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[UbiSoftologist]

Wedbush Morgan Securities analyst Michael Pachter offers his review of Nov 2004 NPD sales data:

1) Disappointing video game sales in Nov

On Thursday afternoon, NPD Funworld released the November 2004 (four-week period ending November 27, 2004) TRSTS data for U.S. console video game software retail sales. Total sales were $849 million, up 77% sequentially from October’s $479 million, and up 11% compared to November 2003’s $764 million. Year-to-date sales are $4.55 billion compared with 2003 year-to-date sales of $4.10 billion (a year-over-year increase of 11%).

The overall sales figures were significantly lower than our expectations of $980 million (up 28%), with strong performances from Microsoft’s Halo 2 and to a lesser extent Take-Two’s GTA San Andreas (PS2) substantially offset by a much higher percentage of sales of lower priced older catalog games. November sales were dominated by Microsoft’s Halo 2 (Xbox), which sold an impressive 3.3 million units, as well as other top releases during the month including THQ’s WWE Smackdown vs Raw (PS2) and The Incredibles (PS2, Xbox, GC, GBA, PC), Konami’s Metal Gear Solid 3 (PS2), and Electronic Arts’ NFS Underground 2 (PS2, Xbox, GC, GBA, DS). We also saw continued strong sales of Nintendo’s Pokemon Fire Red and Leaf Green (GBA), Electronic Arts’ Madden NFL 2005 (PS2, Xbox, GC, PSX, GBA, PC), and Take-Two’s GTA San Andreas (PS2).

There were 33 games selling more than 100,000 units apiece in November vs. our estimate of 34 and compared to 33 last year. The top 10 games captured 39% of dollar sales and 26% in unit sales in November versus 38% and 28% last month. These figures reflect the relative sales strength of new releases this month and last (particularly Halo 2 and GTA San Andreas), and we expect high contributions from the top sellers in December and beyond. The average selling price of all games (console and handheld, legacy and current generation) was $32.28, up 6% from last year’s $30.58 ASP. This year’s blockbuster lineup presents a difficult comparison for next year, and we anticipate that ASPs will decline by 5 – 10% in 2005.

One trend in the data was quite puzzling. Year-over-year PS2 software unit sales were down in November, from 10.6 million to 10.5 million, including 1.5 million units of Grand Theft Auto San Andreas. Without the game, PS2 units would have declined by 15% to 9 million in November. This data point confused us, given that PS2 software unit sales were up by 50% in October (up 9% without GTA). Although a similar trend occurred in 2002 with the launch of Grand Theft Auto Vice City, the cannibalization occurred in the launch month (October), and the decline was only 8%.

In the month after launch of Vice City, PS2 software unit sales were up a robust 103% including GTA and a quite respectable 69% without. Similarly, Xbox software unit sales were impacted by the November launch of Halo 2, with a year-over-year increase of 77% including the game and a decline of 11% without. It seems reasonable to us that the launch of a big game would cannibalize sales to a great extent in the month of launch, but we are baffled as to why this trend occurred in the month following the launch for this year’s GTA game.

We accept that the NPD does the best that it can with limited data (an estimated 60% of retailers report to the company). However, we question the consistency of this month’s data, given that the contribution from Halo 2 and GTA San Andreas totaled $245 million, while the year-over-year sales increase totaled only $85 million. Without contribution from the two games, the overall NPD TRSTS projection for November would have come in at $604 million, down 21% from last November’s figure. Again, this makes no sense to us, especially given the fact that the October figure excluding GTA San Andreas would have come in at $378 million, up 6% over the prior October’s figure. It appears inconsistent to us that Halo 2 and GTA SA would cannibalize other games’ sales to the extent that they did in November, but that GTA SA would not drive sales into negative growth territory in October.

One possible explanation is that sales of the Nintendo DS hardware console and associated software ($82 million total, with $71 million in hardware sales) cannibalized sales of other software. We had expected the DS to experience a strong launch, and it is possible that the $149 device caused avid gamers to defer purchases of other software during the month due to budget concerns. This may help to explain the decline in PS2 software sales.

