The Game Gets Rougher

The video-game industry underperformed the broad market by a wide margin in the first quarter. There's little doubt this is a seriously troubled business, in which growth assumptions taken for granted last year now require a major overhaul. And things could get even worse.

The problems began in late November when Microsoft (MSFT - commentary - Cramer's Take) released fewer than expected units of its long-awaited Xbox 360 console. This baffling move set off a buying frenzy on eBay but left game developers and retailers scratching their heads.

After all, the holiday season was just beginning and developers and retailers planned to sell a boatload of new games as users upgraded their console systems. Instead, major industry players were forced to hit the wires, one after another, reporting year-end sales that couldn't meet modest expectations.

Curiously, one game-related company has prospered this year, despite declining holiday sales in 2005. Mall retailer GameStop (GME - commentary - Cramer's Take) has tagged a series of new highs since early January. But a closer look suggests this maverick performance won't help the industry, because it's largely due to cost savings from its merger with Electronics Boutique.

Microsoft recently indicated it will finally be able fill store shelves with enough consoles to meet demand. However, Sony (SNE - commentary - Cramer's Take), its main competitor, has pushed back the launch of its long-awaited PlayStation 3 to November. Adding to Sony's woes, movie studios and retailers are pulling away from the PSP-compatible UMD format after months of poor movie sales.

The Disruption of Online Gaming

Gaming companies assume that customers will buy an endless flow of new titles, sequels, and sequels to sequels. Add in the continuous revolution in video graphics and it seems realistic to project that hard-core gamers will buy variations of an original theme at least a dozen times over the life of the title.

---

Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.