INDUSTRY UPDATE
According to NPD Funworld data, US videogame console software sales for the first five months of 2004 are $1,699 million compared with 2003 year-to-date sales of $1,709 million (a year-over-year decrease of 1%). Over the last three months, sales have declined compared with last year, due to a greater percentage of sales of older catalog titles at lower prices and the difficult comparisons with the release of Nintendos The Legend of Zelda and Pokemon Ruby and Sapphire and Ataris Enter The Matrix. Despite weak sales so far this year, we continue to be optimistic that strong holiday sales will allow the U.S. console software market to deliver 10% year-over-year growth (up from 5% in
2003), and believe that the rebound in sales growth will start this month following the mid-May price cut on the PS2 to $149 and the release of several blockbuster games in June. We note that unit sales-to-date are up 1%, while ASPs have declined by only 1.5% (compared to our full-year forecast of a 10% decline). Year-to-date, ASPs are $30.61, and
we believe that there is a good possibility that ASPs will stabilize at this level for the remainder of the year, given the likelihood for strong sales of several full-priced blockbuster titles later in the year.
The U.S. hardware installed base is currently at 60 million current generation consoles (including the GBA) as of the end of May 2004 (up from 56 million at year end 2003) and we forecast it to grow to 77 million by the end of 2004. Total console and handheld hardware unit sales are down 9% in the first five months of 2004 compared with the prior
year, but we expect unit sales to accelerate during 2004 with the recent console price cuts and blockbuster games to be released. Following Microsofts cut in Xbox price to $149 on March 30, the Xbox outsold the PS2 on a monthly basis for the first time in April (297,000 units versus 189,000 units) but the PS2 regained sales leadership in May when Sony cut the price to $149. We believe that the next round of price cuts may come as early as this holiday season (current U.S. prices are Nintendo GameCube $99, Microsoft Xbox $149, and Sony PS2 $149), although we think it more likely that prices will hold steady for the remainder of the year. We also expect a strong unit contribution from Nintendos DS handheld, expected out this fall.
At this years E3 event, Sony confirmed it will release the PSP in Japan late this year and in early 2005 in North America and Europe. Although many believe that the PSP will challenge Nintendos market leadership for the hand held market, we expect the PSP to increase the size of the market beyond the younger audience targeted by Nintendos Game Boys. Sony expects to ship three million units worldwide by March 2005. Not to be outdone, Nintendo forecast worldwide shipments of 3.5 million units for its new dual screen portable game system by March 2005. The Nintendo DS is scheduled for launch in Japan and North America in the final quarter of 2004 and in Europe in the first quarter of 2005.
We expect Microsoft to announce a late 2005 launch date for the Xbox Next, although we are skeptical that the company will line up sufficient software support to ensure a successful launch. The Xbox Next will likely be announced as early as next week during Microsofts earnings call, and we expect the market reaction to result in selling pressure for the publishers, as many investors perceive the first next generation console launch as the end of the current console cycle. In our view, the current cycle will continue long past the launch of the Xbox Next, and we do not view the Microsoft announcement as having any long-term impact on the publishers.
We believe that over the remainder of 2004, video game software sales will be driven by the potential megahit games that are expected to be released, including Activisions Doom 3 (PC, Xbox), Microsofts Halo 2 (Xbox), Sonys Gran Turismo 4 (PS2), Sierras Half-Life 2 (PC), Electronic Arts The Sims 2 (PC) and Take-Twos GTA San Andreas (PS2). Our optimism about these games reflects our views about the level of consumer demand for and interest in new games that push existing limits for quality content, graphics, and game play. We expect each of these games to be multi-million unit sellers. It is important to note that only one game (EAs Madden NFL 2004 for PS2) sold over 2,000,000 copies in the U.S. during 2003, and we expect each of the games listed above to exceed that number in the U.S. during 2004