Given the large percentage gains over the last three months, we continue to expect strong overall growth in 2004. We expect that these strong holiday sales will allow U.S. console software sales to grow 11% year-over-year (up from 5% in 2003). We anticipate that PC software sales (expected to decline approximately 8%) will contribute sufficiently to enable overall U.S. interactive software sales growth of 10% for the year. So far in 2004, ASPs have held relatively steady, with ASPs through November up 1% ($30.87, compared to last year’s $30.70). Unit sales through November are up 11% (from 133 million to 147 million). These figures compare to our forecast at the beginning of the year for an ASP decline of 5% and unit sales growth of 17%. In part, we believe that the higher ASPs are attributable to a large number of full-priced, high quality games. We believe that the lower unit sales growth is attributable to lower than expected hardware unit sales, primarily due to supply issues. We expect supplies to rebound early next year, and could see robust growth continue through the first several months of 2005.

2) Comment on Activision

Activision (ATVI—Buy)

Releases during November: 11/9 Cabela's Big Game Hunter 2 (PS2, Xbox, GBA), 11/9 Lemony Snicket’s A Series Of Unfortunate Events (PS2, Xbox, GC, GBA, PC), 11/16 Vampire: The Masquerade Bloodlines (PC), 11/16 Call of Duty: Finest Hour (PS2, Xbox, GC), 11/16 Spider-Man 2 (DS).
November Retail Sales--$63 million
WMS Estimate--$55 million

Activision’s market share decreased sequentially from 10.6% last month to 7.4%, as its retail sales increased from $51 million to $63 million (compared with $71 million last November). Sales were led by Tony Hawk's Underground 2 which sold 331,000 units compared with our estimate of 450,000 units combined in its second month (on top of the 423,000 units sold last month). Call of Duty sold 228,000 units compared with our estimate of 250,000 units combined. We expect Activision’s catalog games (Spider-Man 2, Shark Tale, Shrek 2, etc.) to continue to sell well through the balance of the year. Activision’s ASP for all units sold was $31.04, down 15% from last year’s $36.63 reflecting the larger contribution of catalog games to the mix.

We note that Activision is well on its way to meeting or exceeding its U.S. sell-through performance from last year’s December quarter. The company has generated $122 million in cumulative U.S. retail sales through November (not including the November NPD PC data, expected out next week) compared to $94 million generated through November 2003 (also excluding November contribution from PC software sales). We believe that the company’s December sales will be similar to last year’s, and think that its international sales should be sufficient to ensure that it meets guidance for the quarter.

3) Comment on Electronic Arts

Electronic Arts (ERTS—Buy)

Releases during November: 11/2 Lord of the Rings: Third Age (PS2, Xbox, GC, GBA), 11/9 The Urbz: Sims in the City (PS2, Xbox, GC, GBA, DS), 11/15 Medal of Honor Pacific Assault (PC), 11/15 NFS Underground 2 (PS2, Xbox, GC, GBA, PC), 11/17 NCAA March Madness 2005 (PS2, Xbox), 11/17 Madden NFL 2005 (DS), 11/22 GoldenEye: Rogue Agent (PS2, Xbox, GC).
November Retail Sales--$133 million
WMS Estimate--$150 million

Electronic Arts’ market share decreased sequentially from 17.3% last month to 15.6%, and its retail sales increased from $83 million last month to $133 million (compared to $172 million last November). Sales were led by NFS Underground 2, which sold 735,000 units combined, compared with our estimate of 800,000 units combined. Its other top releases this month, Lord of The Rings Third Age and GoldenEye, sold 223,000 units and 70,000 units respectively compared with our estimate of 300,000 units each. EA’s sports games seems to have recaptured market share from Take-Two’s ESPN sports games this month as Madden NFL 2005 sold 562,000 units (compared with 404,000 last November) compared with ESPN NFL 2K5’s148,000 units. The company’s ASP for all units sold was $34.33, down 16% compared with last year’s $40.76, reflecting a shift in Electronic Arts’ mix of sales toward lowerpriced catalog and the high contribution from its recently reduced priced sports games.

