Activision ( ATVI) CEO Bobby Kotick is determined to raise prices on video games. But analysts and investors question whether consumers will play along. Expanding on comments he had made previously, Kotick said this week that his company plans to boost the wholesale prices $10 per unit on top-line title games for next-generation consoles, such as Microsoft's ( MSFT) upcoming Xbox 360 -- those titles sell for roughly $50. The price hike is a key part of Activision's strategy of boosting operating margins during the next console cycle. Kotick apparently is not alone in seeking more dough from consumers. A survey of Xbox 360 titles available for preorder on Web stores such as GameStop and Amazon.com indicates that other software publishers including Electronic Arts ( ERTS) and Take-Two Interactive ( TTWO) are also going to try to increase prices for next-generation games. In the near term, the plan may pay off, some analysts say. If consumers running out to buy an Xbox 360 on day one aren't intimidated by the $700 price that retailers are charging for the mandatory bundles, they likely aren't going to balk at an added $10 for individual games. "We've said we're to going sell those products at higher price points until ... the market forces us to sell them at lower price points, which we don't think is likely," Kotick said in a presentation at the Banc of America conference in San Francisco on Monday. "We don't really think that there's a lot of price sensitivity on the part of the consumer, if you're delivering value," the CEO said. Despite Kotick's bravado, many analysts doubt that the price hike will stick -- with the exception of truly extraordinary games. Pressures ranging from high hardware costs to less-expensive titles to increasing competition are likely to keep prices in check for most games, they say.
"I'm sure Activision would love to sell their titles for more money, but there's a question as to how much pricing power
the game publishers really have," says Joe Spiegel, a hedge fund manager at Dalek Capital, adding that consumers appear to be "habituated" to the current price points for games. "We have a system that works now. The pricing model is not broken," he says. The battle over pricing could prove important to publishers such as Activision as Microsoft, Sony ( SNE) and Nintendo roll out their next-generation game systems in the coming year. In the early years of console cycles, game publishers typically see revenue stagnate or plunge as overall game prices and operating margins slump because of companies' efforts to ramp up development for next-generation games. A price hike would likely enable publishers to do a much better job of maintaining revenue and margins in the near term and boost them later in the cycle. Kotick has set a goal of raising Activision's operating margin from the 13% the company posted last year to 26% in the next console cycle. Although there are several components of his game plan -- among them, goosing international sales, boosting the company's number of multimillion selling titles and upping the number of internally developed titles -- price increases are a key component. Backers of the price hike argue that they are necessary and fair. The cost of developing games for next-generation systems and the royalties that publishers are paying to intellectual property owners is skyrocketing, analysts say. The result of the cost increases is that the number of units publishers have to sell to just break even, at current price points, is becoming increasingly daunting. Publishers, meanwhile, have been offering consumers a more valuable product for their money. Game prices may have largely remained constant over the last two console cycles, but the typical title is vastly more visually complex, and the game play is much longer-lasting than in the past, say analysts.
And although game prices have generally stayed the same, says Wedbush Morgan analyst Michael Pachter, the cost of entertainment, such as movie tickets and sporting events, has risen. "I think consumers expect
a price hike ," says Pachter. "They've gotten a gift that game prices haven't gone up." Pachter, Kotick and some other analysts believe that consumers will readily pay more for games. In his presentation, Kotick said that when Activision released Doom for the current Xbox, it debuted two versions of the game: a special-edition package for about $60 and a regular edition at $50. Sales of the more expensive edition comprised more than half of the units Activision ended up selling, Kotick said. Prices haven't risen on games in recent years, because "the publishers have all been wimps," says Pachter, whose company has no banking relationship with the companies mentioned. Most analysts don't doubt that publishers will likely be able to charge a premium for special editions of games. And for the few blockbuster titles out there, publishers will probably have wide latitude in what they charge, analysts say. "I think there's no doubt that for the next version of Take-Two's Grand Theft Auto, there's another $10 on the table if they choose to take it," says Steve Monticelli, a fund manager with Mosaic Investments, who keeps close tabs on the video-game sector but has no current positions in it. But many analysts doubt that publishers will be able to sustain a broader price jump. The cost to make games might be rising, but that doesn't mean consumers will pay more for them, say these analysts. "I don't think the consumer cares" about developing costs rising, says Spiegel, who, through options, has synthetic long positions in Take-Two and Nintendo. "Looking to the consumer for compassion is a pretty bad idea."
Price may be no object to the initial purchasers of the Xbox 360 and other new systems. But with next-generation consoles burning a hole in consumers' wallets, Spiegel and other analysts question how much money will be left over for games -- particularly the higher-priced titles. "The average gamer's discretionary
spending is going to be eaten up with hardware costs," says Mike Hickey, who covers the video-game software sector for Janco Partners, adding that publishers are not going to price games in a way that will "eat sales." Additional factors will weigh on publishers' ability to maintain higher prices. While Activision, EA and the like are apparently targeting a $60 price point for next-generation games, Microsoft and other console makers seem to have a different pricing plan. Amazon is listing Microsoft's Project Gotham Racing and Perfect Dark Zero -- two of the company's more widely anticipated games for the Xbox 360 -- at $50, or $10 less than rival titles. Competition also will weigh on prices later in the cycle. As more games are released for the next-generation consoles, older titles will become available as cut-price catalog editions or as used games, meaning that titles will have to be truly different to distinguish themselves -- and command a premium price. Further pressure could come from the kind of bargain pricing Take-Two engaged in last year when it was trying to gain market share in the sports game front. As the number of games and consoles increases, "it becomes much harder to maintain a higher price point," says David Cole, an industry analyst with DFC Intelligence. "It's just basic economics."