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By Bob Blandeburgo
Thousands of video game industry insiders are gathering at the Los Angeles Convention Center this week for the Electronic Entertainment Expo (E3), the industry's annual trade show, and each year the stakes get higher among the sector's "Big Three:" Nintendo Co. (ADR OTC: NTDOY), Microsoft Corp. (Nasdaq: MSFT), and Sony Corp. (NYSE: SNE).
In the past, companies would typically announce new video game systems in the fourth year of the existing system on the market, but at this year's E3, there were no new systems announced. Instead, all three console manufacturers announced peripherals that would evolve and extend the life of their current systems.
That's good news for the sales of software publishers in what has become a $22 billion industry.
And it could also be good news for investors in the last half of the year, industry analysts and market-research firms say.
Video-game sales plummeted 17% in April and hardware sales dropped 8% on a year-over-year basis, according to NPD Group Inc. But here's the wild card: U.S. consumers still spent roughly $10 billion on games and related hardware in the year's first four months, and surveys suggest shoppers aren't likely to cut their game-related spending in the months to come, The Seattle Times reported this week.
And several companies are positioned for second-half rebounds, industry insiders say.
Nintendo Goes the Software Route
Nintendo changed everything when it debuted its Wii console more than two years ago. The motion-sensing controllers offered users an entirely new way to interact with games, and Nintendo gained the lead in the industry for the first time in more than 10 years. The company had an installed base of more than 50 million Wiis as of March.
This year's E3 is less about hardware and more about the games that transformed Nintendo into the player it is in the industry today. To that end, the company unveiled new titles based on some of its most beloved properties. Nintendo revealed it is working on "New Super Mario Bros." and "Super Mario Galaxy 2," both based on Nintendo's Mario character.
The Japan-based game maker is also developing "Metroid: Other M" and a new "Legend of Zelda" (working title) for its Wii system.
But even though the company is revisiting many of its classic titles, Nintendo is still moving down a path of innovation. One of its biggest successes has been its "Wii Fit," which takes users off the couch and puts them on the Wii Balance Board for a variety of exercise activities and games. As of March, "Wii Fit" has sold in excess of 18 million units worldwide.
The company said at E3 this week it is developing a sequel – "" – due on shelves in the fourth quarter.
While Wii captures most of the headlines, Nintendo's DS handheld game system – which has sold more than 100 million units worldwide since its 2004 launch – will also get more games based on these key characters.
Microsoft Puts its Backfield in Motion
Redmond, Wash.-based Microsoft announced a slew of ambitious projects for its Xbox 360 console at E3.
Not content with being No. 2 in a three-horse race, Microsoft's message was clear: It's going to do motion-sensing controls better than Wii, and it will do so using its existing Xbox 360 console and a camera/microphone peripheral code-named Project Natal.
Instead of relying on a controller to track movements, Natal will track the movement of the actual user, not unlike thethat is used for animation of many of today's games. For instance, to swing a baseball bat in a game, a player will hold their hands and arms in the correct position and mimic the motion they would make if they were to swing a real bat.
While the technology is garnering plenty of attention, Microsoft has not revealed when the product will be in stores, nor has it specified any compatible games yet.
Microsoft will update the Xbox 360's proprietary operating system-called the dashboard-this fall with several new features in an attempt to further separate its console from those of its competitors.
Perhaps the most notable feature will be the Xbox Live account to their Facebook account. Once the accounts are linked, users will be able to see their friends' Facebook accounts on their TVs. The same will be true for users of Twitter, the micro-blogging service whose popularity is zooming.. Using this new feature, any user will be able to link their
Microsoft also will integrate its Zune media-player brand into the Xbox dashboard, renaming its video marketplace the Zune Video Marketplace. The move is an attempt to increase awareness for its struggling Zune line, which has failed to capture significant market share from Apple Inc.'s (Nasdaq: AAPL) iPod – despite some technically superior features.
The company did not say whether users would be able to download content to their Zune players from the Zune Video Marketplace for Xbox.
Investor darling Netflix Inc. (Nasdaq: NFLX) also has a presence on Microsoft's console in the form of streaming movies and TV shows for any user who is both a Netflix subscriber and Xbox Live gold member.
Microsoft announced Monday that Xbox 360 users would now be able to browse more than 12,000 streaming choices. Currently, users must browse the library through a PC and add a title to their queue.
Xbox 360 users will also be able to listen to Internet radio starting this fall thanks to a Last.fm. Through the Xbox 360 dashboard, users will be able to tailor a Last.fm radio station based on their music preferences.with
In a sign of the times, Microsoft will give users yet another option to download games to its console, enabling them to skip a trip to retailers such as GameStop Corp. (NYSE: GME), the world's largest seller of video games. Starting this fall users will be able to download Xbox 360 games directly to their consoles.
Marc Whitten, an Xbox Live executive with Microsoft, insists that "retail is not going away – it's still really important."
Not to be forgotten for Microsoft's game console are the games themselves. The company will release "Halo 3: ODST," a follow-up to 2007's best-selling game. Other notable releases from Microsoft coming in the next year are "Alan Wake," "Crackdown 2" and "Forza Motorsport 3."
After a Billion-Dollar Loss, Sony Looks for Portable Profits
With the most expensive system on the market, Sony's PlayStation 3 (PS3) is No. 3 in three-horse console race. Although the company lost $1 billion for the year ended March 31, and faces increasing pressure from game publishers to drop the $400 console's price, Sony made no such announcement at E3 this week.
Instead, the company rallied around its most popular franchises, such as "Ratchet and Clank" and "God of War" and reinvented its PlayStation Portable (PSP) handheld gaming system for the always-crucial holiday shopping season.