Quarter to date, EA’s U.S. sales are tracking below last year’s levels. The company’s U.S. sales (excluding November PC data) are at $231 million, compared to last year’s $272 million (also excluding November PC). We are not optimistic that the company will make up the shortfall with a year-over-year increase in U.S. sales for December, and expect its overall U.S. sales to be approximately $70 – 100 million lower for the quarter. It is likely to make up some ground with the late December release of NFL Street 2, and should capture some incremental sales in Europe, particularly from strong PC game sales. We are comfortable that the company can deliver revenues within its guidance range of $1.4 – 1.475 billion, although we are no longer optimistic that it can exceed the high end of the range.

4) Comment on Take-Two Interactive

Take-Two Interactive (TTWO—Buy-Focus List)

Releases during November: 11/17 Dora The Explorer Super Star (GBA), 11/17 ESPN College Hoops 2K5 (PS2, Xbox).
November Retail Sales--$100 million
WMS Estimate--$125 million

Take-Two’s market share decreased sequentially from 26.3% last month to 11.8%, as its retail sales decreased from $126 million to $100 million (compared with $44 million last November). Sales of GTA San Andreas were again quite strong, but much lower than we expected with 1.5 million units sold compared with our estimate of 2.2 million units sold in its second month of release (on top of the 2.1 million units sold last month). So far, San Andreas has sold 3.6 million units, 25% higher than the 2.9 million units sold by Vice City in its first two months of release. ESPN NFL 2K5 had another strong month, selling 148,000 units combined. ESPN NBA 2K5 sold very well with 245,000 units. Although we believe that Take-Two has taken market share from Electronic Arts for team sports games, we are beginning to see some stabilization of market share now that Electronic Arts has lowered pricing on its front line sports titles. Take-Two’s ASP for all units sold was $35.70, up 15% from last year’s $29.22, reflecting the large contribution from sales of GTA offset by its $20 ESPN games this year.

We expect negative investor reaction to the Take-Two sales numbers, and in particular believe that investors will be disappointed in sales of GTA. We acknowledge our part in setting expectations too high, and note that many investors will likely question whether the drop off in sales from October is the beginning of a trend. We note that Vice City sold 1.4 million units in October 2002, 1.45 million in November, and 1.58 million in December. We expect a rebound in unit sales for San Andreas next month, and believe that investor concerns about Take-Two’s performance will be alleviated a month from now. Should San Andreas sell through an additional 1.6 million units in December, the game’s cumulative U.S. sales will total 5.2 million, implying sell-through of approximately 10 – 11 million units worldwide.

5) Comment on THQ

THQ (THQI—Hold)

Releases during November: 11/1 The Polar Express (PS2, Xbox, GC, PC), 11/2 WWE Smackdown vs Raw (PS2), 11/9 Hot Wheels Stunt Track (PS2, Xbox, GC, PC). November Retail Sales--$71 million
WMS Estimate--$65 million

THQ’s market share increased sequentially from 3.5% last month to 8.4%, as its retail sales increased from $17 million to $71 million (compared with $56 million last November). Sales were led by WWE Smackdown vs. Raw, which sold 362,000 units compared with our estimate of 300,000 units in its first month. The Incredibles and The SpongeBob SquarePants Movie each sold very well with 492,000 and 344,000 units respectively compared with our estimate of 250,000 units each. THQ’s ASP for all units sold was $30.29, up 5% from last year’s $28.91, reflecting a greater contribution from new releases. The company had 48 titles sell 10,000 units or more, compared with our estimate of 50 and 49 last November.

