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Analysts Remain Optimistic Despite Weak September NPD Predictions

Analysts Remain Optimistic Despite Weak September NPD Predictions Exclusive

October 1, 2008 | By Leigh Alexander

As the NPD prepares the video game hardware and software sales results for the month of September, analysts are recommending that the industry brace itself for a slowdown in comparison to August -- which was already somewhat weaker than in past months.

September year-over-year growth is set to take a big hit largely due to the Halo effect -- in other words, it'll be hard for the month to measure up to last year's record-breaking Halo 3 debut.

And while analysts say the industry's likely to resist long-term impact from the current credit crisis, investors are "understandably cautious given the outperformance of the video game category for the year-to-date," says Lazard Capital Markets' Colin Sebastian.

Therefore, seeing industry growth decelerate for the second month in a row may "pressure shares of video game publishers," according to Wedbush Morgan analyst Michael Pachter.

Last month actually saw fairly strong software sales, although hardware was affected by pending price cuts (for Xbox 360), supply constraints (for Wii) and hardware model transitions (for PlayStation 3). And the industry still saw overall growth of 9 percent year over year -- but the fact that it was the first single-digit percentage growth in two years likely sets investors up for increased anxiety at a weak September.

Analysts seem to agree that a disappointing September may turn out to be a temporary squeeze that will ameliorate in the holiday period, which is expected to be stronger -- and boosted by the presence this year of key releases in October like Guitar Hero: World Tour, LittleBigPlanet, Fable 2 and Fallout 3 that in previous years might have waited until the holiday season.

"We believe video game companies remain cautiously optimistic ahead of the key holiday selling season," says Sebastian, who adds that shares are nonetheless "likely to remain choppy until there is better visibility for holiday sales."

"Specifically, we believe the performance of an extensive October new software release lineup will provide the next meaningful gauge of the industry’s resistance to the broader macroeconomic slowdown."

EEDAR analyst Jesse Divnich estimates that September software sales will come in at $60 million, an increase of only 1 percent over last year -- but calls this an "incredible achievement," citing the month's comparison to the Halo 3 debut and the lack of any major franchise releases in September.

"Last September was mostly driven by new releases, which accounted for over $330 million. Halo 3 contributed most of that by ringing in over $225 million," Divnich points out.

"This year, however, new releases are only expected to contribute about $250 million, indicating that industry sales continue to be driven by back catalog titles, casual games, and high software attachment rates to new hardware sold."

But aren't casual gamers and back catalog buyers the sort to consider games non-essential, and thus trim back their buying habits in a poor economic climate?

In theory, but: "We are just not seeing that," Divnich says. "Wii Fit continues to sell out at retailers, Star Wars: The Force Unleashed, a game that definitely under-delivered on quality, is likely to sell over 1.2 million units in September (USA). Lego Batman, a game that specifically targets the casual and mainstream segments, is expected to ring in over 600,000 units."

"Furthermore, we have not seen any reduction in weekly hardware sales. In September, The Nintendo DS and Wii are expected to sell over 1 million units combined, while the Xbox 360 is likely to see a 30 percent increase in weekly sales over last month."

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