carries few surprises for the industry - predicting that the transition period will come into effect in 2005/06, following on from a growth year in 2004 which could see game stocks rise by up to ten per cent.

However, while this analysis does not disagree with the bulk of predictions for the coming years, a number of sources within the publishing industry have recently voiced their belief that the coming "transition period" will not follow the same model as the previous one - which is largely the model being used by analysts for their predictions.

Key factors such as the hugely staggered release of the main home consoles (Xbox 2 is expected to arrive in late 2005, with PS3 not arriving until at least 12 months later and Nintendo's Revolution somewhere in between), the presence of the PSP and Nintendo DS in the market, and the determination of publishers to continue to drive sales of current-generation software through the transition period, are all quoted as key differences between this period, and the one that occurred some five years ago.

"Everyone learned lessons from the last transition," a source at a US publisher told us today. "Publishers, platform holders, retailers - we all got stung last time. Now we know that we have to keep supporting the old platforms, Sony knows that it has to make the new platform as easy as possible to develop for, the retailers know that the current stuff is going to be their bread and butter even after the new stuff arrives. These are pretty important lessons."

"Hopefully when you combine those lessons with the fact that PSP is going to go a long way to smoothing out the market, and Xbox 2 is launching so early that it might have that effect too... We'll see a transition period that's still going to be tough for small publishers because of the development costs involved, but for the bigger players, they should be able to keep growing through it."

Our source, who declined to be named as his company has not yet issued detailed guidance for the 05/06 period, said that despite analysts expectations of a decline, there is a mood of "cautious optimism" among the industry's larger publishers about the transition. "There are a lot of problems we have to solve, but I think people feel that this time around, it doesn't have to hit us on the bottom line," he concluded.