Pressure mounts on E3 to prove industry can grow long-term

Investors will be "spooked" by poor April sales; new hardware must demonstrate ability to extend console cycle, say analysts

After worse than expected game sales for the month of April, there is increasing pressure on the games industry to prove that new hardware offers potential for long-term growth in the videogame business.

According to US analysts, the 26 per cent drop in revenues during April will "spook" the investment community, despite the decline partly attributable to the Easter sales period falling a month earlier than last year.

"April 2010’s results will only exacerbate the growing concerns about the long-term viability of the traditional retail packaged goods market as back catalogue sales and mainstream/casual titles continue to deteriorate at a quicker pace over expectations," said EEDAR's Jesse Divnich in a note to investors.

Wedbush Morgan's Michael Pachter added that, "on balance, we expect investors to be spooked by the April results, and expect many to continue to believe that the videogame industry is in a state of persistent secular decline."

With investors expecting the current generation to come to a close, this year's E3 could prove critical for the industry to highlight the potential for growth – new hardware, both announced and rumoured to be revealed – will need to excite the market beyond 2010.

"Despite what may feel like depressing numbers, the future remains bright for the industry. With new technology on the horizon (PlayStation Move, Microsoft Natal, 3D Gaming, and the Nintendo 3DS), the industry is likely to rebound this holiday season," offered Divnich.

"However, this does put an extraordinary amount of pressure at this year’s E3 event to demonstrate that these new technologies can rekindle excitement among mainstream and core consumers. If these technologies fail to generate the excitement and anticipation needed for medium term sales performance improvements this may accelerate the completion of this current hardware cycle.

"Even with the impressive release schedule in the holiday season, which includes new titles for large franchises such as Halo, Medal of Honor, Ghost Recon, and Call of Duty, EEDAR believes that the launch of the PlayStation Move, Microsoft Natal and possible new hardware from Nintendo to be crucial to the success of the 2010 holiday season," he added. "If either of the new technologies fail to excite consumers, software sales could retreat into the negatives for calendar year 2010 and would only reinforce concerns among investors about the long-term viability of the traditional packaged goods market."

May must also be a positive month for sales, with releases such as Super Mario Galaxy 2, Red Dead Redemption, Alan Wake, Lost Planet 2, Skate 3 and THQ's new UFC title all packing potential at retail.

"We think that investors will stay on the sidelines until they see evidence of a sustainable rebound in sales, which we expect to commence in May," said Pachter.

Poor April results were also due to the lack of long-tail sales for single-player games released the previous month, claims Doug Creutz of Cowan and Company, and it is online and digital strategies that can add shelf life to multiplayer titles as single-player games are traded in quickly after completion.

Sony's God of War III sold only 180,000 units last month in the US, compared to 1.10 million in March, while Square Enix's Final Fantasy XIII shifted 1.32 million in its release month, compared to only 91,000 units in April. In comparison, the multiplayer focused Battlefield: Bad Company 2 sold 1.28 million in March, and 273,000 in April.

"We believe the data suggests that sales of single-player games without a robust online or multiplayer functionality are seeing a significant negative impact from the used game market," said Creutz.

"If correct, our thesis does pose a problem for the ability of AAA titles, particularly those that do not feature a robust multiplayer mode, to maintain sales momentum beyond the initial release window."

Online console gaming is another significant area for growth, with publishers likely looking to continue to monetise play beyond the initial purchase of a disc. EA's Project Ten Dollar and Ten Dollar Pass are examples of monetising the amount of hours consumers spend online, and other publishers are likely to follow suit.

"If EA's plan is successful, we would not be surprised if similar programs become increasingly standard for all publishers over the next 12-18 months," offered Creutz.

Activision is also likely to look at additional ways of charging for online play, said Pachter, after the success of Call of Duty Modern Warfare 2.

"We anticipate that Activision will find a way to monetise the 1.75 billion hours of Call of Duty Modern Warfare 2 online play on the Xbox 360 in the first five months following the game’s release. This gameplay suggests that as many as 12 million gamers (PS3 and Xbox 360 combined) played online for an average of 10 hours per week for the five months since the game’s launch.

"It is obvious to us, and likely equally obvious to Activision, that these gamers are spending a lot of time that was monetised only through the original purchase. In the future, we think that Activision will find a way to charge for some portion of online gameplay, and if successful, we think that other publishers will follow suit."

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Latest comments (12)

Terence Gage Freelance writer 11 years ago
I think, crucially, that this generation of console games needs to sustain for longer than is traditional. I mean, really, aside from better visuals, what could a new PlayStation and Xbox offer consumers? - better visuals, and not a great deal else, I feel. 3D gaming is imminent, online integration is advanced and very focal, lifelike physics and destructible environments have been a reality for some years and visuals are already excellent, with likely a little untapped grunt still in the hardware.

If we are looking at a new generation of consoles from Sony and Microsoft in the next couple of years (assuming Nintendo will continue on their lower-tech route they started with the Wii), I think a lot of developers will really struggle, with huge development costs and mounting technological demands meaning there will be fewer costly and risky 'Triple-A' releases.

