Analysis: Nintendo To Slow In 2010 As Arc, Natal Lure 'New Casual'

[In his latest issue of his Joystick Economics newsletter, Janco Partners analyst Mike Hickey warns of ongoing price-drop pressure for video game software, forecasts a "new casual game market" during this year, and says that Nintendo "needs to cut the price of their console from $200 to $150 immediately." Here's Hickey's Tuesday note in full.] We acknowledge that a traditional hardware cycle would now be nearing completion, leaving further market growth dependent on continued and aggressive hardware price cuts, software price cuts, hardware extensions and an economic lift. Near-Term PS3/360 Growth, Nintendo Slide We remain optimistic for near term PS3 and Xbox 360 market growth opportunities, vis-a-vis an emerging secondary casual market cycle, as accessory innovations potentially target an established Nintendo casual market. We expect continued market weakness through ’10 for Nintendo related products, as the Wii cycle fades meaningfully and the DS platform faces considerable competition from Apple related mobile gaming devices. We recognize new hardware from Nintendo is on the horizon. We expect continued pricing pressure on front line releases for the majority of games in calendar year ’10, whether through immediate pricing action at drop and/or accelerated promotional activities by retailers and supported in-part by publishers; regardless the perceptual value or effective price to most consumers will likely trend lower into holiday ’10. Reduction In AAA Titles? We believe there are still too many triple-A games in the market, as the market will likely support a decreasing number of releases, leaving many high quality games without an addressable market sufficient to offset their high production and development expense. We believe promotional activities from retailers will intensify, as they chase a narrowing consumer appetite. We have lingering concerns the domestic retail game market could begin to follow the UK’s holiday promotional activity, where highly anticipated game releases are often sold significantly below suggested retail price to drive foot traffic. Although it would likely take several years for this magnitude of promotional pricing to develop, Walmart’s aggressive promotional activity in the prior holiday did not go unnoticed. The Rise Of A 'New Casual Market' We believe a new casual game market will emerge in calendar 2010, which could be very beneficial for Microsoft, Sony, Apple and 3rd party software developers like Electronic Arts, Activision, THQ, Ubisoft, and Take-Two. The casual hardware extensions from both Sony and Microsoft will likely drive both additional hardware and software sales, for casual and non-gaming mass market opportunities. We expect a potential up-migration from a portion of Nintendo’s Wii market, as many new gaming console households chose to upscale their game entertainment experience, enjoy a broader array of multimedia options and experience “the new” casual gaming opportunities. We expect 3rd party publishers could benefit significantly over the emerging casual cycle, as their prior experience at the casual market was often tortuous from Nintendo’s software domination. Console Price Cuts Needed We think console manufactures need to dramatically cut price points in calendar ’10, to continue hardware sales momentum from the holiday. However, we expect Microsoft will not cut the price of their hardware in front of the introduction of Natal motion technology this holiday, as they are likely hesitant to offer a price induced inflection point for their installed base growth, favoring a hardware innovation as a more sound medium term sales catalyst. Importantly, Nintendo built the majority of their casual mass market oriented installed base from a $250 price point. We believe Nintendo needs to cut the price of their console from $200 to $150 immediately, as they should establish as meaningful of an installed base as possible before the Natal and [reported name for Sony's motion controller] Arc are introduced. We believe they also need to generate strong hardware sales momentum into their competitors release or face the Draconian consumer perception of the Wii having a dramatically reduced entertainment value proposition over a faded technology innovation; Rock Band anyone?