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[UbiSoftologist]

Michael Pachter at Wedbush Morgan reviews video game sales in August:

OVERVIEW
On Monday afternoon, NPD Funworld released the August 2004 (four-week period ending August 28, 2004) TRSTS data for U.S. console video game software retail sales. Total sales were $337 million, down 4% sequentially from July’s $350 million, but up 1% compared to August 2003’s $334 million. Year-to-date sales are $2,767 million compared with 2003 year-to-date sales of $2,657 million (a year-over-year increase of 4%).

The overall sales figures were below our expectations of $360 million (up 8%). We believe that the lower sales level is due to the combination of a large number of value priced games sold during the month (primarily Take-Two’s ESPN NFL 2K5 at $19.99) and few new releases during the month. August sales were led by continued strong sales of Activision’s Spider-Man 2 (PS2, Xbox, GC, GBA, PC), Electronic Arts’ NCAA Football 2005 (PS2, Xbox, GC), and Take-Two’s ESPN NFL 2K5 (PS2, Xbox). The top August release was Electronic Arts’ Madden NFL 2005 (PS2, Xbox, GC, PSX, GBA, PC), with over 2.1 million units sold across all platforms. Our analysis in this report does not include PC games, but we believe that Activision’s Doom III (PC) was also a top seller during the month.

Despite the lower than expected sales this month,we continue to be optimistic that a number of blockbuster titles expected over the back half of the year will provide a strong finish for 2004, and will allow double-digit sales growth for the year. We expect that these strong holiday sales will allow U.S. console software sales to grow 10% year-overyear (up from 5% in 2003).

So far in 2004, ASPs have held relatively steady, with ASPs through August down only 1.7% ($30.07 year-to-date, compared to last year’s $30.59 through August). Unit sales through August are up 6% (from 86.9 million to 92.0 million). Our 10% growth forecast presumes an increase of 17% in unit sales, offset by a 6% decline in ASPs. We believe that it is likely that ASPs for 2004 will decline by less than our forecast, and may end up being close to flat for the year, although we acknowledge that our unit forecast may be somewhat optimistic. Should ASPs hold relatively steady for the remainder of the year, it is possible that overall console software dollar sales will exceed our forecast, due to the large contribution expected later in the year from games such as Grand Theft Auto: San Andreas, Halo 2, Gran Turismo 4, Mortal Kombat: Deception, and several others.

There were seven games selling more than 100,000 units apiece in August vs. our estimate of eight and compared to nine last year. The top 200 games (out of 3,000 games sold) captured 67% of unit sales and 76% of dollar sales, compared with 60% of unit sales and 74% of dollar sales in July, while the top 10 captured 42% of dollar sales in August versus 30% last month. These figures reflect the relative sales strength for new releases (particularly Madden), and we expect higher contributions from the top sellers for the balance of 2004. The average selling price of all games (console and handheld, legacy and current generation) was $30.46, down 6% from last year’s $32.27 ASP, but in line with last year’s full-year ASP of $31.12. We expect a greater proliferation of handheld games (such as the new Pokemon games) and a handful of discounted titles (notably, ESPN NFL 2K5) to keep ASPs at this level next month, with ASPs ranging between $29 and $30, followed in October by an increase in ASPs when Grand Theft Auto: San Andreas is released.

 

[UbiSoftologist]

The following are specific publisher comments by Mr Pachter:

On EA:

Electronic Arts (ERTS—Buy)
Releases during August: 8/9 Madden NFL 2005 (PS2, Xbox, GC, PSX, GBA, PC), 8/31 NASCAR 2005: Chase for the Cup (PS2, Xbox, GC).
August Retail Sales--$141 million
WMS Estimate--$140 million
Electronic Arts’ market share increased sequentially from 22.2% last month to 41.7%, and its retail sales increased substantially from $78 million last month to $141 million in August (compared to $121 million last August). Madden NFL 2005 sold an impressive 2.1 million units, in line with our estimate of 2.1 million units. This figure represents a year-over-year sales gain of approximately 14%. NCAA Football 2005 sold 145,000 units combined compared with our estimate of 200,000 units (on top of the 806,000 units sold last month), representing a slight drop-off from last August’s 164,000 units sold. In the aggregate, this year’s version of NCAA Football has outsold last year’s by approximately 18%, and we expect a similar performance for Madden in its first two months. The company's other catalog titles performed inline with our expectations. The company’s ASP for all units sold was $43.64, in line with last year’s $43.44, but still much higher than the industry average, reflecting Electronic Arts’ ability to maintain a favorable mix of sales toward higher-priced new releases.

On Activision:

Activision (ATVI—Buy and Focus List)
Releases during August: 8/3 Doom III (PC), 8/31 Cabela's Deer Hunt 2005 (PS2, Xbox).
August Retail Sales--$21 million
WMS Estimate--$28 million
Activision’s market share decreased sequentially from 14.6% last month to 6.3% in August, as its retail sales decreased from $51 million to $21 million (compared with $9 million last August). Spider-Man 2 sold 281,000 units combined versus our estimate of 250,000 units (on top of the 1.3 million units sold in its first two months). Shrek 2 sold 82,000 units combined in its fourth month of release. We had expected slightly stronger sell-through for some of Activision’s catalog games, leading to the overall number coming in lower than we expected. We expect Spider-Man 2 and Shrek 2 to continue to sell well throughout the balance of the year. Activision’s ASP for all units sold was $31.47, up 30% from last year’s $24.26 reflecting the large contribution of the full priced Spider-Man 2 to the mix. The results do not include Doom III sales, as this is a PC game and our analysis in this report focuses on console games.

