Is PC gaming dead?
Doom 3 Xbox sells 400K units
PSP does ANOTHER million software units (Taken from $40 million dollar revenue, may be more or less)
April 2005 NPD Video Game Sales Preview
We expect April U.S. retail video game console software sales data to be released after the market close on Thursday, May 12. We forecast sales of $400 million, up 27% over last year.
We believe that investor expectations are low for industry sales growth this year, and think that expectations will change as the industry continues to deliver double-digit sales growth. We recommend that investors accumulate Activision, Atari, Electronic Arts, Majesco, THQ, and Take-Two shares.
Activisions sales should be $35 million, up 225% over last year.
Atari is expected to deliver $12 million in sales, up 17% over last year.
We expect Electronic Arts sales to be $90 million, up 17% over last year.
We expect Majesco sales to be $3 million, up 139% compared to last year.
Midway sales are expected to come in at $16 million, down 16% from last year.
We expect Take-Two to deliver $29 million in sales, up 138% over last year.
THQs sales should be $32 million, up 52% over last year.
We expect NPD Funworld TRSTS U.S. retail video game console software sales data for the month of April (four-week period ending April 30, 2005) to be released on Thursday, May 12, after the market close. In this note, we attempt to forecast the sales figures before they are released. Our forecast is based upon a combination of channel checks, company press releases and intuition, with the greatest dependence upon intuition. Our channel checks are conducted by visiting a very small slice of the over 25,000 retail stores that carry video games in the U.S. We note that for a given game, a difference of only one unit per store per week could result in a difference of 100,000 units in
volume, or $5 million in retail sales for the month. Therefore, we caution readers to use our estimates as only one data point in a sea of information.
We expect April sales of $400 million (up 27% vs. April 2004s $315 million), due to contribution from a number of new releases during the month as well as continued sales strength from Sony PSP software. In April, we expect continued strong sales of Sonys Gran Turismo 4 (PS2) and Ubi Softs Splinter Cell 3: Chaos Theory (Xbox, PC) along with a slew of strong-selling PSP titles. The top new releases in April were Activisions Doom 3 (Xbox), Microsofts Jade Empire (Xbox), Take-Twos Midnight Club 3 DUB Edition (PS2, Xbox), Midways Unreal Championship 2 (Xbox), THQs WWE Wrestlemania 21 (Xbox), and Nintendos Pokemon Emerald (GBA). We note that there were 19 games that sold over 100,000 units in March, and we expect 10 in April (compared to 7 last year).
In 2004, ASPs held relatively steady, ending the full year down 1% ($30.76, compared to 2003s $31.12), while full year unit sales were up 9% (from 186 million to 203 million). For 2005, we anticipate that console and handheld ASPs will decline by 3.4% (to $29.73), reflecting a decline in current generation console game pricing partially offset by significantly higher prices for new handheld software, and an increase in pricing for NFL games. We also expect unit sales to end the year up 13%. We forecast US console and PC software sales growth of 10% for 2005. ASPs year-to-
date through March are down 3% and unit sales are up 19%. For April, we expect unit sales to be up by over 30% compared to last year, and we expect ASPs to decline slightly.
Hardware
The U.S. hardware installed base currently stands at 79 million current generation consoles (including handhelds) as of the end of March 2005 (up from 75 million at year end 2004). Console prices were stable through year-end (current U.S. prices are Nintendo GameCube $99, Microsoft Xbox $149, and Sony PS2 $149), with the next round of cuts likely some time this year (when supply and demand are back in balance). We believe that Microsoft currently loses money on each console sold, so further price cuts could be especially costly for the company. It is possible that the company will choose to maintain pricing for the current generation Xbox following the launch of the next generation Microsoft console (Microsoft has planned an Xbox 360 announcement on MTV at 9:30 p.m. ET on May 12th). Should Microsoft choose to maintain pricing for the Xbox, we believe that Sony will cut price on the PS2 in order to capture incremental market share in front of the launch of the Xbox 360. We note that the redesigned PlayStation 2 has a manufacturing cost that is purportedly below $100, so Sony may choose to maintain pricing for current generation PS2s until supply and demand are in balance, and will have a tremendous cost advantage over competitor Microsoft in pricing going forward. We believe that Sonys PS2 shipment forecast of 12 million units worldwide does not incorporate a price cut this year, although we expect one no later than this fall.
Activision
Releases during April: 4/3 Doom 3 (Xbox) 4/3 Doom 3: Resurrection of Evil Exp (PC).
We estimate that Activision generated $35 million in sales for the month (compared with $24 million last month and $11 million last April). We believe that sales were led by the new release of Doom 3 on the Xbox, selling 400,000 units, with a higher than usual average selling price due to the collectors edition. We expect that catalog titles of Tony Hawk's Underground 2, Call of Duty, Spider-Man 2, Shrek 2, X-Men: Legends, and Shark Tale also sold well.
