Updated from Friday, June 6, with views from Bank of America Merrill Lynch on Take Two.
NEW YORK (TheStreet) -- New content, software and titles are expected to take the spotlight at this year's E3 Electronic Entertainment Expo in LA, raising the odds investors are going to trust that the upcoming console cycle will be a thriving one, and that the sector will continue to deserve their attention.
Gone is the cautious atmosphere of last year's E3. The early successes of the current console cycle heading into the event has greatly alleviated 2013's worries that the Nintendo (NTDOY) Wii U's failure to take off was a bad sign for the Xbox One and PS4. With Xbox One and PS4 sales already burgeoning early on in the cycle, Sterne Agee analysts are estimating that the installed base of Xbox One and PS4 could grow to up to about 100 million units for each by the end of the current cycle even though PS4 sales are currently stronger than Xbox One sales. That's up from 80 million units from the prior cycle.
The annual E3 game conference will officially take place from June 10 to June 12 in Los Angeles, with presentations trickling in starting June 9.
The success of these two consoles so far has helped fuel good performance in the games group overall in the recent quarters. "We expect this trend to continue over the next 12 to 24 months as software sales turn positive later this year and set the stage for top-line acceleration next year," Sterne Agee's interactive entertainment analyst Arvind Bhatia said in a client note.
Strong software availability is, of course, key to driving hardware sales in the long-run and is a forward-looking data point of great interest to investors. With that being said, the upcoming E3 should bolster confidence that the early successes of Xbox One and PS4 will be sustainable beyond the early adopters, offsetting the impact of Nintendo's weakness on the games group.
At the upcoming event, Bhatia is expecting a strong lineup of next-gen titles for both the PS4 and Xbox One, with console-makers in particular aiming to highlight exclusive IPs as a way to differentiate themselves from the competition, given that price is no longer a differentiating factor. For instance, Microsoft (MSFT) recently announced a Kinect-less Xbox One for $399 coming on June 9, which matches the price of the PS4 from Sony (SNE).
Various Wall Street and industry analysts dive into the details of the content they're anticipating at this year's E3, by developer, publisher and console maker.
What Sterne Agee says: Ubisoft has a good track record when it comes to E3. In the past, the company has been able to showcase its titles well and has been successful in throwing in a few surprises, such as the 2012 reveal of Watch Dogs. There should be a strong showing from the company again this year.
Key titles in focus will be Assassin's Creed Unity, Far Cry 4, Tom Clancy's The Division and The Crew. It wouldn't be surprising if management decided to share sell-through data on the recently released Watch Dogs title.
What Enders Analysis's Heloise Thomson says: There will definitely be a lot floor space dedicated to Ubisoft's Assassin's Creed Unity, where the protagonist will be returned to an urban historical setting (during the French Revolution). This is ideal for actual stealth-play rather than obvious battles on land and the high seas.
"I enjoyed the relaxed nature of Black Flag but it's not as engaging as creeping around recognizable landmarks and narrow streets."
Assassin's Creed Unity is expected to be released during the fourth quarter of 2014.
What Sterne Agee says: As usual, Activision Blizzard (ATVI) will not be hosting a press conference at E3, but will have a large booth and be hosting investor meetings at the conference. Destiny could have a prominent presence at the booth and be marketed heavily at E3 given its upcoming Sept. 9 launch. The title is expected to be released on the Xbox One and PlayStation 4, as well as Xbox 360 and PS3. Sales of Destiny to retail outlets could reach 8 million units this year. Street expectations range from 6 million to 10 million units.
Call of Duty: Advanced Warfare meanwhile may be highlighted at the Microsoft and Sony press conferences as well as at the Activision booth.
This year's Skylanders title, Skylanders Trap Team, seems quite innovative and will likely have a strong presence at E3. But it will still be important to keep an eye on competing products from Disney (DIS) Infinity and potentially from Nintendo's Nintendo interactive figurines. Another Activision title to keep watching will be its free-to-play PC title Heroes of the Storm.
