Wedbush: Game Sales Up 15%, PS3/Wii Hardware On 'Low End' Of Estimate

Analyst firm Wedbush Morgan has released its preview of December's NPD hardware/software sales, following Lazard's similar predictions last week, predicting December U.S. game sales of $1.875 billion - up 15% compared to December 2005’s $1.637 billion. Starting with game console sales, ahead of the actual figures, which will appear on January 11th, it's commented: "NPD data shows that Xbox 360 hardware sales in the U.S. were 3.4 million units. We expect sales of 1.2 million units in December, after sales of 500,000 units in November (this number may be too low, but we were fixated on forecasting 360% growth for Xbox 360 software...)" In addition, Wedbush is estimating that Sony sold 600,000 units (800,000 cumulative) of PS3 and that Nintendo sold 1.3 million (1.8 million cumulative) units of Wii in December. According to the firm: "This implies that each company likely shipped at the low end of their guidance range (Sony’s guidance was 1.0 - 1.2 million cumulative units to North America by year end, while Nintendo’s guidance was for worldwide shipments of 4 million by year end)." The company also notes that the current-gen PlayStation 2 hardware, which outsold the 360 in November, likely sold around 1 million units." Overall, according to their estimates, U.S. hardware installed base currently stands at 18 million next generation consoles (including handhelds) as of the end of November 2006 (up from 8 million at year end 2005). Wedbush's $1.875 billion game software estimate for December reflects a decline of $361 million in current generation software sales (PS2, Xbox, GC, GBA), more than offset by an increase of $600 million in next generation software sales (PS3, Wii, 360, PSP and DS). Overall, the company expects next generation software sales of $927.5 million and current-generation software sales of $947.5 million. Analyst Michael Pachter adds: "Due to relatively light supply of next generation PS3 and Wii consoles, we do not expect next generation software sales to be greater than current generation sales in December. We believe that December will be the last month that this is the case." The company's forecasts reflect only a slight decline for PS2 software sales (-3%), as "that console continues to sell through extremely well." It forecasts a much more considerable decline for GameCube software (-67%) and for Xbox software (-63%), as "these platforms have all but been abandoned by their respective manufacturers." It's also mentioned: "We expect a dramatic year-over-year increase in sales for Xbox 360 software (not coincidentally, up 360%), a substantial increase for DS software (up 68%), and a very slight decline in sales for PSP software (-2%)." The company's estimates include $268 million in software sales for the PS3 and Wii, which is based on our expectation of a tie ratio of 2.5 units for each hardware unit sold (1.3 million Wii hardware units x $50 ASP x 2.5 plus 600,000 PS3 hardware units x $60 ASP x 2.5 plus a catch up for 200,000 PS3 hardware units sold in November x $60 ASP x 1.4). According to Pachter: "Our expected tie ratio is higher than last month’s 1.8 tie ratio for the Wii and 1.1 tie ratio for the PS3, as we believe that more end users are buying or getting the consoles and thus buying games to play them." The report continues: "We expect December sales to be driven by continued strong sales of recent releases Microsoft’s Gears of War, Square Enix’s Final Fantasy XII, Activision’s Call of Duty 3 and Guitar Hero II, Nintendo’s The Legend of Zelda: Twilight Princess, Electronic Arts’ Need for Speed Carbon, and THQ’s WWE SmackDown vs. Raw 2007. Most new games were released before the holiday selling period, so December was a light month for new releases." Also revealed: "We note that 31 games sold over 100,000 units in November, and we expect 135 in December (compared to 102 last year)." The conclusion from the report is relatively rosy for the game biz in the short-term: "It appears to us that most of the major U.S. publishers are solidly on track to meet or exceed consensus estimates for the December quarter. We expect the publishers to continue to deliver solid results during the March quarter, and expect to see next generation hardware sell-outs well into next year. We think that robust software sales December will reinforce investor confidence that the industry is on solid footing." However, Pachter suggests: "There may be a pull-back in mid-2007, when software sales growth comparisons become more difficult and investors attempt to lock-in any gains. Once supply and demand of the PS3 and Wii are in balance (expected as early as February), we think that hardware unit sales will be more modest than they were in the analogous period of 2002, when console prices averaged under $200." Why so? "In our view, once hardcore gamers have obtained their next generation consoles, higher average console prices will be an impediment to rapid sell-through, and we expect cycle-to-cycle declines of 10% or more to persist through the end of summer 2007. We believe that should software sales growth stall in summer 2007 (when year-over-year comparisons average +20%), investors may again become concerned about a secular shift away from video games, and we expect the U.S. publisher stocks to become more volatile."