Game Makers Brace for Console Cycle

With the current generation of video game consoles starting to age, game developers were expected to have an unimpressive harvest in 2004. Instead, game-software sales were up about 9% through November, according to industry estimates. And in response to the better-than-expected results, stocks in the sector thrived.

But with the next generation of consoles expected to debut in the coming year, developers might not be so fortunate. Software sales often have withered during past console transitions while development costs have mushroomed. Although industry executives have promised to do a better job of tending their businesses this time around, analysts disagree about how 2005 will turn out.

"It's a tougher call than it normally is," said Steve Monticelli, president of Mosaic Investments. (Monticelli doesn't have a stake in any of the video-game-software stocks.)

On one side, many analysts believe sales will be flat at best next year. The average price of games likely will fall as consumers anticipate the debut of the new consoles, they say. And the appearance of new hardware -- particularly two new handheld game machines -- could cut into software sales, they say.

"The consumer doesn't have unlimited funds," said Joe Spiegel, a fund manager with Dalek Capital. "The handheld market is likely to grow, but that money has to come out of somewhere." (Spiegel doesn't have a position in any of the video game-software stocks.)

But some analysts think 2005 could see plentiful sales. The new handheld platforms likely will boost software sales this year as consumers buy games to go with their new devices, said Wedbush Morgan analyst Michael Pacther, predicting that the overall game-software market will grow 10% next year. (Wedbush Morgan has not done any recent investment banking business for the major public gaming companies.)