What Enders Analysis's Heloise Thomson says: Destiny is finally going to hit the shelves in the third quarter of 2014 and the campaign behind that is going to be massive. Activision revealed that the development, marketing, packaging and royalties costs for Destiny could reach $500 million, possibly making it the most expensive launch ever for a video game. That would surpass the record $265 million in development and marketing costs reported for the rollout of Rockstar's Grand Theft Auto V last year.
"It's a gigantic gamble, so you can be sure that everyone and their gerbil will have heard of Destiny before September."
15 million copies of Destiny would need to be sold to reach breakeven, and it's highly possible that, that number will be hit within the first two years of the launch, if not less, as gamers look for something new to break the familiarity of franchises like Call of Duty and Halo.
What Sterne Agee says: EA's (EA) title portfolio this year appears quite balanced. Unlike last year, when Battlefield was the biggest focus, this year's lineup does not seem to depend on a key, core gamer title.
Battlefield Hardline, The Sims, UFC, Dragon Age Inquisition and EA Sports titles such as FIFA, Madden, NBA Live and an unnamed Golf title will be the key drivers this year and be present on the E3 show floor. In addition, it wouldn't be surprising to see EA showcase the early versions of some of the potential 2015 titles such as Star Wars: Battlefront.
EA could also announce new content to be released in a couple of years.
This year, EA guided that 51% of its revenue will be coming from digital sources, including downloadable content, full-game downloads, and mobile and subscription revenue. Some of the mobile titles could be on display on the E3 show floor.
What Enders Analysis's Heloise Thomson says: Star Wars: Battlefront is one of the big games people are waiting for and also lines up nicely in anticipation of the new Star Wars film arriving December 2015.
Take-Two Interactive Software
What Sterne Agee says: 45% of Take Two's (TTWO) revenue this year is expected to come from its Rockstar division. Also, there are at least a couple of unannounced titles included in the lineup this year, according to management.
As such, investors are wondering if Rockstar will in fact participate at the E3 conference this year (Rockstar has historically not participated) and if Take Two/Rockstar would showcase any new IP on the show floor. History would suggest either one of these is a long shot. Still, for the sake of speculation, new IP could include a sequel to Midnight Club (the last version was released in October 2008) and Agent; this Rockstar title was announced in July 2007 as an exclusive on the Sony platforms. Other titles with an even lower probability of being featured could include Max Payne or a sequel to the Red Dead series.
As for Take Two's 2K division, expectations are that already announced titles such as Borderlands: The Pre Sequel, Civilization: Beyond Earth, Evolve, NBA 2K 15, and WWE 2K15 will be highlighted at the booth at E3.
Take Two does not host a press conference or a management presentation during E3 events.
What Bank of America Merrill Lynch says: Evolve looks set to be the first game from Take-Two dedicated to the next-generation consoles after being featured in the February 2014 issue of GameInformer magazine. Take-Two will launch the game on the new consoles on Oct. 21.
Based on the first trailer, the game has some unique gameplay elements that should help it stand out from a crowded shooter market this holiday. Evolve is a new sci-fi co-op shooter game where up to four players can join to hunt and kill a fifth playable monster. Each hunter has a different, special hunting ability, and as monsters, the players can kill other monsters to evolve and become more powerful.
An initial sell-in of 2.2 million units can be expected.
What Sterne Agee says: A positive E3 this year should be good for shares of GameStop (GME). Given the second-half expectations for solid growth in software, investors will be looking for confirmation that the lineup from publishers is strong enough.
Heightened discussions on full-game downloads could pressure shares of GameStop. However, management recently provided data that indicated the company is seeing very strong market share on digital downloads as well as on packaged software.
What Sterne Agee says: At E3, Sony may continue to underscore PS4 as a gaming console made by gamers for gamers. Sony already has a lead over Microsoft on next-generation consoles and Sony will want to build on that. Still, this will be somewhat challenging now especially in the U.S., given that Microsoft has lowered the price of its console to $399 by unbundling it from the Kinect controller.
