Entertainment Software: October 2007 Video Game Sales Preview: Expect +50% Sales Growth
We expect October U.S. retail video game console software sales data to be released after market close on Thursday, November 15. We forecast sales of $555 million, +50% compared to last year's $369 million. We believe Activision's Guitar Hero III drove most of the sales growth, accounting for $100 million (1 million units) in sales.
Our estimate reflects $425 million in sales contribution from new platforms (PS3, Wii, 360, PSP and DS) and current generation software sales of $130 million. We estimate sell-through of 450,000 Wii, 325,000 Xbox 360 and 125,000 PS3 hardware systems. For purposes of comparison, The simExchange prediction market forecasts 467,000 Wii, 412,000 Xbox 360 and 136,000 PS3 hardware systems.
Our forecast assumes PS2 software sales of $110 million, down 25% compared to last year and consistent with our full year projection for -32% (YTD through September is -24%).
Sales growth over the last 12 months was a robust 18%, with last month up 47% on the strength of Halo 3. Comparisons were relatively difficult for the last four months (an average of 20%), and year-over-year sales averaged +26% for that period. The October comparison is only +1%, suggesting that our estimate is likely very close to the mark. In early November, Sony introduced a $399 PS3 and bundled SingStar with the PS2, Microsoft bundled two free games with the Xbox 360, and Nintendo seems to have improved its supply situation. We think that our 19% growth forecast for the full year is probably close, implying around 21% console/handheld software sales growth and a decline of 3% for PC software sales.
Share prices for the major video game publishers have pulled back sharply of late, as investors again appear concerned that next generation console cycle strength will be insufficient to overcome a weakening economy. We disagree, as we think that solid software sales growth will continue well into 2008, as the lineup of post-holiday games is as strong as we have ever seen. Accordingly, we recommend that investors accumulate Activision, Electronic Arts, GameStop, THQ, and Ubisoft shares at current levels.
For October, we expect the following revenue results:
*
Activision -- $140 million, +387% y-o-y.
1 Atari -- $2 million, -35% y-o-y.
2 Electronic Arts -- $94 million, +20% y-o-y.
3 Majesco -- $3 million, +34% y-o-y.
4 Midway -- $7 million, -52% y-o-y.
5 Take-Two -- $30 million, +23% y-o-y.
6 THQ -- $21 million, -12% y-o-y.
7 Ubisoft -- $27 million, -13% y-o-y.
Our forecasts for console hardware sales are as follows (The simExchange prediction market forecasts are provided for comparison):
WMS TSE*
Wii 450,000 467,000
PS3 125,000 136,000
Xbox 360 325,000 412,000
PS2 190,000 n/a
PSP 225,000 251,000
DS 400,000 460,000
GBA 60,000 n/a
*The simExchange prediction market forecasts used with permission.
We expect a slight increase in PS3 hardware sales due to the November 2 price cut of the 80Gb PS3 to $499, and expect Xbox 360 hardware sales to decline around 200,000 units from the Halo 3 spike last month. The rate of PS2 software sales decline grew last month (-47%) as compared with -24% YTD through September. The degree of PS2 software sales decline over the remainder of the year will depend upon next generation console sales, as most next generation consoles are likely replacements for current generation consoles. As total next generation hardware sales increase, we expect a corresponding decrease in PS2 software sales, and we have modeled a decline of -25% in October, and -32% for the full year. We expect PS2 software sales to stabilize in October December, as the DVD versions of Spider-Man 3, Shrek the Third, Ratatouille, The Simpsons Movie, and Transformers are expected to drive sales of the video games for each film. In addition, PS2 sales of Guitar Hero III should be very strong for the remainder of the year.