Analyst: In Poor Economy, Retailers React, Big Publishers Gain, Smaller Ones Lose

Lazard Capital Markets analyst Colin Sebastian observes some impact from the global economic downturn on video game retail, and explains how the situation could benefit large publishers, challenge small ones -- and even lengthen the current console lifecy
Warning signs have appeared to suggest the global economic crisis may impact video games at retail, says Lazard Capital Markets analyst Colin Sebastian, who says he's "cautiously optimistic although sales are a little uneven." Echoing recent statements by Ubisoft CEO Yves Guillemot, Sebastian agrees retailers are being more cautious about their upfront inventory purchases, relying more heavily on reorders for games that sell well. The analyst says that in the current climate, launch sales of games are generally strong -- but tend to drop off rapidly. "We interpret this trend to suggest that the core market remains healthy, while more casual/mass market consumers are spending more cautiously or waiting to make purchases closer to the holidays," he says. This affords greater sales weight to major publishers like Activision, Electronic Arts and Ubisoft, with their seasonal blockbuster-type titles, suggests Sebastian -- to the detriment of the smaller publishers. "Naturally those titles selling particularly well will receive reorders," he says. "In contrast, there will be incremental pressure on smaller publishers as well as moderate or weaker-selling software." Additionally, the analyst expects unilateral price cuts across the board from retailers to try and drive traffic to stores. All told, however, Sebastian remains optimistic about the strength of the video game industry alongside other forms of entertainment media even in an unfavorable economy, noting steady hardware sales despite the fact that game consoles are more expensive than any other products in the sector. Sony and Microsoft remain on track, the analyst adds, also pointing to Ubisoft's increased guidance at the close of its strong second quarter. The leading publishers also have plenty of cash on hand: "Electronic Arts has $2.7 billion ($8/share), Activision Blizzard has $3 billion ($2/share), THQ has $282 million ($4/share), Ubisoft has $339 million ($5/share) and Take-Two has $339 million ($4/share)," Sebastian estimates. A global economic downturn would have hit the games industry much harder either very early or very late in the console lifecycle, Sebastian says, a period where companies must allocate large investments to developing for new hardware platforms. "Instead, we are midway through the current cycle, and even if the industry feels the consumer pinch, a prolonged economic downturn could ultimately extend the length of the cycle as hardware manufacturers become less inclined to spend heavily on expensive new platform development," he concludes. Sebastian pegs "must-have" core titles like Gears of War 2, Resistance 2 and Fallout 3 alongside lower-cost back catalog used games and the most popular of the mass market titles -- Wii Fit, Rock Band and Guitar Hero

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