Atari
Releases during April: None.
We estimate that Atari generated approximately $12 million in sales for the month (compared with $17 million last month and $10 million last April). We believe that sales were once again led by Dragon Ball Z: Sagas (which sold 153,000 units last month). We believe that catalog sales were led by other Dragon Ball Z titles along with other various games.
Electronic Arts
Releases during April: 4/25 FIFA Soccer (PSP), 4/25 NBA Street Showdown (PSP).
We estimate that EA generated $90 million in sales for the month (compared with $114 million last month and $77 million last April). We expect sales to be led by recent releases Fight Night 2, NBA Street 3, and MVP Baseball 2005. We expect to see continued strong sales of PSP titles along with James Bond, Harry Potter, Need For Speed Underground, Lord of the Rings and Medal of Honor, and its catalog of sports games. We also expect the company to capture 20% market share on the PSP, and we estimate approximately $8 million in contribution from PSP games during the month.
Majesco Entertainment
Releases during April: 4/5 Razes Hell (Xbox), 4/19 Psychonauts (Xbox, PC).
We estimate that Majesco generated $3 million in sales for the month (compared with $4 million last month and $1 million last April). We expect modest sales of 30,000 units for its new release Psychonauts. We believe that GBA Video products sold 65,000 units combined (compared with Marchs 72,000 units), along with catalog sales of Blood Rayne and various GBA budget titles.
Midway Games
Releases during April: 4/18 Unreal Championship 2 (Xbox), 4/25 Area 51 (PS2, Xbox, PC).
We estimate that Midway generated $16 million in sales for the month (compared with $6 million last month and $19 million last April). We expect sales of 150,000 for its new release Unreal Championship 2. We expect more modest sales of 50,000 units for Area 51. We believe other sales were led by catalog sales of Mortal Kombat: Deception along with NBA Ballers, PSI-Ops, MLB Slugfest, SpyHunter, and other Mortal Kombat titles.
Take-Two Interactive
Releases during April: 4/12 Midnight Club 3 DUB Edition (PS2, Xbox), 4/18 Close Combat First to Fight (PC, Xbox), 4/19 Stronghold 2 (PC).
We estimate that Take-Two generated $29 million in sales for the month (compared with $23 million last month and $12 million last April). We believe that Midnight Club 3 DUB Edition, with an estimated 300,000 units sold, led sales. We believe that Major League Baseball 2K5 sold 300,000 units in its third month of release (on top of the 405,000 units sold to date). We expect continued strong sales of ESPN sports games: NFL 2K5, NBA 2K5 and NHL 2K5, and believe that each of these games sold a competitive number of units vis-à-vis its Electronic Arts counterpart. We believe that Grand Theft Auto, Max Payne, Midnight Club, and Conflict led catalog sales.
THQ
Releases during April: 4/18 WWE Wrestlemania 21 (Xbox).
We estimate that THQ generated $32 million in retail sales for the month (compared with $39 million last month and $21 million last April). We believe that the new release WWE Wrestlemania 21 sold 150,000 units. We believe that its top holiday releases, WWE Smackdown vs. Raw, The Incredibles, and The SpongeBob SquarePants Movie led sales. We also expect continued strong sales of WWE, Nickelodeon, and Finding Nemo titles.
Market Share Analysis
Although it is difficult to estimate the total sales denominator for calculating market share, based on our estimate for total industry sales, our estimate for each publishers market share is as follows:
Market Share By Company (US Retail Sales)
Apr 2005E Apr 2004A
ATVI 8.8% 3.4%
ATAR 3.0% 3.3%
ERTS 22.5% 24.5%
COOL 0.8% 0.4%
MWY 4.0% 5.9%
TTWO 7.3% 3.8%
THQI 8.0% 6.5%
Conclusion
Following last weeks earnings calls from ERTS, THQI and ATVI, we believe that investors continue to expect sales growth to be flat for the full year. We therefore we think that there may be some positive reaction to the April sales data if it shows high double-digit growth, as we have forecast. Should the data fall short of our estimate, we do not expect investors to become overly concerned about valuations of the video game publishers.
The publishers stocks have all suffered to some extent as a result of Electronic Arts preannouncement in March, with a slight firming up of valuations over the last week. Following generally positive earnings last week, it appears that investor sentiment may be recovering, but we believe that expectations are still quite low for the quarter and for the year. Should the data come in more robust than our forecast, we expect valuations to firm up, as many may perceive sales strength early in the year as signaling a positive trend for 2005.
We expect Take-Two and EA results to be in line with investor expectations, and do not foresee strong market reaction to the NPD data. We think that there could be positive reaction to the NPD data for Activision, Atari, Majesco and THQ, especially if any of these companies delivers upside to our estimates. We do not expect Midway shares to react materially to the NPD data.