We believe that THQ is on track to deliver revenues in line with December guidance, but continue to question whether reorders will be as strong as expected in the March quarter. The company’s quarter-to-date U.S. sales (without November PC data) are $92 million, compared to $87 million (also without November PC data) for the similar period last year. Management guidance calls for revenues of $330 million for the December quarter, compared to $293 million last year, so THQ will have to deliver a very strong performance in December. We expect international sales for the quarter to be higher than last year, particularly due to favorable foreign currency translation, and do not expect a revenue or earnings shortfall from THQ in December.

 

[Wario64]

The Nintendo DS is competing with the PS2 now?

 

[paul777]

One possible explanation is that sales of the Nintendo DS hardware console and associated software ($82 million total, with $71 million in hardware sales) cannibalized sales of other software. We had expected the DS to experience a strong launch, and it is possible that the $149 device caused avid gamers to defer purchases of other software during the month due to budget concerns. This may help to explain the decline in PS2 software sales.

Interesting. I wonder what kind of impact the PSP will have on PS2 sales.

 

[Drensch]

I buy the cannibal theory. Anecdotally, I would have bought Metroid, Baten Kaitos and some other stuff if it weren't for the ds-I have several friends in the same basket.

 

[paul777]

Also, the sales would then indicate that the DS didn't cannabalize GBA sales much, if it all.
Now that's very interesting. Could the 3rd pillar actually function as a 3rd pillar afterall?

 

[Mrbob]

Pachter damage control?

We have all talked about how November 2004 is the greatest release month in the history of videogames. I can't believe Pachter did not make a comment about ALL the quality titles hitting in such a short time which is causing a cannibilization of sales. He keeps on thinking it is only Halo 2 and GTA SA causing this. Halo 2 and GTA aren't the only two good games that were out in November. It is a combination of all the high profile titles released together which has 'caused sales of each title to eat away at one another. Hopefully November 2004 teaches this industry the lesson I thought they learned years back when Resident Evil 2 was released post Xmas.

 

[Link316]

However, we question the consistency of this month’s data

when you're wrong, you're wrong, Pachter should just suck it up

 

[UbiSoftologist]

Should San Andreas sell through an additional 1.6 million units in December, the game’s cumulative U.S. sales will total 5.2 million, implying sell-through of approximately 10 – 11 million units worldwide.

10M units worldwide by the end of 2004...amazing...

 

[Link316]

I think Pachter's also neglecting the sales of budget GH/PH/PC games, cause most of the new console shoppers I see are usually holding a bunch of $20 budget titles

 

[puck1337]

As the generation progresses, the amount of used software out there grows faster and faster. I'm sure that it's having some kind of impact.

 

[Rocket Punch]

DS cannibalized software and PS2?? NO!!!!!! TEH DIFFERNT MARQET!!1 Will people now understand they're one and the same? Diversity is the name of the game. DS and PSP will only blur the lines even more.

It's still much too early to deem the third pillar a success. But consider this, Nintendo needs only switch GBA project to the DS platform and produce less software for GBA (phase out) and the market should shift to DS accordingly. It all depends on how badly they want their third pillar to stick.

 

[vireland]

Given that Wal Mart is responsible for 25% or more of game sales for many titles and the fact that Wal Mart gave NPD the boot 3 years ago, NPD is making some really poor guesses about what's happening inside Wal-Mart based on the limited amount they can observe and then extrapolate to the whole chain. The extrapolate part is what's problematic, and the reason the NPD numbers are WAY less valuable than they were 3 years ago. Many months (especially when there's a single large release in it) they're little more than a guess.

 

[-SRV-]

I think Pachter's also neglecting the sales of budget GH/PH/PC games, cause most of the new console shoppers I see are usually holding a bunch of $20 budget titles

IAWTP. I can wait a couple months before a game gets a Target price slash or goes GH or whatever. I will do it for MGS3. It isn't worth $50 to me, but it is worth $20. Why not get 2 1/2 games slightly later for the price of a launch one? I am backlogged in games as it is.

Realted to topic, but not quote: Maybe everybody is playing Halo2, GTA:SA, and GBA games on the DS... No time for others.