Summer films to fuel vid games

Sector expected to soar thanks to adaptations of tentpole releases

After delays and uncertainty, the video game industry is ready to rock, and investors could see outsized profits from shares of Electronic Arts Inc., GameStop Corp. and THQ Inc.

That's according to a 61-page report from BMO Capital Markets positing that new profit streams and strong upcoming game titles bode well for the industry, especially now that next-generation consoles are in millions of North American homes.

PricewaterhouseCoopers predicts that, with Nintendo's Wii, Sony's PlayStation 3 and Microsoft's Xbox 360 all available now in the U.S., console sales will rise to 17.5 million units this year from just 10 million in 2005.

As for new software, "The big guns are on their way," BMO analyst Edward Williams said. "The release schedule for summer 2007 is replete with potentially strong movie-based games."

Among them are "Spider-Man 3," "Shrek the Third," "Transformers," "Ratatouille," "Harry Potter and the Order of the Phoenix," "The Simpsons Movie" and "Surf's Up."

Aside from movie-licensed games, Williams sees strong sales for the next versions of the "Halo" and "Grand Theft Auto" franchises and the launch of "Assassin's Creed."

Williams, citing data from research company NPD Group, said dollar sales of game hardware, software and peripherals in the U.S. were up 66% through the first two months of 2007 compared with the same frame a year ago.

Hardware alone was up 106%, driven mostly by sales of Wii, Xbox 360 and the Nintendo DS hand-held unit. Software was up 41%.

March software sales represent a "more challenging comparison," Williams predicts, but he expects "a more robust growth rate later in the spring." Full first-quarter data is expected Friday from NPD.

In any event, he added, "Investors should focus their attention on hardware sales as the most important data point."

The analyst said new consoles are more expensive than they historically have been, which "should lead to a lower adoption rate and longer cycle — as the console will take longer to get down the pricing curve."

That said, he called sales of the Wii during the first two months of the year "exceptional" and credits "innovative design and compelling software," in particular "The Legend of Zelda: Twilight Princess."

The "new revenue opportunities" that Williams focuses on are mobile phone games, in-game advertising and micro transactions, the latter two of which are not without controversy.

Micro-transactions are when publishers charge fees for access to additional content in games consumers already have purchased.

"We expect to gain substantial visibility regarding the potential of the micro-transaction component with the pending launches of 'Halo 3' and 'GTA IV' this year," Williams said.

Gamers have been tolerant of the micro-transaction schemes as long as they were just icons and other innocuous graphics being sold — such as old NFL uniforms in football games or classic cars in racing games — but many cry foul at publishers who charge extra for access to advanced levels of games.

"Many thought their purchase would include all available levels," Dmitri Salcedo at wrote about one particular game. "They weren't too happy to find out that they were only getting some of the them with the rest costing extra."

As for in-game advertising, gamers also have accepted it, to a point. Objections are raised when games go too far in technologically collecting personal data on consumers in order to better target them with particular ads.

Nevertheless, eMarketer said the in-game advertising industry will explode to $2 billion annually by 2011, almost half of that coming from the U.S.

Williams also noted in his report that last year was a better one for the industry than many expected, and he credits the PS2. But because Sony still issues new games for the older console, consumers "could delay the purchase of a next-generation game console," he cautions.

"As the software becomes more compelling, we expect hardware unit sales to expand, driving a virtuous circle that in turn drives greater demand for software," Williams said.