PC Games Face Own 'Doom'

In terms of being a video-game platform, the PC is going the way of the Atari 2600.

Once one of the most popular game machines, the PC is losing ground to consoles, handhelds and even wireless phones. Even as the rest of the industry expands, sales of PC-based games are falling like a rock, dropping 12% last year, for instance, according to research firm NPD.

But while the future is likely to be found in devices like Sony's ( SNE) recently released PlayStation Portable and Microsoft's ( MSFT) upcoming next-generation Xbox, the PC still represents some 15% of the video-game industry's total sales.

And its decline as a platform could have big implications for companies such as Electronic Arts ( ERTS) that drive a significant amount of revenue from PC-based titles.

"It's inevitable that PC game sales will go down, but I wouldn't think they would go down that precipitously," said Michael Pachter, an analyst who covers the video-game software industry for Wedbush Morgan Securities. "You want to see everything up. You don't want to see anything down 12%."

Software makers sold about 45 million units of PC-based games last year, tallying $1.08 billion in retail sales, according to NPD. That was down from 2003, when they sold 52.7 million units with a retail value of $1.22 billion. And even 2003's sales totals were down 14% from the prior year, when gamemakers sold $1.4 billion worth of PC titles at retail.

That drop stands in contrast to the performance of console and handheld titles. Retail sales of such games grew 8% last year to $6.2 billion, after growing about 5% in 2003, according to NPD.

The difference is even starker when considering that many analysts had predicted that sales of console and handheld games would be flat at best last year, while the PC game results include several big hits, including Doom 3 from Activision ( ATVI) and EA's The Sims 2.

PC game sales are largely being cannibalized by sales of titles made for Sony's PlayStation 2 and other consoles, analysts say.

Consumers can spend about $150 to buy the latest console and be assured that they can run all of the latest games. In contrast, they'd have to spend $2,000 or more to buy a PC that has enough power to play games such as Doom 3.

With that kind of difference in cost, consumers have largely moved to consoles as their gaming platform. For instance, Sony has sold some 68 million of its two PlayStations combined in North America.

"It's pretty obvious that the number of consumers that can spend two grand is smaller than the number that can spend 200 bucks," said Norm Conley, a portfolio manager for JAG Advisors and a contributor to TheStreet.com's sister site, RealMoney.com.

But it's more than just a lower price. As might be expected, consoles often are better suited for games than PCs. Playing head-to-head games against family members in your house is a lot easier over a big-screen TV and with the multiple controllers used on a console than on a PC screen and keyboard.

Outside of simulation games such as Atari's ( ATAR) Civilization III and a few other genres, "the days of pure PC-only titles ... are going away," said Joe Spiegel, a fund manager with Dalek Capital.

With gamers increasingly focused on consoles, the gamemakers have shifted their focus, too. The latest and greatest titles typically come out for consoles long before they make it to the PC, if they ever do make it over, they note. The biggest games of last year, for instance, were Microsoft's Halo 2 and Take-Two Interactive's ( TTWO) Grand Theft Auto, neither of which is yet available for the PC.

But other factors may be at play. The PC game data don't take into account revenue generated by online games, such as Sony's EverQuest. Such games often charge a subscription -- or sell online advertising -- and represent the direction in which PC games are heading, said one industry executive, who asked to remain anonymous. Even packaged PC titles are increasingly including online hooks.

"The shelf space for PC games has been shrinking," the executive said. "It's not necessarily because people are bored with PC games. It's because PC games are evolving."

Likewise, Pachter said that the decline may have to do more with a drop-off in sales of low-priced PC titles than it does with top-of-the-line offerings. If this is the case, "that's probably a good thing," he said.

Game publishers are alert to these trends, of course. Many have begun to ramp up production of games for handhelds and wireless phones, as well as the next generation of consoles, which are expected to start debuting later this year.

Still, sales of PC games are important to many of the leading game companies. In the first half of its fiscal year, for instance, 18% of EA's revenue came from PC games.

Such titles comprised 27% of Activision's sales in the first two quarters of its fiscal year. Indeed, surging sales of Doom 3, Rome: Total War and Call of Duty: United Offensive helped the company nearly double its revenue during that period over the same two quarters in its previous fiscal year.

Such titles also typically offer higher profit margins than comparable console titles, because game software publishers don't have to pay royalties on sales to console makers. And sales of PC versions of popular game titles can help lower overall development costs per unit sold.

PC game sales are a good way to diversify revenue, said one fund manager who closely watches the video-game sector, but asked to remain anonymous.

Such sales "give more ooph to a franchise," the fund manager said.

That relative importance is what has some analysts worried about the decline in PC sales. If the decline is due largely or entirely to people giving up on PC games for console games, "that's pretty sad," Pachter said.

But other analysts are more sanguine about the decline. Sales of console and handheld games more than made up for the drop-off in PC titles last year.

And while PC games are declining in sales, that loss could well be replaced by games made for Nintendo's DS and Sony's PSP, not to mention the next-generation consoles, analysts say.

The declining PC game market is an "incremental negative," said Conley. But it's "cancelled out by the incremental positive of having a larger number of platforms."

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