Garnering the most attention for Sony is its announcement that it would redesign PSP into the PSP Go. The unit, which will not use any form of removable physical storage such as a CD or cartridge, will rely on downloads from Sony's PlayStation Store for game sales.
Sony will also add video downloads to its PlayStation Store for PSP, enabling users of the old or new PSP to download movies and TV shows directly to the unit. Previously, users had to download the content to their PCs and transfer them to PSP via a cable.
Like the other two consoles, PS3 is searching to carve out its niche and relies on exclusives to do so. The company revealed that Square Enix Holdings Co. Ltd. would release "Final Fantasy XIV Online" exclusively for PS3. More than 85 million games in the "Final Fantasy" series have been sold worldwide.
Sony also, due for release next spring.
Have These Stocks 'Got Game?'
Aside from the gaming sector's Big Three, there are several publicly traded third-party game publishers that could present some good opportunities for investors that made key announcements at E3 this week.
Activision Blizzard Inc. (Nasdaq: ATVI), the world's largest third-party publisher, has the largest slate of games coming in the next year, most of which are based on well-established properties. At the trade show, Activision is showing off "Modern Warfare 2," "DJ Hero," "Guitar Hero 5," "Tony Hawk: Ride," "Blur," "Singularity," "Prototype," "Wolfenstein," "Transformers: Revenge of the Fallen" and "Marvel Ultimate Alliance 2."
"Modern Warfare 2's" predecessor, "Call of Duty 4: Modern Warfare," has sold more than 13 million copies, and Activision is hoping "DJ Hero" duplicates the success of its "Guitar Hero" franchise, in which its third installment alone surpassed the $1 billion revenue mark in January.
Not to be outdone, Electronic Arts Inc. (Nasdaq: ERTS) is showing off the latest version of its popular football game, "Madden NFL 10." The publisher has an exclusive license to develop and sell NFL-branded games.
Other notable EA titles being shown at E3 include "Army of Two: The 40th Day," "Crysis 2," "Mass Effect 2," "G.I. Joe," "Fight Night Round 4" and "Battlefield: Bad Company 2."
The company also just released the "The Sims 3," the third title in the best-selling PC game franchise.
One publisher that might be worth watching is Majesco Entertainment Co. (Nasdaq: COOL). A string of upbeat earnings announcements have sent this micro cap stock from a 12-month low of 36 cents a share late last year to a 52-week high of $2.14 on Wednesday.
Majesco, best known for its accessible "Mama" games for Wii and Nintendo DS, is reviving a property that was popular for Nintendo's console in the 1980s: "A Boy and His Blob." That title is due for a third-quarter release and is garnering considerable attention in the gaming press.
While most agree that the value proposition for video games (30 to 40 hours of entertainment for an average outlay of about $60) is a strong one, there are signs the industry is taking its lumps as the ongoing financial crisis induces consumers to cut back on discretionary spending.
Market researcher NPD attributed the April skid in large part to a weaker array of offerings, according to CBS Interactive's CNET Inc. Even sales of Nintendo's Wii, almost impossible to find on shelves since its 2006 debut, have cooled off 43%.
Nintendo's system can now be found in abundance on most store shelves.
Heavy hitters Electronic Arts and THQ Inc. (Nasdaq: THQI) have shed hundreds of jobs this year, contributing to the nearly in the game industry since July 2008 after both reported losses in the hundreds of millions of dollars.
However, other analysts note that the downer numbers were due, in part, to tough comparisons. The year-ago figures for April were supercharged by the release of such blockbuster titles as Nintendo's "Super Smash Bros: Brawl," which saw U.S. sales of 2.7 million units.
For its part, EA is taking aggressive steps to regain a profitable footing, MarketWatch.com reported. Wedbush Morgan Securities Inc. analyst Michael Pachter wrote in a recent investors report that EA will be shifting into cost-cutting mode in an effort to become profitable again, an objective that should be helped by a strong pipeline for the current quarter.
"We are encouraged by management's current plan, and we think that EA is only one or two quarters away from restoring investor confidence," Pachter wrote in the report.
Activision has seen its shares skid about 35% from their late-July peak of almost $19, although the firm's "Guitar Hero" and "Call of Duty" franchises have remained top sellers. And its merger with the maker of "World of Warcraft" has enabled it to diversify away from a strict reliance on cyclical console game sales by giving it access to a stream of recurring subscription revenue.
Bank of America Corp. (NYSE: BAC) analyst Justin Post said Activision's business will get a boost later this year, thanks to looming releases of new "Guitar Hero" and "Call of Duty" titles, a new "Tony Hawk" game, and "Starcraft 2" from its Blizzard gaming unit. Post said that investors who wish to want to profit from Activision's shares might want to look at the June-to-September time period.
"We believe best period for Activision stock could be June-September as 'The Street' starts anticipating Activision's strong holiday line-up, and we see the potential tail-wind of console (PS3, Wii) price cuts over the summer," Post wrote in a research note to clients.
And even the recessionary conditions could provide aid to the gaming sector, should the financial crisis continue is transition from virulent downturn to a nagging malaise. Consumers will be forced to continue to curtail their spending, eschewing expensive vacations and looking for ways to better entertain themselves at home. Faced with a bummer summer after dumping a St. Barts vacation in favor of a neologistic "staycation" those consumers may seek solace with some heroic guitar jamming or some virtual shoot-em-ups. And that could help put these gamers back in the black.
[Editor's Note: Associate Editor Bob Blandeburgo, a veteran journalist and a Money Morning newcomer, is a longtime chronicler of the world's high-tech and video-gaming sectors. He wrote about Microsoft Corp.'s new "Bing" search-engine initiative earlier this week.]
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