Games groups gear up for a year of change

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Shortages of the latest console, a lawsuit over how games are promoted, fewer orders than expected for a blockbuster title – January was a tough month for video game publishers at the start of a tumultuous year of transition for the industry.

Third-quarter results from Electronic Arts, the biggest publisher, tomorrow, and its forecasts for the rest of the year, could set the tone for the industry. EA has disappointed over the past few quarters but will hope for a return to form with its line-up for Microsoft’s Xbox 360 console and groundbreaking new franchises such as The Godfather, which was delayed but is scheduled for release next month.

Publishers have been suffering as the new console from Microsoft has made consumers lose their appetite for buying games on the old Xbox. At the same time, component shortages and the slow roll-out of production of the 360 has meant demand has not been satisfied and publishers do not have the base they expected to achieve million-selling products.

The French games publishers have also cited weakness in the market. Vivendi this week said sales faltered in its games division late last year while Ubisoft last week cut its annual sales forecasts as it reported softer European and US markets.

Surprisingly, 2005 was a record-breaking year in the US with hardware, software and accessory sales worth $10.5bn beating the previous best of $10.3bn in 2002, according to the NPD Group, a marketing information provider.

Sales of software for the Xbox, Sony’s PlayStation2 and the Nintendo GameCube were down 12 per cent on 2004, but the industry was saved by the strength of the growing portable gaming market represented by Nintendo’s Game Boy Advance and DS machines and Sony’s PSP. Software sales for these platforms grew 42 per cent.

“Every time you have a console transition this happens – it throws everything into a change mode, and the portable sector really did help to smooth the transition in 2005,” says Anita Frazier, analyst at NPD.

“This year the emphasis will be on getting a foothold in the next-generation consoles,” she says, with Sony’s PlayStation3 and Nintendo’s Revolution expected to join the 360 this year. Ms Frazier points to Activision’s success with Call of Duty, a highly realistic second world war shooting game: “It was the best-selling 360 game and even though the installed base was small, it did really well.”

Others, such as THQ, which reports third-quarter results Friday, are saving their big next-generation releases for the summer, with Microsoft expecting to have shipped about 5m of the new consoles by the end of June. THQ has also been forced to push back the release of its Cars game, because the Pixar animation it is based upon has been delayed until the summer.

A more unexpected delay in January was the postponement of the 10K results filing by Take-Two, best known for its Grand Theft Auto franchise. The Federal Trade Commission launched an investigation into the company last July after pornographic content was found hidden in Grand Theft Auto: San Andreas. The FTC is focusing on whether management knew of the content but did not disclose it in order for the game to avoid an adults-only rating.

Take-Two said it needed more time to file its 10K to meet Sarbanes-Oxley corporate governance requirements. Take-Two also suffered a major fire at its 2K Games subsidiary in January and, to complete its woes, the city of Los Angeles said it was suing over the hidden porn in GTA: San Andreas.

Other publishers may also find themselves under scrutiny: the action against Take-Two was described as part of an ongoing investigation into the marketing of video games in general.

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