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Analysts: U.S. Retail Industry Can Keep Growing In 2010

Yesterday's March NPD results showed the U.S. retail game industry's first month of software sales growth since September 2009 -- and analysts suggest that the industry segment is very nearly out of the woods.
Yesterday's March NPD results showed the game industry's first month of software sales growth at U.S. retail since September 2009, marking the end of a long period of declines -- and for the most part, forecasting further industry segment growth in the period to come. "The negative trend in software sales that began last March appears to finally have come to an end," says Wedbush analyst Michael Pachter. "Sales growth of 10 percent against a relatively difficult dollar comparison last year suggests to us that growth can, indeed, be sustained for the balance of 2010." March's $875 million software revenues mark the second-highest non-holiday month for game sales in history (the highest remains June 2008), and is the sixth-highest non-December month in history, Pachter points out. "In other words, March 2010 was a very good month, indeed," he says. However, the industry's not quite out of the long drought yet; Pachter and other analysts like Cowen Group's Doug Creutz expect a possible decline in April due to fewer strong releases this year as compared to last. The only standout in the sales results for April is expected to be Ubisoft's Splinter Cell Conviction, which Pachter calls "likely to garner significant sales." But May will bring a "spectacular" lineup, adds Pachter, with Super Mario Galaxy 2, Prince of Persia, Lost Planet and Red Dead Redemption being just a few of the heavy-hitters, and growth should be an easy prospect for the industry. Says Cowen's Creutz: "We believe this will serve as a catalyst to continue the rally in game publisher stocks. Historically, video game stock trends have changed direction within a few months of an inflection point in [NPD results]." Adds Pachter: "We think that a return to sales growth has begun, and we think that investors will again gain the confidence to invest in a sector that has appeared (until now) to be in a state of persistent secular decline. After 2009's "unexpected and largely inexplicable 10 percent decline", investors need to see indisputable positive trends this year before their caution subsides, Pachter says. Although 2009's declines have been pinned on anything from a Wii bubble in 2008 to the contraction of the music genre to emerging platforms, Pachter believes the industry simply "reverted to the mean" in 2009 after two straight years of growth -- 34 percent and 27 percent for 2007 and 2009, respectively. Adds Pachter: "We believe that high single digit software sales growth is sustainable, and remain confident that following a rocky start to 2010, salesgrowth will average 6 percent or more for the balance of the year, driving overall sales growth for the year to 4 percent." Additionally, he forecasts hardware price cuts in 2011, which will further drive software sales. Publishers "appear largely to have costs under control," he says, and will benefit from growing digital revenue streams as well as social, casual and mobile markets. "We expect new business models on the console side, with increased reliance on downloadable content, and we see the potential to monetize multiplayer gaming by creating subscription models," he notes. By combining these strategies, Pachter believes smart publishers have the potential to grow revenues by 10 percent annually -- if not more. "We remain optimistic about the industry, and think that once investors again appreciate that growth is underway, they will bid up multiples for the publishers to above-market multiples," he concludes.

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