Big Fourth Quarter Looms For Video-Game Sector

"Best year ever," suggests analyst.

Those seeking a bit of consistency among Wall Street analysts need look no further than video games. The consensus for the rest of the year: The sector will rock.

"I've got a big wish list for Christmas," says David Riley, manager of research firm NPD Group. "This will be the best year ever for video-game titles."

Riley says a few factors have converged that should propel sales through Christmas, including a recent drop in price of the Xbox and PlayStation 2 consoles, the soon-to-launch Nintendo DS handheld device and some strong franchise games to be released in the months leading up to the gift-giving season.

But not all game publishers will benefit equally, says Michael Pachter, research analyst at Wedbush Morgan Securities.

Although Pachter sees sales of software -- combining both PC and console games -- rising more than 10% from a record $7 billion last year to $7.76 billion this year, it won't be the usual suspects that most fuel the gains.

In other words, Microsoft Corp., Take Two Interactive Software, Sony Corp., Konami and the Sumner Redstone-controlled Midway Games Inc. -- which could increase its sales a combined 20% year over year -- will take market share away from leaders Electronic Arts, Activision and THQ Interactive, which will grow sales at a significantly slower pace, if at all.

Helping to take that share are what Pachter predicts will be the hottest games of the season: Microsoft's "Halo 2," Midway's "Mortal Kombat: Deception," Take Two's "Grand Theft Auto: San Andreas," Sony's "Gran Turismo 4" and Konami's "Metal Gear Solid 3: Snake Eater."

While Pachter has a "buy" rating on most gamemakers -- with the notable exception of THQ, which he rates a "hold" -- he predicts that the biggest winner on Wall Street this year will be Take Two, along with games retailers Gamestop Corp. and Electronics Boutique.

Perhaps the biggest catalyst driving sales this year is the price decrease of the Xbox and PS2 from $179 to $149, Riley says.

In terms of actual dollars spent, sales of consoles in January, February and March decreased year-over-year by 21%, 28% and 24%, respectively. Then Microsoft lowered its Xbox price and sales in dollar terms stabilized, but sales in terms of units took off.

In April, 647,000 combined Xbox, PS2 and GameCube consoles were sold, up from 541,000 in the same month last year, while unit sales increased 17% year-over-year in May and 10% in June. Sony matched Microsoft when it lowered the price of its PS2 in mid May.

"They were only $30 drops, but that made a huge difference in the consumer market," Riley says.