Video game publishers have little to fear from Microsoft's ( MSFT) announcement last week of a lower shipping target for its gaming console Xbox 360. The market for consoles and game software remains robust, and publishers have hedged their bets well, spreading their risk across the three newest consoles in the market: the Xbox 360, Sony's ( SNE) PlayStation 3 and Nintendo's ( NTDOY) Wii, say some analysts. Microsoft's Xbox 360 forecast may have inadvertently turned the spotlight to the performance of Sony's PS3. There have been conflicting reports about demand for the console, and this has fed fears that weak sales of the PS3 could lead to an unexpectedly challenging year for the video game publishers. But the current generation of game consoles has one major difference from the last time around: no platform will dominate the market like Sony did. Among the latest consoles, Nintendo's Wii
is already a hit , with 3.1 million units sold worldwide since its launch in November, halfway to the company's target of 6 million units sold by March. Microsoft has sold 10.4 million Xbox 360 consoles, while Sony has sold about 2 million PS3 consoles in just two months since the product's launch. And publishers such as Electronic Arts ( ERTS), Take-Two Interactive ( TTWO) and Activision ( ATVI) seem to have sniffed out that trend. Sales of PS3 games will likely represent only about 23% of total fiscal 2008 revenue for EA and 21% of revenue for Take-Two, while Activision and THQ's ( THQI) PS3 sales will represent 20% and 16%, respectively, of total company revenue, says Bank of America analyst Michael Savner in a research report. (Bank of America makes a market in stocks of the companies mentioned above and has had banking relationships with them.)
"Last generation, Sony accounted for two of every three consoles sold, and software publishers made their bet accordingly," says Brian O'Rourke, principal analyst with research firm In-Stat. "But publishers realized that in this generation, the Xbox 360 and Wii would perform well, and they are making games for all platforms." In that context, Microsoft's decision to cut Xbox 360 units is unlikely to cause any ripples. Microsoft says it hopes to sell about 12 million Xbox 360 units by June, down from its previous guidance of 13 million to 15 million units. The cut also will trim revenue related to attached software, accessories and Live, said Microsoft. But Microsoft's decision doesn't stem from softening demand for the Xbox 360. Instead, it is an attempt by the company to manage its inventory and increase profitability for the division. Xbox 360's strong showing during the holiday season helped drive growth of the entertainment and devices division of Microsoft by 76%. Still, the
division lost $289 million for the quarter ended Dec. 31, similar to a loss of $286 million the year before. "The question for Microsoft may be, 'Why ramp up production and step up units into the channel if it is costing more to do that?'" says Michael Pachter, an analyst with Wedbush Morgan Securities, which does not have a banking relationship or own shares of Microsoft or Sony. Most video game publishers are increasingly becoming platform-agnostic, he says. "Electronic Arts and Activision have titles for all three platforms, while THQ is a little behind on PS3 development, which should work to their advantage now," says Pachter. "Ubisoft is the most exposed to PS3 right now relative to the revenue." EA owns a 20% stake in privately held Ubisoft.