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Analyze This: Handicapping the 2006 Holiday Gift-Buying Season

Gamasutra quizzes top analysts from the NPD Group, Wedbush Morgan, and Lazard Capital Markets on "the race among the big three" console manufacturers this holiday season, including plenty of exclusive insight into who's coming out on top.

They are the professional analysts whose job it is to research, keep track of, advise their clients, and opine to the media about the gaming business. Analyze This cuts right to the chase: Rather than reporting on a subject, and throwing in quotes by analysts to support or refute a point, Gamasutra offers up a timely question pertaining to the business side of the video game industry and simply lets the analysts offer their thoughts directly to you.

With the official launches of the PS3 and Wii this month, the holiday gift-buying season for the video games industry has begun. We asked several analysts, those who have taken part in this column throughout the year as well as new contributors, to give a general rundown on how the race among the big three game companies will play out. This will be the first holiday retail season in which all three next-generation consoles will be on the market (albeit one of them - the PS3 - in very limited quantities).

Each person's opinion is his or her own and will (probably) not necessarily agree with their fellow colleagues'. This month, NPD's Anita Frazier, Michael Pachter of Wedbush Morgan, Ben Bajarin of Creative Strategies, David Mercer of Strategy Analytics, Lazard Capital Market's Colin Sebastian, and Screen Digest's Ed Barton discuss their views on the coming holiday gift-buying season.


AnalyzeThis_frazier_headsho.jpg 99_icon_arrow.gif Anita Frazier, The NPD Group

On the next-generation consoles: Our recent study on "next-gen purchase intent" showed that the PS3 enjoys the highest future purchase intent of all three systems. I believe that Sony has built an incredible brand and in this third generation Playstation will continue to enjoy great success in both hardware and software sales.

Right now, the Wii has the lowest level of awareness of the three systems, but a similar level of future purchase intent as the 360 -- which in my mind really points to great untapped potential as the marketing ramps up. The Wii has some incredible momentum behind it right now, and certainly the marketing behind the system (demonstrations, ad campaign, etc.) has really succeeded in making gaming on the Wii look incredibly fun, and accessible.

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The Legend of Zelda: Twilight Princess

Our purchase intent study shows that immediate purchase intent for the 360 is pretty low, while a good portion of those interested in purchasing a 360 are waiting for a price drop. Microsoft may have tapped out that less price sensitive early adopter portion of the market. The 360 has had a year lead in this next-gen race, and now that they've addressed the production issues, which constrained inventory early on, the story is all about delivering the content, whether first or third-party, that will drive continued sales of hardware.

Other thoughts: Zelda! The game with the highest degree of anticipation appears to be The Legend of Zelda: Twilight Princess. Other titles I expect to finish well for the holiday season are Call of Duty 3, Final Fantasy XII, and Gears of War.

The industry is up 12% so far this year, and I think there is nothing but good news ahead as we finish out 2006. We should comfortably achieve record-breaking revenues this year.


pachter_headshot.jpg 99_icon_arrow.gif Michael Pachter, Wedbush Morgan Securities

On the next-generation consoles: The PS3 will sell out everywhere until well after year-end. That's a function of extremely limited expected supply, and a large number of hardcore gamers with money.

The Wii will also sell out everywhere, again, until after year-end. Supply will likely be twice the PS3 number (around 2 million), and demand could be higher initially for two reasons: First, the price is comparatively low; and second, the box doesn't require an HD monitor, meaning that everyone can plug-and-play and derive full enjoyment.

The 360 continues to chug along, and Gears of War looks like a credible killer app. I'd guess that Microsoft sells around 1.5-to-2 million [Xbox 360 consoles] in November and December, keeping pace with the Wii.

guitarhero2.jpg
Guitar Hero II

Other thoughts: A huge hit this season will be Guitar Hero II, which I expect to be in scarce supply due to manufacturing constraints for the guitars. (The interesting metric will be how many PS2s are sold to old guys like me who just want that game.)

I'd guess that software sales are up, probably by 5-to-10%. The limiting factor is hardware availability, and if people decide to wait until after year-end to buy next-generation boxes and hold off on software purchases, those numbers could be lower. I don't think that they will wait.

It will be interesting to see if retailers talk consumers looking for a PS3 into a 360. It will also be interesting to see if PSP sales continue to lag, especially given Sony's focus on the PS3.


AnalyzeThis_bajarin_headshot.jpg 99_icon_arrow.gif Ben Bajarin, Creative Strategies

On the next-generation consoles: Sony has proven that it knows a thing or two about the gaming industry and what its consumers want. This was evident by the crowds of people who lined up more than a week in advance to wait in line to buy a PS3.