Also, I'm not surprised that games like GoWIII, FFXIII, etc, sell massive amounts in their first month then tail off -- unlike the Wii or DS, sales for the HD consoles have almost always operated in the same way.
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Jim Webb Executive Editor/Community Director, E-mpire Ltd. Co.11 years ago
If an investor can't see why sales dropped in April over the previous month and are basing their longer term investment strategy because of April, they need to pull their some of their money out of the industry and invest in some better investment advice.

Any long term investor knows you don't base long term trends on blips. Especially blips with context behind them.
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Kingman Cheng Illustrator and Animator 11 years ago
Second Jimmy's reply.

Things don't just continue to grow without these little dips. Leaves fall off trees but they still continue to grow.
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Luis Morales Public relations, Med Mercs11 years ago
It's the nature of the business, considering this is the first time console manufacturers are trying to extend their consoles on a 10 year cycle. I believe we are at a mid point were this companies need to come up with something so extraordinary that it will benefit both the industry and consumer. Investors need to relax, as this totally new to everyone......No, I don't think we need new consoles at the time.
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Kingman Cheng Illustrator and Animator 11 years ago
That's a good point actually Luis with regards to the year cycle. I'm sure they're still basing the idea off the old models and not thinking how much more life this generation has to offer. I agree the current consoles are fine, it'll also give time for the bleeding 3D TV's to go down in price too!
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Barla Von Designer 11 years ago
In terms of PC gaming, the likes of firms like AMD/ATI, Intel, Nvidia, Valve, etc, should be at these shows every year promoting PC gaming as the PC Gaming Alliance as a group are a complete and utter waste of everyones time. They have done nothing significant for the platform.
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Josef Brett Animator 11 years ago
I agree we don't need new consoles. look at the PS2 - it's still selling by the million and getting some fine games.

I'm looking forward to seeing what developers will end up squezzing out of the consoles. I think it will be the first time we will see a console reach it's full potential (I don't even feel the PS2 has reached it's, even with it's epic lifespan as developers focus there R and D on the new gen).

As for the investors getting scared - wake up, this is business and stuff like this happens all the time. I agree with Jimmy again.
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Tony Johns11 years ago
I think it will be a miracle if the current generation of consoles are still going by the end of 2012...

Like surely, next year might be where we might see some information about new consoles in the next generation with Nintendo already announcing the followup to their DS handheld.

I wonder if Sony is able to come up with the system to replace the PSP since it did sell well but not as well as people might have expected.
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Perry Chen Studying Finance, Boston College11 years ago
Growth cannot be sustained forever. That is economic fact.

The video game industry is rapidly maturing and eventually, growth will slow as a result. Pretty soon, everyone who has always wanted to play video games or buy a video game console would have already done so. It is starting to show already.

I personally don't invest in the video game industry for this reason, as much as I love video games - the industry is highly vulnerable to changes in consumer tastes. After all, video games are luxury goods - no one needs them to live.

Instead of tapping into already depleting revenue streams by introducing DLC to the table, I recommend that the industry start looking at markets that are clearly demonstrating growth. North America, Europe, and Japan are all saturated. In order to maintain that growth, new markets must be exploited.
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John Welsh Program Manager Defence/Serious Games SME, Sydac11 years ago
Agreed Perry. Go into any retail outlet and there is such a glut of possibilities consumers are being very selective. Given that we are only seeing now the realisation of what current consoles can achieve and the manufacturers' investment in meaningful peripherals that will perhaps add another 2-3 years of life to each in its current guise (Natal and Move - if they deliver - add significant possibilities, as will 3D) a broadening of application is necessary.

Casual games are significant but casual. There is however substantial opportunity in serious games with clear scope and need. Not just flash-based solutions but full professional products that have longevity and offer diversity, of which currently there are very few.

Of course as always will the market support it and will someone pay for them?
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Sergio Santos Freelance 3D Artist 11 years ago
..."we think that Activision will find a way to charge for some portion of online gameplay, and if successful, we think that other publishers will follow suit."...
Or they could find a way to suck blood out of gamers and sell it, and other publishers would follow.

I think publishers are getting crazy these days.
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Terence Gage Freelance writer 11 years ago
Tony - "I wonder if Sony is able to come up with a system to replace the PSP since it did sell well but not as well as people might have expected."

I'm sure there will be a PSP2 - even if the PSP has been a relative disappointment for Sony, it has still clocked up 60 million-odd sales, and has been the best or one of the best selling consoles in Japan consistently for the last couple of years. I hope they launch a handheld successor, and learn from the things the PSP got wrong and the DS got right.

Perry - "I recommend that the industry looking into markets that are clearly demonstrating growth. North America, Europe and Japan are all saturated."

While there are parts of Eastern Europe that are showing promising growth (I recall there was an article here recently saying that said territory was worth X billion in 2009), I agree and I think that Microsoft and Sony particularly would do well to invest a lot of resources into getting their consoles out there in big up-and-coming countries like India and China. Sony has recently released the PS2 in South America, and if they can produce the console for next to nothing and get decent sales in as-yet-unexploited countries I think it would be a very profitable strategy to push these territories.
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