On Take-Two Interactive:

Take-Two Interactive(TTWO—Buy and Focus List)
Releases during August: 8/31 The Guy Game (PS2, Xbox).
August Retail Sales--$24 million
WMS Estimate--$20 million
Take-Two’s market share decreased sequentially from 7.5% to 7.3%, as its retail sales declined from $26 million to $24 million in August (compared with $11 million last August). ESPN NFL 2K5 had another very strong month, selling an impressive 760,000 units combined compared with our estimate of 450,000 units in its second month. Although we believe that Take-Two has expanded the market for games based upon the NFL franchise, we expect to see some migration of market share from Electronic Arts in the latter part of the year, as ESPN NFL should compete for sales among more casual holiday shoppers. Take-Two’s ASP for all units sold was $20.55, down 18% from last year’s $24.91, reflecting the large contribution from sales of its $20 ESPN game this year. We continue to believe that many investors are focused on the release of the next installment in the GTA series, GTA: San Andreas, in October.

On THQ:

THQ (THQI—Hold)
Releases during August: 8/31 WWE Day of Reckoning (GC).
August Retail Sales--$12 million
WMS Estimate--$16 million
THQ’s market share decreased sequentially from 4.8% to 3.5%, as its retail sales declined from $17 million to $12 million (compared with $16 million last August). WWE Day of Reckoning was released outside of the retail month, so sales will show up in next month’s results. Sales were lower than we expected with few games generating strong numbers. THQ’s ASP for all units sold was $22.14, down 12% from last year’s $25.04, reflecting a greater contribution from low priced GBA and console games. The company had 16 titles sell 10,000 units or more, compared with our estimate of 18.

 

[sonycowboy]

Ubi,

Thanks. I got the report a while ago, but I was too lazy to post it here. The damn PDF doesn't format well, so I have to fix the paragraphs which is a pain.

Anyway, not a good month overall. Sales were essentially flat to last year after a couple of months of positive gain. I'm sure publishers aren't real happy with Sony & MS having supply problems as that sort of thing can halt the momentum that a price drop brings.

 

[UbiSoftologist]

Conclusion of the report:

August overall retail sales were lower than our expectations, coming in at $337 million compared to our estimate of $360 million. We expect double-digit sales growth to resume in September and continue through 2004, as the industry faces relatively easy comparisons to last year and an outstanding lineup of games over the balance of the year. We continue to expect overall industry growth of 10% for the full year as the console installed base continues to expand, driven by strong sales of several blockbuster games over the rest of the year (such as Sony’s Gran Turismo 4, Take-Two’s GTA San Andreas, and Microsoft‘s Halo 2). We expect video game sales in September to be driven by the new release of Nintendo’s Pokemon Fire Red and Leaf Green (GBA), Electronic Arts’ Def Jam Fight For NY (PS2, Xbox, GC) and Burnout 3 Takedown (PS2, Xbox), and Microsoft’s Fable (Xbox).

Take-Two’s results were much better than we expected, and we expect Take-Two shares to reflect its inroads into team sports with its ESPN branded games. Although Electronic Arts’ sales were in line with our estimates, we believe that investors may be concerned with the market share gains made by Take-Two’s ESPN NFL game. Since launch, ESPN NFL 2K5 has sold over 1.5 million units, compared to Madden NFL 2005’s 2.1 million units. Thus, this year’s version of Madden has captured under 60% market share of the pro football genre, compared to almost 85% captured last year. We expect the Madden brand to continue to sell through well, and expect Electronic Arts to maintain a share of over 60%, but note that some investors may not be satisfied with year-over-year sales gains on an absolute basis should the company lose significant share to Take-Two. In the event that Take-Two enjoys similar success with its other ESPN branded sports offerings, we think that Electronic Arts’ shares could come under pressure. Our investment thesis for Electronic Arts is intact, as we believe that there is a sufficiently large market to allow for two strong entries, and we believe that EA is likely to meet or exceed both its guidance and consensus estimates for the balance of the year. However, we believe that EA shares could react to any actions taken by the company over the near term to preserve its dominance of sports games.

We do not expect significant movement in the share of Activision, Atari, Midway or THQ as a result of the data. Although each of these companies came in below our expectations, the shortfall was sufficiently modest to preclude significant declines in the respective companies’ share prices. We expect that investors will continue to focus on the key releases from each company over the balance of the year and think that our “Buy” rated companies (ATVI, ATAR, ERTS, and TTWO) are in good position to maintain or grow market share over the balance of the year.

 

[DarienA]

Good EA analysis... they are right, some investors will just see that ESPN sold more this year and get jumpy.... Congrats to Take Two on what may turn out to be a lucrative deal.

 

[UbiSoftologist]

Thanks. I got the report a while ago, but I was too lazy to post it here. The damn PDF doesn't format well, so I have to fix the paragraphs which is a pain.

You're welcome It's my pleasure to contribute useful info to this forum.

 

[Culex]

Oddly enough, there was no mention of a shortage for PS2 or Xbox.

 

[explodet]

You're welcome It's my pleasure to contribute useful info to this forum.