The Wii has very strong appeal to a particular demographic. I think the Wii will do even better once word gets out about the revolutionary gaming experiences it provides.

The Xbox 360 will remain this holiday season the easiest next-gen console to get your hands on. They will do well as demand is still high.

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Resistance: Fall of Man

Other thoughts: On the PS3, Resistance: Fall of Man will be a driver. On the Xbox 360, Gears of War will be a holiday driver. On the Wii, look for games that really take advantage of the console's unique capabilities.

Simply due to all the new console launches and exciting game titles, this holiday season will be quite productive for the electronic games industry.


mercer_headshot.jpg 99_icon_arrow.gif David Mercer, Strategy Analytics

On the next-generation consoles: For Sony and Nintendo, it's just a question of how many they can push through the supply chain as they'll sell everything they can make, if for different reasons. The PS3 is still positioned to become the dominant platform of the next generation in our view, but its real test will come this time next year when sales will have to be well into the millions.

Nintendo should have a great holiday season with the Wii in North America, Europe and Japan. The price point is going to tempt many gift buyers that might not even have considered a console purchase. Nintendo's longer term challenge, as in previous generations, is to sustain this momentum beyond the peak end-year season, and it has traditionally done a poor job in this respect. So we also reserve judgment on the Wii's longer term success until at least 12 months have passed.

xbox360.jpg

Most attention will focus inevitably on the PS3 and the Wii, but our view is that we should be watching the 360's performance more than anything else. Microsoft has to sell 4 million 360s in the last quarter worldwide to meet its own target, and most of those will be bought in the next few weeks. It's a huge task, and we will be watching for any signs that retailers are under pressure to move 360s more quickly, such as price movements or offers.

Other thoughts: In Europe we don't have the distraction of a PS3 launch, so it's a straight fight between the 360 and the Wii. As we said, Nintendo should put in a strong performance, although it only has two weeks after launch to meet demand before the holiday begins. The pressure is really on Microsoft: Only 1% of European households have bought an Xbox 360, so far.


AnalyzeThis_sebastian_headshot.jpg 99_icon_arrow.gif Colin Sebastian, Lazard Capital Markets

On the next-generation consoles: Consumers without preorders are going to be hard-pressed to find a PS3. The bigger story for Sony this year may actually be the PS2, which continues to sell well six years after launch.

We expect Wii to sell very well with a lot of pent-up demand for the system. Nintendo has an opportunity with Wii to expand into a broader and more mainstream consumer audience.

The 360 has a few points in its favor this holiday: the fact that we are seeing the second generation of 360 titles is one advantage; the PS3 supply issues could also help boost sales if retailers direct disappointed consumers to the Xbox 360; and Gears of War may be the first game since Call of Duty 2 to really drive hardware sales. Look also for early promotions of Halo 3, and ongoing traction with Xbox Live to help differentiate the 360 from the other platforms.

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Red Steel

Other thoughts: You will probably hear a lot about the big first-party titles, but there are definitely a number of third-party games that should also perform well, such as Call of Duty 3, Red Steel and Need for Speed.

The PS3 and Wii launches will help drive traffic to stores, but consumers will be walking away with more products for the older platforms. You have a healthy PS2 market, and the DS and PSP handhelds should be popular holiday gifts.

We are just reaching the starting line in terms of the next generation. But looking out to holiday 2007 you should expect a more intense battle among the platforms, and that's when we will get a better sense for who the winners and losers might be.


AnalyzeThis_barton_headshot.jpg 99_icon_arrow.gif Ed Barton, Screen Digest

On the next-generation consoles: Many dub this holiday season the start of the next-gen "race" or "battle" -- we don't see it in such simple terms. Although there is some overlap, each next-generation console is essentially chasing a different type of consumer and their challenge is to expand their particular target market. This is what will ultimately lead to overall market growth.

Hardware shortages will see PS3 and Wii selling out until well into 2007 in all major territories. U.S. and European markets will drive increasing sales volumes on handheld and Xbox 360 platforms. We estimate that Xbox 360 will generate around $1.6 billion in global software sales in 2006, up from $260 million in 2005.

nintendods.jpg

Other thoughts: We feel that Nintendo DS will perform strongly this Christmas in all major territories while PS2 software, nowadays largely ignored by the mainstream media, will continue to sell in significant volumes until 2008. PS2 software will generate around $5.2 billion in software sales in 2006, down from $7.6 billion in 2005.

Although new hardware launches are exciting, it is easy to forget that launch performance is not indicative of longer term results. The first meaningful indications as to how the next generation will shape up will not emerge until late 2007.

Got a business-related question concerning the games industry that you would like to suggest for discussion in Analyze This? Are you a professional analyst who covers the market and would like to take part in this column? Feel free to send an email to [email protected]

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