PlayStation 2 Shipping Shortfalls Lead to Downgrade at Electronic Arts

Shipments of the Sony (SNE) PlayStation 2, the most in-demand gift of the holiday season, apparently are falling far short of the already reduced delivery schedule, according to industry analysts.

The shortfall of consoles led one analyst to downgrade the shares of the U.S.'s largest independent video game maker, Electronic Arts (ERTS). Another analyst also distributed a note reducing Sony's earnings estimate for the year.

James Lin, analyst for Sutro, estimated Monday that Sony has shipped 60% to 65% of the next-generation video game consoles it said it would ship under a revised schedule. The consumer electronics company originally planned to ship 3 million of the $299 machines by the end of the year, starting with 1 million to be released in the U.S. Oct. 26.

Sony revised the schedule a month before the release date, saying that unspecified component shortages would cut the number to 1.3 million by the end of the year, with 500,000 shipped by Oct. 26. (Analysts had speculated that Sony would have difficulty meeting the number.) The company promised 100,000 a week until the end of the year. The consoles were sold out in advance, with wanna-be buyers lining up by the hundreds and sleeping on the floor for an opportunity to buy one.

Citing poor game sales as a result of fewer consoles sold, Lin downgraded game-maker Electronic Arts to buy from strong buy and reduced the price target from $63 to $52. Still, Electronic Arts closed up 84 cents, or 2%, to $44.85.

"It's a concern," said Justin Post, analyst with Deutsche Bank. "If the hardware isn't out there, the software won't sell through." (His firm has no underwriting relationship with Electronic Arts.) Post said software sales figures for the PlayStation2 had led analysts to believe the machines weren't getting to customers.

Salomon Smith Barney also issued an intraday note reducing its fiscal year 2000 earnings estimate for Sony down 14.2%. It said the revision was due to "expansion of losses on video game operations." Sony closed up $4.68, or 6.2%, to $80.44.

Sony announced one month ago that year-over-year profit for the quarter declined 57% due to PlayStation2 production. Electronic Arts' exposure to the PlayStation 2 drought will cause a "short-term" problem for the stock, Lin said.

Lin estimated that EA would sell as much as 40% of the PlayStation 2 titles. But EA's long-term outlook with the PlayStation 2, considered the dominant gaming console for the next few years, was very positive, he said. (Sutro has no underwriting relationship with Electronic Arts.)

Deutsche Bank's Post was less sure that the poor PlayStation sales would hurt EA as much. He estimated EA was counting on about 22% of its revenue from the PlayStation 2. Even with a shortfall in sales, he said, the company could still make its 15% to 25% year-over-year earnings estimates. "It's not make or break, but there is an upside opportunity for them," he said.

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