The rich got richer (i.e. Electronic Arts and Activision), while the rest of the game industry seemed to limp through its recent quarters as reports and analysis came in for the period ending June 30 and companies looked ahead to how they would handle the last half of '04.

Sluggish game sales for the first half of the year pressed upon many of the middle tier publishers, including Atari, Acclaim, Vivendi, and THQ, and a number of financial analysts cast doubt on the near-term prospects for some of these publishers. While everyone expects the second half of 2004 to help the industry bounce back as a whole, the main challenge for most companies is how to market their holiday fare in the face of an unprecedented line of legendary franchises all coming to market at once.

A recent brief by Banc America analyst Gary Cooper seems to have had a major effect on company strategy. In it, Cooper argued that a "murderers row" of titles, including Sims 2, Doom 3, Half Life 2, GTA: San Andreas, Halo 2, and Gran Tourismo 4 would compete fiercely for holiday dollars, putting most of these titles at some risk of underperforming and certainly locking out many new franchises and middling titles from consumer consideration. "We have very low expectations for games of publishers with less known brands," said Cooper, "including Acclaim, Midway, Atari, Eidos, Vivendi (except for HL 2, if released) and even Microsoft (apart from Halo 2)." As a result, the industry seems to have gotten a severe case of quality control obsession, as numerous publishers announced in recent weeks that in order to "polish and perfect" some of their major hopefuls for the Christmas wars they would release them instead in early '05.

Piper Jaffrey analyst Tony Gikas also warned that despite recent talk of an easy transition to new hardware in this next cycle, the industry is still facing declining sector sales in 2005 and 2006. "We think new hardware launches expected during the next year (GB-DS, PSP and X-Box 2.0) are at significant risk of delays and could further exacerbate a downturn in sector sales," Gikas said recently.

In the face of these challenges, EGB offers its run down of recent financial results, conventional wisdom among analysts, and our own take on holiday prospects for the majors.

Acclaim. Between a Rock and Hard Place?

The NASDAQ stock exchange is threatening troubled publisher Acclaim with de-listing as its stock price and market valuation have dipped far below exchange minimums.

We think things get much worse for Acclaim in the holiday season. Its line-up, including Juiced, Red Star and 100 Bullets is very likely to get swamped by the familiar brands. The company could and probably should push its titles into 2005, but then it ruins its revenue picture for several running quarters and banks on early 2005, which will also be inordinately competitive because of all the delayed titles.

Activision: Next Gen Nirvana?

Activision deservedly crowed that it had the best non-holiday quarter in the company's history, off of Spiderman 2 and Shrek 2 properties both selling over 2 million copies. Already riding the Doom 3 wave, and with X-Men and Tony Hawk titles slated for the current quarter, it looks like Acitvision may get the bulk of its sales in wisely before the Christmas crunch.

Defying recent analyst comments that the next-gen hardware might be slower to catch on than previous generations, CEO Bobby Kotick told an RBC investors' meeting that gamers will be wowed by the new technology and buy in quickly. "The real-time rendering capabilities are beyond what I think the consumer is expecting," he says. He anticipates "unprecedented" rates of sale on the next-gen consoles and even quips that he would tell Sony and Microsoft they could add $100 to their intended pricing. In fact, he anticipates Activision titles for these systems will sell at a higher price as well and that the market will bear it.

While we agree that it is time for game title prices to go up $5 or $10, we do not foresee enough of a range of launch titles for the next-gen consoles that will demonstrate their technical chops early in the cycle. We think technology sold the last generation, but game experiences will sell the next.

Atari Will Run Between Raindrops

Atari claimed its quarterly revenues were driven by a 50% sell-through of its initial Driv3r shipment, although CEO Bruno Bonnell admitted that Europe was performing much better than the U.S., where he says the title faced competition from the Spiderman 2 licensing juggernaut. "We got some distortion in the U.S.," he says. Bonnell also snarked about the loss of the Unreal license. "After all of those years, the proposal made to the company for new agreements and compensation were not acceptable from a P&L point of view."

Bonnell admits the wall of major game licenses hitting this holiday "are going to suck dollars out of the market," but he intends to "run between the raindrops" with shipments including Axis & Allies, Backyard Basketball, Sid Meier's Pirates and some entries in its perennially popular Dragonball Z and Duel Masters franchises. Aimed more at franchise loyalists, families and girls than the core, these titles will "cherry pick" audiences, says Bonnell, with highly targeted and efficient marketing that does not try to overcome the holiday noise.

Well, maybe. We're still waiting to see effective niche games marketing from any major company. We agree with Gikas' assessment that "Atari lacks IP and title momentum. [It] has few power brands capable of driving meaningful sales and earnings growth." It will continue to flounder.

