Challengers are chipping away at

Electronic Arts'


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's

sister site,


. "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

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. 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 --


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PlayStation 2,


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Xbox and


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.

That strategy seems to have had some success, boosting sales of Take-Two's


, while apparently limiting sales of EA's

Madden 2005

. American Technology Research's P.J. McNealy projects that sales of this year's iteration of


are down 20% from last year's version.

"We believe that ERTS continues to be under pressure in the sports categories with September software sales," McNealy said. (American Technology Research does not do investment banking, and McNealy does not have a position in the companies he covers.)

EA has

responded to the threat with its own discount, offering customers a free sports title for each one they buy.

But the question for Conley and others is how long EA will continue with the promotion and whether it might take other steps. EA "is a juggernaut and is the premier name in the group, but everyone knows that," Conley said. "I'm wondering how they are planning on dealing with


Not helping matters is that EA reportedly had "performance" troubles with another of its sports games,

Tiger Woods PGA Tour 2005

. The problem reportedly only affected a limited number of copies sent to the U.K., and the company vowed to correct it by sending out replacement copies.

But that performance trouble is an unwelcome black eye for a company that charges such a premium for its sports titles, said Joe Spiegel, a fund manager at Dalek Capital.

"That's not good," Spiegel said. "When you're fighting a resurgent ESPN brand, you want to have the message your games are of the highest quality." (Spiegel doesn't have a financial position in EA shares, but is long Take-Two.)

While the company is fending off Take-Two on the sports front, it'll face a broader battle for sales during the holidays. Analysts expect fewer than 10 titles will

dominate the holiday season, headed by Take-Two's upcoming

Grand Theft Auto: San Andreas



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Halo 2


EA titles such as

The Sims 2


Need for Speed Underground 2

are likely to see strong sales. But some analysts worry that they may be crowded out by the more hyped blockbusters.

"It will be interesting to see how much shelf space

EA's executives think

San Andreas

is going take," said Spiegel. "If the shelf space is going to

San Andreas

, it's got to come out of somebody, and the biggest somebody is EA."

The concerns about EA seem to be reflected in analysts' estimates. On average, analysts expect EA to post a second-quarter profit of 35 cents a share excluding gains and charges on $714.1 million in sales. The company itself predicted that it would earn 28 cents to 34 cents a share in the quarter on sales ranging from $680 million to $740 million.

To be sure, some investors and analysts are relatively unconcerned about EA's prospects.

Friedman Billings Ramsey analyst Shawn Milne wrote in a Friday research note that EA is likely to report better-than-expected results in its just-completed quarter, based on solid sales of


and other titles. While EA faces a tough year-over-year comparison in the holiday quarter, titles such as

Need for Speed


FIFA Soccer 2005

should buoy the company's revenue, Milne wrote.

"At the current price level, we believe ERTS offers upside to long-term investors," Milne said, reiterating his "outperform" rating on the stock and his $62 price target. EA shares closed regular trading on Monday up $1.09, or 2.4%, to $46.52.

In addition, Sony just released a new version of its PlayStation 2 console. That could juice sales of the device in the short term, as well as sales of software for it, Spiegel said. As the leading publisher on the PlayStation, EA will likely benefit from any sales uptick, he said.

EA could see longer-term benefits from another development: the release of Nintendo's upcoming GameBoy DS handheld device. EA plans to have several of its top titles, including


, available for the DS as soon it's released later this year.

"Hopefully, EA can start to exploit the handheld market. That's a long-term good for them," Spiegel said.

Perversely, some investors are hoping for EA to report a disappointing quarter or offer subpar guidance, not because they don't believe in the company, but because they want to get into the stock.

"I pray for some sort of big pullback, because I think the company's amazing," said Matt Kelmon, a fund manager at Kelmoore Investment. (Kelmon does not have a position in EA.)