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Next Generation's Software Growing Pains

A Slow Start

During transitions, game companies often come under pressure on both the top and bottom lines. Typically, sales of next-generation games don't ramp up quickly enough to make up for the decline in sales -- and prices -- of old-generation games. At the same time, companies take on increased development costs as they try to get up to speed with and master the new game-machine technology.

On the cost side, things look much the same. Game development costs are going up for the new consoles, according to most analysts. If the average game could be made for less than $10 million for the current generation of consoles, the run-of-the mill next-generation games will cost more than $10 million, says John Goldman, CEO of Foundation 9 Entertainment, one of the leading privately held game developers. And, depending on who you ask, per-game costs for top-of-the line titles could run into the $20 million to $30 million range.

But things were supposed to be different on the revenue side. Acknowledging past mistakes, most major software publishers have pledged to support Sony PlayStation 2 and other current consoles far longer than they supported previous machines, such as the original PlayStation -- the idea being that there's still a huge market for those machines.

In the meantime, high-powered handheld systems such as the PlayStation Portable and the Nintendo DS, launched in advance of the console transition, were supposed to help bridge the gap between cycles, helping bring in sales -- at a relatively low cost -- that publishers didn't have before.

But so far, many publishers seem to be experiencing some of the same transition-year trouble that they've experienced in the past. Shares of EA, for instance, were hammered in March when the company announced a big earnings miss. It has predicted flat sales and earnings this year, but recent price cuts on current-generation games could hamper results.

Other companies are also starting to feel the pressure. Midway Games (MWY) and Take-Two recently slashed their guidance. Activision expects earnings to essentially stagnate this year, while THQ (THQI) predicts its profits will plummet on flat sales.

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