SIG Analysts Examine Next-Gen Transition Worst Cases

The Video Game Journal produced by analysts Jason Kraft and Chris Kwak of the Susquehanna Interest Group has taken a look at possible problem scenarios that could exacerbate publisher woes during the console transition, as well as a nightmare scenario that combines all potential factors. The occasion for the analysis is the growing likelihood that Sony will not launch its PlayStation 3 in any territory by the originally planned spring 2006 date, which was most recently hinted at in a Variety interview with Sony CEO Howard Stringer. A PS3 delay into 2007 is the first of the problem scenarios the analysts examine, adjusting predicted next-gen-based revenue for the four main Western publishers -- Electronic Arts, Activision, Take-Two, and THQ -- downward by 20% to simulate the effect they predict. Of the four companies, THQ sees the fewest ill effects, given its light investment thus far in next-generation sales, while EA's next-gen-heavy strategy would see it suffer the most drastic blow. The second scenario is a further 20% reduction in current-generation console sales, which have been falling since the Xbox 360's introduction into the marketplace during the 2005 holiday season. Simulated adjusted revenue would hit Take-Two the hardest, given its reliance on current-generation games such as GTA: Liberty City Stories and Bully for 2006, while THQ's significant revenue stream from handhelds would spare it some of the pain. In the third problem scenario, prices for new games in the current generation would continue to fall from the now-common $40 to $30 for new titles. The effects across the board would be greater in this event, according to the analysts' projections, with Take-Two again suffering the most. Finally, the analysts venture into a "nightmare scenario" in which all three of the problems coincide. "To determine the aggregate financial impact," say the researchers, "we cannot simply add the results of the three scenarios. They are interdependent and need to be calculated serially," which would result in slightly less serious consequence than simple concatenation, but a devastating result nonetheless: estimated revenue would fall from 22 to 27%, with earnings sinking by 60-88%. "Those convinced that next-gen consoles could drive secular growth should evaluate the likelihood of each downside scenario, as quantifying and accepting a potential earnings bottom can only help investors," says the SIG report. "The sooner we accept that these scenarios are probable – and not just possible – the sooner we will reach the bottom. That way, when the levee does finally break, we will be ready."