Pressure mounts on E3 to prove industry can grow long-term

After worse than expected game sales for the month of April, there is increasing pressure on the games industry to prove that new hardware offers potential for long-term growth in the videogame business.

According to US analysts, the 26 per cent drop in revenues during April will "spook" the investment community, despite the decline partly attributable to the Easter sales period falling a month earlier than last year.

"April 2010’s results will only exacerbate the growing concerns about the long-term viability of the traditional retail packaged goods market as back catalogue sales and mainstream/casual titles continue to deteriorate at a quicker pace over expectations," said EEDAR's Jesse Divnich in a note to investors.

Wedbush Morgan's Michael Pachter added that, "on balance, we expect investors to be spooked by the April results, and expect many to continue to believe that the videogame industry is in a state of persistent secular decline."

With investors expecting the current generation to come to a close, this year's E3 could prove critical for the industry to highlight the potential for growth – new hardware, both announced and rumoured to be revealed – will need to excite the market beyond 2010.

"Despite what may feel like depressing numbers, the future remains bright for the industry. With new technology on the horizon (PlayStation Move, Microsoft Natal, 3D Gaming, and the Nintendo 3DS), the industry is likely to rebound this holiday season," offered Divnich.

"However, this does put an extraordinary amount of pressure at this year’s E3 event to demonstrate that these new technologies can rekindle excitement among mainstream and core consumers. If these technologies fail to generate the excitement and anticipation needed for medium term sales performance improvements this may accelerate the completion of this current hardware cycle.

"Even with the impressive release schedule in the holiday season, which includes new titles for large franchises such as Halo, Medal of Honor, Ghost Recon, and Call of Duty, EEDAR believes that the launch of the PlayStation Move, Microsoft Natal and possible new hardware from Nintendo to be crucial to the success of the 2010 holiday season," he added. "If either of the new technologies fail to excite consumers, software sales could retreat into the negatives for calendar year 2010 and would only reinforce concerns among investors about the long-term viability of the traditional packaged goods market."

May must also be a positive month for sales, with releases such as Super Mario Galaxy 2, Red Dead Redemption, Alan Wake, Lost Planet 2, Skate 3 and THQ's new UFC title all packing potential at retail.

"We think that investors will stay on the sidelines until they see evidence of a sustainable rebound in sales, which we expect to commence in May," said Pachter.

Poor April results were also due to the lack of long-tail sales for single-player games released the previous month, claims Doug Creutz of Cowan and Company, and it is online and digital strategies that can add shelf life to multiplayer titles as single-player games are traded in quickly after completion.

Sony's God of War III sold only 180,000 units last month in the US, compared to 1.10 million in March, while Square Enix's Final Fantasy XIII shifted 1.32 million in its release month, compared to only 91,000 units in April. In comparison, the multiplayer focused Battlefield: Bad Company 2 sold 1.28 million in March, and 273,000 in April.

"We believe the data suggests that sales of single-player games without a robust online or multiplayer functionality are seeing a significant negative impact from the used game market," said Creutz.

"If correct, our thesis does pose a problem for the ability of AAA titles, particularly those that do not feature a robust multiplayer mode, to maintain sales momentum beyond the initial release window."

Online console gaming is another significant area for growth, with publishers likely looking to continue to monetise play beyond the initial purchase of a disc. EA's Project Ten Dollar and Ten Dollar Pass are examples of monetising the amount of hours consumers spend online, and other publishers are likely to follow suit.

"If EA's plan is successful, we would not be surprised if similar programs become increasingly standard for all publishers over the next 12-18 months," offered Creutz.

Activision is also likely to look at additional ways of charging for online play, said Pachter, after the success of Call of Duty Modern Warfare 2.

"We anticipate that Activision will find a way to monetise the 1.75 billion hours of Call of Duty Modern Warfare 2 online play on the Xbox 360 in the first five months following the game’s release. This gameplay suggests that as many as 12 million gamers (PS3 and Xbox 360 combined) played online for an average of 10 hours per week for the five months since the game’s launch.

"It is obvious to us, and likely equally obvious to Activision, that these gamers are spending a lot of time that was monetised only through the original purchase. In the future, we think that Activision will find a way to charge for some portion of online gameplay, and if successful, we think that other publishers will follow suit."