Doom 3 Xbox sells 400K units
PSP does ANOTHER million software units (Taken from $40 million dollar revenue, may be more or less)
April 2005 NPD Video Game Sales Preview
We expect April U.S. retail video game console software sales data to be released after the market close on Thursday, May 12. We forecast sales of $400 million, up 27% over last year.
We believe that investor expectations are low for industry sales growth this year, and think that expectations will change as the industry continues to deliver double-digit sales growth. We recommend that investors accumulate Activision, Atari, Electronic Arts, Majesco, THQ, and Take-Two shares.
Activisions sales should be $35 million, up 225% over last year.
Atari is expected to deliver $12 million in sales, up 17% over last year.
We expect Electronic Arts sales to be $90 million, up 17% over last year.
We expect Majesco sales to be $3 million, up 139% compared to last year.
Midway sales are expected to come in at $16 million, down 16% from last year.
We expect Take-Two to deliver $29 million in sales, up 138% over last year.
THQs sales should be $32 million, up 52% over last year.
We expect NPD Funworld TRSTS U.S. retail video game console software sales data for the month of April (four-week period ending April 30, 2005) to be released on Thursday, May 12, after the market close. In this note, we attempt to forecast the sales figures before they are released. Our forecast is based upon a combination of channel checks, company press releases and intuition, with the greatest dependence upon intuition. Our channel checks are conducted by visiting a very small slice of the over 25,000 retail stores that carry video games in the U.S. We note that for a given game, a difference of only one unit per store per week could result in a difference of 100,000 units in
volume, or $5 million in retail sales for the month. Therefore, we caution readers to use our estimates as only one data point in a sea of information.
We expect April sales of $400 million (up 27% vs. April 2004s $315 million), due to contribution from a number of new releases during the month as well as continued sales strength from Sony PSP software. In April, we expect continued strong sales of Sonys Gran Turismo 4 (PS2) and Ubi Softs Splinter Cell 3: Chaos Theory (Xbox, PC) along with a slew of strong-selling PSP titles. The top new releases in April were Activisions Doom 3 (Xbox), Microsofts Jade Empire (Xbox), Take-Twos Midnight Club 3 DUB Edition (PS2, Xbox), Midways Unreal Championship 2 (Xbox), THQs WWE Wrestlemania 21 (Xbox), and Nintendos Pokemon Emerald (GBA). We note that there were 19 games that sold over 100,000 units in March, and we expect 10 in April (compared to 7 last year).
In 2004, ASPs held relatively steady, ending the full year down 1% ($30.76, compared to 2003s $31.12), while full year unit sales were up 9% (from 186 million to 203 million). For 2005, we anticipate that console and handheld ASPs will decline by 3.4% (to $29.73), reflecting a decline in current generation console game pricing partially offset by significantly higher prices for new handheld software, and an increase in pricing for NFL games. We also expect unit sales to end the year up 13%. We forecast US console and PC software sales growth of 10% for 2005. ASPs year-to-
date through March are down 3% and unit sales are up 19%. For April, we expect unit sales to be up by over 30% compared to last year, and we expect ASPs to decline slightly.
Hardware
The U.S. hardware installed base currently stands at 79 million current generation consoles (including handhelds) as of the end of March 2005 (up from 75 million at year end 2004). Console prices were stable through year-end (current U.S. prices are Nintendo GameCube $99, Microsoft Xbox $149, and Sony PS2 $149), with the next round of cuts likely some time this year (when supply and demand are back in balance). We believe that Microsoft currently loses money on each console sold, so further price cuts could be especially costly for the company. It is possible that the company will choose to maintain pricing for the current generation Xbox following the launch of the next generation Microsoft console (Microsoft has planned an Xbox 360 announcement on MTV at 9:30 p.m. ET on May 12th). Should Microsoft choose to maintain pricing for the Xbox, we believe that Sony will cut price on the PS2 in order to capture incremental market share in front of the launch of the Xbox 360. We note that the redesigned PlayStation 2 has a manufacturing cost that is purportedly below $100, so Sony may choose to maintain pricing for current generation PS2s until supply and demand are in balance, and will have a tremendous cost advantage over competitor Microsoft in pricing going forward. We believe that Sonys PS2 shipment forecast of 12 million units worldwide does not incorporate a price cut this year, although we expect one no later than this fall.
Activision
Releases during April: 4/3 Doom 3 (Xbox) 4/3 Doom 3: Resurrection of Evil Exp (PC).
We estimate that Activision generated $35 million in sales for the month (compared with $24 million last month and $11 million last April). We believe that sales were led by the new release of Doom 3 on the Xbox, selling 400,000 units, with a higher than usual average selling price due to the collectors edition. We expect that catalog titles of Tony Hawk's Underground 2, Call of Duty, Spider-Man 2, Shrek 2, X-Men: Legends, and Shark Tale also sold well.