Electronic Arts Feels the Heat

While no one doubts that EA will continue to prosper, it is notable that for once the company is actually feeling the pressure from other franchises. EA has pushed its Medal of Honor: Pacific Assault to November, and it will have Goldeneye 2 in the period, but officials projected relatively flat revenues for the quarter because of the fierce competition from the likes of GTA: San Andreas. In fact, EA is poised to have a monstrous current quarter. With NCAA, Madden and The Sims 2 all releasing in the same period, it is almost staggering to think of how much revenues these titles could bring in. The Sims franchise especially will continue to sell through Christmas regardless of the competition. The good news for other game companies is that they probably won't have to contend with the EA marketing machine drowning out their messages and stuffing store shelves.

This may be the first Christmas in several years where EA did not own the market. But not for long. The long-term worry for the mid-tier publishers is that they will have EA to contend with in early '05, where many of them are pushing titles originally slated for late '04. EA has street sport titles, and titles in the Oddworld, Battlefield, and Time Splitters franchise all for possible release in early '05.

Midway Claws Back

Evidence of a turnaround at Midway comes from MLB SlugFest, PsiOps, and NBA Ballers performing well in the quarter, reducing the rate of loss for the beleaguered company. The Oct. 4 launch of its core franchise, Mortal Kombat: Deceptions is well positioned to bring in more revenue because it comes in before the holiday onslaught and it has little fighting genre competition. Wisely, it pushed the unproven Area 51 into 2005, and it seems to have succeeded in doling out one or two key money-makers in each quarter this year.

Has Sony Got Game?

Sony reported 38 million PS2 games shipped in the recent quarter, up from 31 million a year ago, although the games division lost money (see chart). We are puzzled by the Sony holiday games strategy, aside from Gran Tourismo 4, which should sell exceptionally well. Otherwise, Sony is relying on sequels to franchises Ratchet and Clank, Jak and Daxter, and Sly Cooper, which did not burn up the charts last year and show only iterative changes this year. FPS KillZone seems to be its strongest offering, but it will compete head-on with Halo 2 and perhaps with WWII shooters, which it resembles in some ways. Rather than leading software innovation, Sony appears to be following some of its own weaker trends.

THQ Stays the Course

THQ has The Incredibles coming this holiday, licensed from Disney\Pixar and a good candidate for selling well outside of the gaming core, as will SpongeBob Squarepants titles off of the Nickeolodeon license. The SpongeBob games did surprisingly well last year. THQ's Finding Nemo title sold 6 million copies, and THQ announced its deal with Pixar has extended to the first film the animation studio makes after its own agreement with Disney expires. Otherwise, THQ is deliberately avoiding the holiday push by moving its AAA hopeful STALKER into 2005. "Let's keep STALKER away from that," said CEO Brian Farrell. Banc of America's Gary Cooper worries that THQ is losing momentum by pushing several titles into 2005, with mainly the WWE wrestling titles driving sales in the current quarter. Several analysts believe that the delays are adding risk to THQ's performance. We think the licensed kids titles will be able to penetrate the holiday noise effectively enough to keep THQ on track, but that is about all.

UbiSoft

Ubi was rumored to be buying EIDOS, but the most recent buzz at press time was that the deal was off. It is also rumored to be courting Codemasters. The company seems to be pulling back from last year's ambitious Christmas assault, which bore little fruit. It is unclear whether and how it plans to market Prince of Persia 2 any differently in the U.S. this time out, since it faces even harsher competition this year. The console version of Far Cry is not likely to grab the FPS-starved crowd it enjoyed on the PC. Wisely, Ubi is pushing its WWII entry, Brothers in Arms, into 2005, since it had little chance of competing this year.

Vivendi Universal: A Slow Turnaround

Vivendi Universal continues to struggle (see chart) but it praises the performance of Chronicles of Riddick and Van Helsing in the last quarter, and in fact both licensed titles surprised critics with their quality. It has a new organization and executive group in place as of early July, and VUG continues to say it is in transition. Vivendi has an opportunity to make up lost ground in the holiday quarter with Half Life 2 (presumed to be a September releases) and what we think will be a sleeper, Leisure Suit Larry. Its Men of Valor title, however, will be up against both Medal of Honor and Call of Duty franchises releasing for the consoles. From what we have seen, it is a good game in a cluttered category that should be pushed to 2005 to give it room to distinguish itself.

Contact: Gary Cooper, 415/627-2643, gcooper@bofasecurities.com; Anthony Gikas, 612/303-6245, Anthony.n.gikas@pjc.com

Company: Acclaim [AKLM]: No quarterlies yet from Acclaim, but its recent FY statement (ending March 31, 2004) showed a revenue decline to $142.7 million from $210.1 million in 2003, but narrows its loss to $56.4 million from 84.8 million.

