Mid-Year Round-Up: Game Companies Face Mixed Results and a Challenging Holiday

Electronic Gaming Business, August 11, 2004

The rich got richer (i.e. Electronic Arts and Activision), while the rest of the game industry seemed to limp through its recent quarters as reports and analysis came in for the period ending June 30 and companies looked ahead to how they would handle the last half of '04.

Sluggish game sales for the first half of the year pressed upon many of the middle tier publishers, including Atari, Acclaim, Vivendi, and THQ, and a number of financial analysts cast doubt on the near-term prospects for some of these publishers. While everyone expects the second half of 2004 to help the industry bounce back as a whole, the main challenge for most companies is how to market their holiday fare in the face of an unprecedented line of legendary franchises all coming to market at once.

A recent brief by Banc America analyst Gary Cooper seems to have had a major effect on company strategy. In it, Cooper argued that a "murderers row" of titles, including Sims 2, Doom 3, Half Life 2, GTA: San Andreas, Halo 2, and Gran Tourismo 4 would compete fiercely for holiday dollars, putting most of these titles at some risk of underperforming and certainly locking out many new franchises and middling titles from consumer consideration. "We have very low expectations for games of publishers with less known brands," said Cooper, "including Acclaim, Midway, Atari, Eidos, Vivendi (except for HL 2, if released) and even Microsoft (apart from Halo 2)." As a result, the industry seems to have gotten a severe case of quality control obsession, as numerous publishers announced in recent weeks that in order to "polish and perfect" some of their major hopefuls for the Christmas wars they would release them instead in early '05.

Piper Jaffrey analyst Tony Gikas also warned that despite recent talk of an easy transition to new hardware in this next cycle, the industry is still facing declining sector sales in 2005 and 2006. "We think new hardware launches expected during the next year (GB-DS, PSP and X-Box 2.0) are at significant risk of delays and could further exacerbate a downturn in sector sales," Gikas said recently.

In the face of these challenges, EGB offers its run down of recent financial results, conventional wisdom among analysts, and our own take on holiday prospects for the majors.

Acclaim. Between a Rock and Hard Place?

The NASDAQ stock exchange is threatening troubled publisher Acclaim with de-listing as its stock price and market valuation have dipped far below exchange minimums.

We think things get much worse for Acclaim in the holiday season. Its line-up, including Juiced, Red Star and 100 Bullets is very likely to get swamped by the familiar brands. The company could and probably should push its titles into 2005, but then it ruins its revenue picture for several running quarters and banks on early 2005, which will also be inordinately competitive because of all the delayed titles.

Activision: Next Gen Nirvana?

Activision deservedly crowed that it had the best non-holiday quarter in the company's history, off of Spiderman 2 and Shrek 2 properties both selling over 2 million copies. Already riding the Doom 3 wave, and with X-Men and Tony Hawk titles slated for the current quarter, it looks like Acitvision may get the bulk of its sales in wisely before the Christmas crunch.

Defying recent analyst comments that the next-gen hardware might be slower to catch on than previous generations, CEO Bobby Kotick told an RBC investors' meeting that gamers will be wowed by the new technology and buy in quickly. "The real-time rendering capabilities are beyond what I think the consumer is expecting," he says. He anticipates "unprecedented" rates of sale on the next-gen consoles and even quips that he would tell Sony and Microsoft they could add $100 to their intended pricing. In fact, he anticipates Activision titles for these systems will sell at a higher price as well and that the market will bear it.

While we agree that it is time for game title prices to go up $5 or $10, we do not foresee enough of a range of launch titles for the next-gen consoles that will demonstrate their technical chops early in the cycle. We think technology sold the last generation, but game experiences will sell the next.

Atari Will Run Between Raindrops

Atari claimed its quarterly revenues were driven by a 50% sell-through of its initial Driv3r shipment, although CEO Bruno Bonnell admitted that Europe was performing much better than the U.S., where he says the title faced competition from the Spiderman 2 licensing juggernaut. "We got some distortion in the U.S.," he says. Bonnell also snarked about the loss of the Unreal license. "After all of those years, the proposal made to the company for new agreements and compensation were not acceptable from a P&L point of view."

Bonnell admits the wall of major game licenses hitting this holiday "are going to suck dollars out of the market," but he intends to "run between the raindrops" with shipments including Axis & Allies, Backyard Basketball, Sid Meier's Pirates and some entries in its perennially popular Dragonball Z and Duel Masters franchises. Aimed more at franchise loyalists, families and girls than the core, these titles will "cherry pick" audiences, says Bonnell, with highly targeted and efficient marketing that does not try to overcome the holiday noise.