Electronic Arts Faces Siege From Below

Challengers are chipping away at Electronic Arts' (ERTS Quote) dominance among video-game software publishers.

The company is entering the all-important holiday season without a top-tier, blockbuster title. Meanwhile, EA's rivals are starting to use discounts to cut into its market share.

The question is how the company responds to these threats and how successful it will be. EA will get a chance to answer those concerns when it reports second-quarter results after the bell Tuesday.

"I think the stock will trade up if they have good answers [or] thoughts on this new competition," said Norm Conley, a portfolio manager for JAG Advisors and a contributor to TheStreet.com's sister site, RealMoney. "Conversely, it will trade down if they don't appear to have a plan." (Conley is long EA shares.)

Such scrutiny comes with holding the No. 1 position in the industry. EA's sales last year were larger than the combined revenues of its three biggest rivals, Take-Two Interactive (TTWO Quote), Activision (ATVI Quote) and THQ (THQ Quote). Because of EA's size, many investors own its stock as a proxy for the video-game industry.

Those investors are looking for an early tell on how the industry is likely to navigate the end of the game-console cycle. The current generation of consoles --Sony's (SNE Quote) PlayStation 2, Microsoft's (MSFT Quote) Xbox and Nintendo's GameCube -- are all aging. Industry analysts expect the hardware markers to start unveiling next-generation consoles next year.

Investors have been worried about how the game publishers will perform in the interim. In past cycles, many publishers have seen their profits squeezed as development costs jump and sales start to tail off.

Intensified competition could aggravate those problems, particularly if publishers resort to price cuts to gain or maintain market share.

Take-Two is already using this strategy to take a bite out of EA's share in the sports-game market. Take-Two teamed up with Sega to copublish the ESPN line of sports games. But Take-Two slashed the price of the games, offering them for $19.95, or less than half of EA's typical $49.95 price for its sports titles.