The video game sector is not improving with the economy.  It seems to not even be getting ‘less-bad’ with the other sectors that are looking ‘less-bad’ compared to earlier months.  Last night’s awful earnings and forecast from Take-Two Interactive Software (NASDAQ: TTWO) does highlight the risks or issues today in the video game sector, but the sector woes go far beyond just this one video game title publisher.  So it seems that the holiday season for 2009 may be a dud for the video game sector.  The only good news is that long-term investors may finally start getting an opportunity here to pick up depressed valuations.

Take-Two’s earnings are a disappointment and its guidance is worse.  The largest factor noted was the performance of its Major League Baseball titles cutting performance plus an impairment of capitalized software based on sales estimates for its MLB titles in fiscal 2010 and other outside inventory write-downs.  In video game publishing, inventory write-downs translates to poor demand from retailers.  After looking through the rest of the comments from the company (and at least 4 downgrades or estimate cuts from analysts), it is only of some surprise that shares are down over 30%.

Where this story gets interesting though is not on Take-Two and the woes of one company.  Most video game stocks are not getting punished with Take-Two is not an “industry representative” for the whole sector.  But the problems are running deep in the sector and that is going to create more near-term uncertainty for many of the players.  The real cracks starting coming in October when NPD showed that the price cuts helped game sales only for a brief bit.

Nintendo (NTDOY) on the hardware side has been the real dog after being the hero for two years before.  And it has implications that run deep in the sector.  Nintendo was recently reported to have such low orders even after making formal price cuts to its Wii system that its parts and chip suppliers for the popular Wii gaming system now losing money. And to make matters worse, Wal-Mart Stores Inc.(NYSE: WMT) just came out with yet more price cuts and bundled-prices for the Wii and its game titles.  That is only one gaming system of the three major systems.

Amazon.com (NYSE: AMZN) also decided to make a steady push into the video game sector for both new and used games via trade-ins.  New games is one thing.  But used games, this goes directly head to head with GameStop (NYSE: GME).  GameStop took it on the chin when Wal-Mart made its price cuts for popular game titles, and that was not just for Wii.  There have also been price cuts announced by Sony (NYSE: SNE) for its PS3 system and Microsoft Corp. (NASDAQ: MSFT) for its Xbox 360.  Despite sales prices cuts there have not been any steady growth figures in systems sales when you look for prior comparisons.  In short, the system sales look to be dwindling over time.

The game titles are mixed out there.  Activision Blizzard (NASDAQ: ATVI) set a record and then some with the launch of “Call of Duty: Modern Warfare 2.” That launch was so large that it blew movie sales out of the water.  Activision Blizzard also has that huge World of Warcraft franchise that adds steady revenues in the MMORPG arena, and it also sells Guitar Hero and Band Hero.   Electronic Arts (NASDAQ: ERTS) did not do well with its last earnings report, not because its revenues beat estimates, but because the guidance failed to create excitement and because cost cutting via layoffs and development center closures does not exactly breed optimism that a turnaround is coming soon.

Most of the core video game players are at severe discounts to their recent highs if you go back beyond a 52-week period and into 2007.  GameStop is down almost by two-thirds.  Electronic Arts (NASDAQ: ERTS) is down over two-thirds, while Activision is now more steady and just within a long-term trading range as it is a matured and giant company after the Activision and Blizzard merger.  There is just one issue despite all this negativity and uncertainty.

It seems that the game systems will go for a next-generation platform upgrade with announcements starting in 2010.  But the industry expectation is that this will not be out until the Holiday Season for 2011… or even 2012.  If you can look out beyond the horizon of the coming days, then video game publisher valuations may start to look attractive.  Just don’t be looking for the quick buck on this sector.

There is a wild card and it is a big one.  Apple (NASDAQ: AAPL) is rumored to be wanting into the video game sector above and beyond its “App Store” games for iPhone.  It can’t cut out the game publishers in that arena, but how it prices systems and games and how it sells the games would be an open-ended question… as would be who wins and who loses.  There is also the notion that four major platforms might just be too many to go around.

Jon C. Ogg

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