Stock Performance YTD 1/2/04 - 8/9/04 / % Change / YTD Range: 0.63 - 0.18 - 33.33% .15 - .84

Company: Activision [ATVI]: Revenues rocketed to 211.3 million, up from $158.7 million year ago period, with net income up to $12.0 million from $7.8 million. CEO Kotick says this marks 12 years of uninterrupted revenue growth, leaving $500 million in cash. Full year revenue is projected to be $1.1 billion Stock Performance YTD 1/2/04 - 8/9/04 / % Change / YTD Range: 12.52 - 13.7 9.42% 11.59 - 16.79

Company: Atari [ATAR]: Revenue was down to $110..3 million from $151.4 million year ago quarter, with net income down to $12.1 million from $23.8 million. The company anticipates a 25% year-over-year revenue increase in the quarter ending Sept. 30.

Stock Performance YTD 1/2/04 - 8/9/04 / % Change / YTD Range: 4.21 - 1.8 - 57.24% 1.76 - 4.84

Company: Konami: Revenue of 350 million Euros ($429.4 million) down from 435 Euros ($527.5) same period year, off 17.6%. The general toy and hobby business was off, but so was the video game division, which brought in 67.4 million Euros ($82.66 million) down 40% from 97 million Euros ($188.9 million). Stock Performance YTD 1/2/04 - 8/9/04 / % Change / YTD Range: NA

Company: Microsoft [MSFT]: The Home and Entertainment division reported operating loss of $339 million in the last quarter up from same quarter 2003 of $245 million. Xbox revenue dropped $5 million in the quarter as a result of price cuts, but it was responsible for $144 million more in revenue for all of fiscal 2004 than in 2003. MS also cited next-generation R&D on the Xbox as part of the overall operating loss for fiscal 2004 of $1.21 billion. Rumors abound that Bill Gates will unveil the Xenon successor to Xbox in his traditional keynote address at the Consumer Electronics Show in Las Vegas in early 2005. Stock Performance YTD 1/2/04 - 8/9/04 / % Change / YTD Range: 27.45 - 27.38 - .26% 24.14 - 29.00

Company: Midway [MWY]: $47.3 million in quarterly revenues beats the paltry $5 million of year ago quarter. Midway recorded a $25.7 million loss for the first half of the year, but the rate of loss slowed to $10.7 million the June 30 quarter.

Stock Performance YTD 1/2/04 - 8/9/04 / % Change / YTD Range: 3.86 - 11.49 197.67% 3.65 - 12.85

Company: Sega [SEG-JP]: Units sales of 1.57 million beat Sega's 1.28 million forecast, but falling prices in the U.S. market (40% of Sega sales) made profits drop 51% to $8.4 million).

Stock Performance YTD 1/2/04 - 8/9/04 / % Change / YTD Range: NA

Company: Sony [SNE]: Despite superb profits for the parent company, the games division reported a loss of 21.6 million Euros (vs profit of 8.2 million Euros same period last year) off of falling hardware sales and increased next-gen R&D costs.

Stock Performance YTD 1/2/04 - 8/9/04 / % Change / YTD Range: 34.98 - 33.29 - 4.83 33.29 - 43.66

Company: THQ: A net loss of $3.9 million on sales of $88.2 million is down from year ago period $3.6 million loss on $98.1 million revenues. Full Spectrum Wariror drove revenues in the quarter and because it was internal IP, it also brought margins up 7% to 39.1%. THQ pegs full year revenue at $680 million. Stock Performance YTD 1/2/04 - 8/9/04 / % Change / YTD Range: 17.08 - 18.01 5.44% 15.94 - 23.00

Company: UbiSoft [UEN-Eur.]: Sales dropped 3% vs. year ago quarter to $75.8 million, driven mainly by 2.7 million copies sold of Splinter Cell: Pandora Tomorrow. The French company still project 10% revenue growth for the full year. Stock Performance YTD 1/2/04 - 8/9/04 / % Change / YTD Range: YTD Range: 19.35 - 22.03 (Euros)

Company: Vivendi Universal Games [V]: Revenues continued to tumble down 47% in the quarter compared to a year ago -- $85.4 million down from $161.2 million. Full half-year results were down 38% -- $178 million from $288.6 million Stock Performance YTD 1/2/04 - 8/9/04 / % Change / YTD Range: 24.45 - 23.62 - 3.39% 23.08 - 29.32

[Copyright 2004 PBI Media, LLC. All rights reserved.]

COPYRIGHT 2004 PBI Media, LLC
COPYRIGHT 2004 Gale Group