Video Game Industry Shows Little Sign Of Shaking Off Slump

Game sales are down and a shortage of new consoles isn't helping.

Gamers unable to track down an Xbox 360 aren't the only frustrated souls in the gaming community this holiday season.

U.S. video game sales were down 16 percent in November compared to the same month a year ago, the third straight month to see a drop of at least that size as compared to last year, according to the NPD Group, which tracks the games industry. The industry's $686 million in sales contributed to lowered financial expectations from major publishers such as "Madden" maker Electronic Arts and "Tony Hawk" publisher Activision. The result is a rare rash of bad news in an industry that's been booming for years.

The diminished sales don't threaten to ruin any gamers' fun in the short term, but the dropping numbers could create a domino effect that knocks mid-size game makers off the playing field, according analyst Michael Pachter, who follows the financial aspects of the industry for Wedbush Morgan Securities.

The industry stumble is being partly blamed on Microsoft's inability to meet demand for those hard-to-find 360s. Pachter said he thinks Microsoft aimed to create an appetite for 3 million 360s this year in the U.S., probably marketed the machine well enough to entice twice that many consumers but is still likely to ship only 500,000 units by year's end. "I actually feel bad for them because they swung for the fences and now they're just not hitting them," he said.

To make matters worse for game publishers, gamers who wanted a 360 but couldn't get one aren't turning to games for the pre-360 consoles this season. According to Pachter, NPD reported that sales for current-generation consoles last month were down $240 million from the previous November, a plummet he partially attributes to gamers' seeming disinterest in the season's sequel-heavy lineup.

Not every sequel is toxic to gamers, as evidenced by last November's blockbuster performances of "Halo 2" and "Grand Theft Auto: San Andreas." But Pachter said this year's crop was less inspired and too much of the same thing. He noted that EA's faltering holiday lineup was entirely devoid of original games (in fact, the company did not release a non-sequel all year). "Innovation is what drives growth," he said. " 'The Sims 14' and 'Need for Speed 5' and 'Madden 22' isn't going to do it."

Despite the gathering storm clouds, relief might arrive for gamers and the industry's bean counters early next year. Pachter said that will depend on whether Microsoft is able to ramp up shipments of the 360 and game makers release titles that players care more about. He also sees good omens in EA's 2006 plans for original titles such as the first-person shooter "Black" and the universe-simulating "Spore" as well as Nintendo's preparation for its next GameCube "Zelda" (a sequel that he said will register).

But the analyst said he can also foresee a more dire chain of events for 2006, one that hinges on when Sony releases its next PlayStation. "What I'm afraid of is Sony launches earlier than they're ready for, in May or June," he said. Sony executives have said the PS3 will launch in the spring of next year, though many expect it to only arrive in Japan and not come to America until the end of the year.

Gamers would like to have the console soon, of course. But Pachter points out that releasing the PS3 too soon could result in the same supply problems suffered by Microsoft. Combine that with the likelihood that gamers waiting to buy a 360 might decide to wait a little longer for a seemingly right-around-the-corner PS3, and the result would be still more months of gamers sitting on their money rather than buying games. While Sony could seemingly learn from Microsoft's difficulties, Pachter said the company could easily repeat them for reasons that have nothing to do with video games.

The PS3 is planned to be the first device marketed to consumers that plays a new disc format for movies called Blu-ray, which Sony hopes will replace DVDs. To ensure the format's success, Sony would like movie studios to support it. And to gain that support the company might like to show the studios that consumers are adopting it sooner rather than later. That, said Pachter, could result in the PS3 being released well before enough machines — or games — are ready. Another dose like that of this season's pain could force mid-size publishers to give it up, resulting in fewer games for consumers. Warned Pachter, "Sony could screw everything up."