Next Generation's Software Growing Pains

Despite these near-term troubles, investors have continued to have faith. Despite EA's problems this year, its shares are up 22% over the past year. And Activision and THQ are both up around 75% over the same period.

That's left all of the major U.S. publishers trading at a pricey 28 times or more their estimated earnings for the current year. And all except Take-Two are trading more than 20 times expected earnings for next year also.

Still, the longer-term outlook for the sector is bullish, most analysts believe. PricewaterhouseCoopers, for instance, forecasts that the worldwide market for video games will grow from about $22 billion in 2003 to about $55 billion in 2009.

"In my mind, there's no question that the entire category will be strong stocks in '06. The tougher question is, strong stocks from what point?" says Monticelli.

For those who answer that question right, the console transition will truly be a great time.

>To order reprints of this article, click here: Reprints