The video game sector was supposed to be one of the relative beneficiaries of the recession even if it was not to be entirely immune.  The sector was part of the ‘in-living room entertainment’ trade.  Yet, it isn’t working out that way.  It seems that there has been almost no good news in the sector and the economic recovery is skipping the leaders.  Earnings from GameStop Corp. (NYSE: GME) were not helped at all by guidance.  Sony Corporation (NYSE: SNE) has potentially started a war of emasculation among console makers with its recent price cuts.  And game publisher Electronic Arts Inc. (NASDAQ: ERTS) gave a poor showing with its most recent results.  Recent NPD data for video game sales showed some of the worst reports imaginable.

GameStop Corp. (NYSE: GME) posted more than a 30% drop in earnings to $0.23 EPS as revenues fell 3.7% to $1.74 billion.  More importantly, GameStop cut its 2009 forecast over consumer spending concerns and key video game delays.  It now sees a range of $2.40 to $2.64 EPS from a prior forecast of $2.83 to $2.93 EPS.  And GameStop is not alone.  Online-retail giant Amazon.com Inc. (NASDAQ: AMZN) is a fairly new entrant and threat to the sector, but it said after its most recent quarterly earnings report that video game sales saw a slowdown and it even affected its performance.  To outline just how bad it is out there, the most recent NPD data showed that video game industry sales for hardware and software in the U.S. were down a sharp 29% in July year-over-year.

Sony Corp. (NYSE: SNE) cut the price of its PS3 3 by $100 this week in hopes of a boosting demand for its gaming console.  Sony once had the lead in prior consoles, but the Nintendo (NTDOY) Wii and the Microsoft Xbox (and Xbox 360) platform has skunked Sony.  Just like Sony lost the dominance of Walkman for portable music listening, it has been losing in video game sales.  Its hope is that this will drive more unit sales and therefore game sales into the holiday season.  The PS3 3 will come in a new slim form
factor for $299, under the $399 price tag before, and the new PS3 is said be available for a September 1 release date.

Microsoft Corp. (NASDAQ: MSFT) has been an unknown over a price reduction for its Xbox 360,  but some units can already be had for about $200 for the base unit.  Nintendo’s Wii has stayed steady at $250, but the company has seen a significant slowing of console sales this year.  It seems that the price cuts may not start a price cutting war, but there is room for the console makers to bring down the cost marginally.  Nintendo’s profits were already cut in half.  Xbox may have a new Fable coming, but there is not an apparent ‘next Halo’ type of mega-blockbuster on the immediate calendar.

And the game publishers have been a rather dull lot of late.  Electronic Arts Inc. (NASDAQ: ERTS) gave an earnings report earlier this month which looked OK, but the guidance left investors with nothing more than a discussion over what price-to-earnings ratio is fair for the former sector leader… And shares are down close to 10% since its earnings report.  Over the last month, we even pointed out a long series of management missteps over at Take-Two Interactive Software Inc. (NASDAQ: TTWO).

Activision Blizzard Inc. (NASDAQ: ATVI) has beaten earnings estimates for each of the last four quarters.  But this is now worth more than $15 billion and trades at almost 20-times 2009 earnings over 15-times 2010 earnings estimates.  The good news is that this is on expectations for 20% earnings growth and over 10% revenue growth.  World of Warcraft, Guitar Hero, Call of Duty, and more are keeping this franchise a stronger one.

The way the sector is looking today, it seems that there is a fear that Christmas-celebrating U.S. consumers may convert to Judaism on December 21 this year as a trick to avoid all the mandatory holiday gift buying for the 2009 holiday season.  As more and more keep playing games that cost $0.99 on iPhones and as effectively free games like ‘Mafia Wars’ through Facebook take hold, major profit growth might remain elusive for some time in the sector.

JON C. OGG
AUGUST 20, 2009

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