Titles likely to be highlighted at the event by Sony are Uncharted 4, The Order: 1886, God of War 4, DriveClub, Destiny, Call of Duty: Advanced Warfare, and Assassin's Creed Unity. In addition to key titles, Sony could highlight its PlayStation Now streaming service, its hand-held device PS Vita, and its virtual reality device, Project Morpheus.
What Bank of America Merrill Lynch says: Sony will have a booth on the convention floor and probably will spend the event highlighting a big software lineup for PS4 and showcasing console exclusives coming out over the holidays. Sony has shipped four titles to date, but at last year's E3 said it planned to launch 20 new titles in the first year of PS4. There's clearly a lot still to come for Sony to discuss.
Sony is pleased with the early response to PS4, especially compared to the start of the last console cycle, as it's sold over 7 million PS4s to-date, compared to 5.5 million PS3s at the same point during the last cycle. Sony enjoys a healthy lead over Microsoft in key markets including the U.S. Price cuts to PS3 could come at E3, but such announcements for the PS4 are unlikely to happen.
What Sterne Agee says: Microsoft's focus this year will be the titles lineup for 2014 and 2015. At last year's E3, Microsoft emphasized Xbox One as a broader, all-in-one entertainment device.
At the event, Microsoft is expected to announce a few exclusive titles that would help showcase the strength of the Xbox One console and the commitment of publishers, and highlight its online strength and the growing size of its Xbox Live community, estimated at about 48 million users. Titles that have a high likelihood of being underscored are Halo 5: Guardians for Xbox One in 2015, Destiny, Quantum Break, Assassin's Creed Unity, Call of Duty: Advanced Warfare, Fable sequel, the Gears of War sequel and the Forza sequel.
Aside from the unbundling of the Xbox One from Kinect, Halo 5: Guardians for Xbox One in 2015 is the other big announcement that Microsoft has already made heading into E3.
On the broader entertainment side, Microsoft may announce additional content deals and relationships for Xbox One.
What Bank of America Merrill Lynch says: Microsoft will have a big presence on the show floor at E3 and provide an opportunity to preview AAA titles, which may include Halo 5, Call of Duty, and Evolve, as well as the Madden, FIFA, and NBA franchises. Expect Microsoft to also highlight exclusive rights to downloadable content for some of the industry's biggest holiday titles.
Microsoft is still playing catch-up to Sony due to branding and messaging issues around last year's Xbox One unveiling and is available in fewer markets than Sony, which partially explains their sales gap. But the recent price cut on Xbox One this early in a cycle indicates soft initial demand relative to the PS4 and may suggest Xbox One is tracking behind plan vs. the PS4.
To improve core gamer sentiment at E3, Microsoft needs to focus on software and position the Xbox One as a gaming console rather than an entertainment system. Winning the software battle with Sony may be the best way to help close the current unit sales gap. Despite the recent move to bring Xbox One in line with PS4 on price, ultimately the console with the most compelling, exclusive new IP will win over the consumer.
At last year's E3, Microsoft said it had more games in development than ever, with 15 titles coming in the first year for Xbox One. It has launched three exclusive titles to-date, so expect that there will be a primary focus on titles such as Crimson Dragon, Quantum Break, and the new game from Black Tusk.
What Sterne Agee Says: While Nintendo will have a big booth and host multiple meetings at E3, this is the second year in a row that Nintendo is not hosting a big press event. This is a mistake and suggests capitulation.
Nintendo continues to be in a tough spot as sales of Nintendo Wii U remain soft. Nintendo may choose to lower the price of its Wii U console to $250 from $300 in an attempt to spur sales. But until it can get strong content on the platform, consumers are unlikely to respond.
Previously, there was speculation that Nintendo may introduce new hardware this year. However, Nintendo has categorically denied this. Any new hardware announcements will have to wait, at least until E3 2015. The bottom line is expectations for Nintendo are again very low going into E3 this year.
-- Written by Andrea Tse in New York
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