Atari
Releases during April: None.
We estimate that Atari generated approximately $12 million in sales for the month (compared with $17 million last month and $10 million last April). We believe that sales were once again led by Dragon Ball Z: Sagas (which sold 153,000 units last month). We believe that catalog sales were led by other Dragon Ball Z titles along with other various games.
Electronic Arts
Releases during April: 4/25 FIFA Soccer (PSP), 4/25 NBA Street Showdown (PSP).
We estimate that EA generated $90 million in sales for the month (compared with $114 million last month and $77 million last April). We expect sales to be led by recent releases Fight Night 2, NBA Street 3, and MVP Baseball 2005. We expect to see continued strong sales of PSP titles along with James Bond, Harry Potter, Need For Speed Underground, Lord of the Rings and Medal of Honor, and its catalog of sports games. We also expect the company to capture 20% market share on the PSP, and we estimate approximately $8 million in contribution from PSP games during the month.
Majesco Entertainment
Releases during April: 4/5 Razes Hell (Xbox), 4/19 Psychonauts (Xbox, PC).
We estimate that Majesco generated $3 million in sales for the month (compared with $4 million last month and $1 million last April). We expect modest sales of 30,000 units for its new release Psychonauts. We believe that GBA Video products sold 65,000 units combined (compared with Marchs 72,000 units), along with catalog sales of Blood Rayne and various GBA budget titles.
Midway Games
Releases during April: 4/18 Unreal Championship 2 (Xbox), 4/25 Area 51 (PS2, Xbox, PC).
We estimate that Midway generated $16 million in sales for the month (compared with $6 million last month and $19 million last April). We expect sales of 150,000 for its new release Unreal Championship 2. We expect more modest sales of 50,000 units for Area 51. We believe other sales were led by catalog sales of Mortal Kombat: Deception along with NBA Ballers, PSI-Ops, MLB Slugfest, SpyHunter, and other Mortal Kombat titles.
Take-Two Interactive
Releases during April: 4/12 Midnight Club 3 DUB Edition (PS2, Xbox), 4/18 Close Combat First to Fight (PC, Xbox), 4/19 Stronghold 2 (PC).
We estimate that Take-Two generated $29 million in sales for the month (compared with $23 million last month and $12 million last April). We believe that Midnight Club 3 DUB Edition, with an estimated 300,000 units sold, led sales. We believe that Major League Baseball 2K5 sold 300,000 units in its third month of release (on top of the 405,000 units sold to date). We expect continued strong sales of ESPN sports games: NFL 2K5, NBA 2K5 and NHL 2K5, and believe that each of these games sold a competitive number of units vis-à-vis its Electronic Arts counterpart. We believe that Grand Theft Auto, Max Payne, Midnight Club, and Conflict led catalog sales.
THQ
Releases during April: 4/18 WWE Wrestlemania 21 (Xbox).
We estimate that THQ generated $32 million in retail sales for the month (compared with $39 million last month and $21 million last April). We believe that the new release WWE Wrestlemania 21 sold 150,000 units. We believe that its top holiday releases, WWE Smackdown vs. Raw, The Incredibles, and The SpongeBob SquarePants Movie led sales. We also expect continued strong sales of WWE, Nickelodeon, and Finding Nemo titles.
Market Share Analysis
Although it is difficult to estimate the total sales denominator for calculating market share, based on our estimate for total industry sales, our estimate for each publishers market share is as follows:
Market Share By Company (US Retail Sales)
Apr 2005E Apr 2004A
ATVI 8.8% 3.4%
ATAR 3.0% 3.3%
ERTS 22.5% 24.5%
COOL 0.8% 0.4%
MWY 4.0% 5.9%
TTWO 7.3% 3.8%
THQI 8.0% 6.5%
Conclusion
Following last weeks earnings calls from ERTS, THQI and ATVI, we believe that investors continue to expect sales growth to be flat for the full year. We therefore we think that there may be some positive reaction to the April sales data if it shows high double-digit growth, as we have forecast. Should the data fall short of our estimate, we do not expect investors to become overly concerned about valuations of the video game publishers.
The publishers stocks have all suffered to some extent as a result of Electronic Arts preannouncement in March, with a slight firming up of valuations over the last week. Following generally positive earnings last week, it appears that investor sentiment may be recovering, but we believe that expectations are still quite low for the quarter and for the year. Should the data come in more robust than our forecast, we expect valuations to firm up, as many may perceive sales strength early in the year as signaling a positive trend for 2005.
We expect Take-Two and EA results to be in line with investor expectations, and do not foresee strong market reaction to the NPD data. We think that there could be positive reaction to the NPD data for Activision, Atari, Majesco and THQ, especially if any of these companies delivers upside to our estimates. We do not expect Midway shares to react materially to the NPD data.
