Spider-Man 2 Catapults Ailing Game Industry

Longing for some good news, the video-game sector found a superhero this week.

Activision's ( ATVI) new Spider-Man 2 game has all the makings of a big hit, according to numbers released by the company on Wednesday. The company has already shipped more than 2 million copies of the game in North America alone, an indication of strong initial demand for the title.

"This is another incremental positive for Activision," said P.J. McNealy, who covers video-game makers as an analyst for American Technology Research. (McNealy doesn't own Activision, and American Technology does not do investment banking.)

The news was a welcome change after several weeks of negative reports from the sector. On Tuesday, for instance, Harris Nesbitt analyst Edward Williams dropped coverage of Acclaim ( AKLM), saying that he believed the company would soon be forced to file for bankruptcy.

" Acclaim shares at this juncture are not worthy of serious investment consideration," Williams said in his note. "In our view, the company is struggling to remain a going concern."

Williams' note postdated Acclaim's announcement on Friday of a much-worse-than-expected quarterly loss. Acclaim also said it was having trouble paying its creditors and partners. (Williams doesn't own shares of Acclaim, and Harris Nesbitt doesn't have any banking business with the company.)

But Acclaim hasn't been the only video-game company facing trouble. Among the other struggling companies in the sector are:

  • U.K.-based Eidos (EIDSY), which said last month that it was considering a possible sale. The company also delayed the release of one of its key titles, ShellShock: Nam '67.
  • Take-Two Interactive (TTWO), which in early June missed earnings expectations and lowered guidance for its current quarter. The company's attraction to investors depends almost entirely on the success of San Andreas, the latest iteration of Take-Two's popular Grand Theft Auto franchise scheduled for release later this year.
  • Midway (MWY), whose stock has dropped nearly 20% since June 25. Although the company's shares are still up 162% for the year, many analysts consider the company to be overvalued, noting that Midway hasn't posted a profitable quarter in more than 17 straight quarters. And several analysts have attributed the stock's rise solely to market purchases made by Viacom CEO Sumner Redstone, who has raised his stake in the company to nearly 80% of its outstanding stock.
  • Many of the big-name video-game stocks are up for the year -- Eidos, Atari ( ATAR) and Acclaim are notable exceptions -- but nearly all are off the highs they set in March and April.

    Though the video-game sector continues to grow, several analysts have projected further consolidation, particularly as companies prepare for the next generation of consoles. Analysts believe that Microsoft ( MSFT), Sony ( SNE) and Nintendo will each release a new version of their game machines by 2006.

    In the last console transition, many gamemakers saw their revenue and profits plummet, a consequence of having to shoulder increased development costs for the new platforms while their sales of titles written for the legacy machines decline.

    To be sure, not everyone is struggling. Electronic Arts ( ERTS) and THQ ( THQI) each topped analysts' estimates with their latest quarterly reports, as did Activision with its report.

    Although Activision warned that its full-year earnings might not meet the Street's expectations, some analysts now think the company was being conservative.

    And though Activision didn't release actual sales results for Spider-Man 2, the strong shipment numbers should signify robust sales for the title. A title is generally considered a hit if it sells more than 1 million copies over the course of its lifetime, said Harris Nesbitt's Williams. (Williams doesn't own shares of Activision, and Harris Nesbitt doesn't have any banking business with the company.)

    Spider-Man 2 is the top-selling video game for the PlayStation 2 on Amazon.com and the sixth-most-popular item overall at the merchant's Web store.

    "Throw in international sales and reorders, and certainly this game becomes a very, very big title," Williams said.

    Activision has already had one hit this year with Shrek 2, its title based on the recently released movie of the same name, noted a fund manager who asked not to be named. The fund manager is long about 300,000 shares of Activision.

    Noting that the company expects to release the latest version of its Doom series later this year, the fund manager said that Activision could greatly exceed Wall Street's earnings estimates and its own guidance.

    "They totally sandbagged their numbers for this year," the fund manager said.

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