Video game biz pins hopes on 'Halo: Reach'

Microsoft's new title could revive slumping industry

NEW YORK -- Like Hollywood so often does, the video game industry is hoping for a touch of franchise magic to reignite software sales. Enter "Halo: Reach."

Microsoft's prequel, which streets Tuesday, isn't expected to beat the Day 1 record of $310 million in sales set last year by "Call of Duty: Modern Warfare 2" -- "Reach" is an Xbox 360-only title, and the Activision Blizzard game got a multiplatform release -- but preorders for the latest "Halo" have shown similar trends.

Amid a game-sales slump that began in March 2009, game makers are looking to "Reach" to become a much-needed hit and help set the stage for renewed momentum ahead of the important holiday selling season.

Wedbush Securities analyst Michael Pachter expects the new "Halo" release to launch with a $220 million-plus sales day.

"A big game would be great for the industry as it would drive significant store traffic and create interest in the sector," BMO Capital analyst Edward Williams said.

It's no surprise that hope rests on a franchise title because they have become as key to game makers as to Hollywood studios.

"A huge percentage of sales comes from recurring franchises," Pachter said. "Typically 25 of the top 30 for the year are sequels, and probably 80%-90% of revenues come from sequels."

The "Halo" franchise has sold more than 34 million copies worldwide and grossed nearly $2 billion, making it the best-selling Xbox and Xbox 360 game brand and one of the top-grossing gaming franchises of all time. Its most recent installment, 2007's "Halo 3," brought in a then-record $170 million in first-day sales. And some expect the latest edition will have a stronger sales start and become one of the year's biggest releases, maybe the biggest.

Josh Holmes
"We expect it to be the biggest game of the year," said Josh Holmes, executive producer of "Reach" and studio creative director at Microsoft's 343 Industries, which will manage the "Halo" franchise after studio Bungie decided to start on a new project with Activision Blizzard.

"Reach" will have some competition for that title. Among the buzz releases coming before Christmas are next month's "Medal of Honor Limited Edition," "Fallout: New Vegas" and "Fable 3," followed in November by "Call of Duty: Black Ops," "Need for Speed: Hot Pursuit" and "Gran Turismo 5."

Those potential hits will arrive just in time for an industry that could use some positive buzz.

The latest confirmation of the biz's recent sluggishness came late last week as research firm NPD Group reported that U.S. software sales were down 14% in August to $403.5 million after an 8% drop in July and a 15% decline in June. That left the year-to-date software sales haul 9.7% below the same period of 2009. The August decline was driven by continued weak software sales for the Nintendo Wii and sluggish debuts for Take-Two's "Mafia II" and Eidos' "Kane & Lynch 2."

In 2009, game software sales declined 11% to $9.9 billion, according to NPD.

The recent figures have dented the image of the gaming sector, which in recent years has consistently been seen as one of the entertainment industry's biggest growth engines besides the Internet.

"The declines can only be explained as a combination of a weak economy and console fatigue at persistently high prices, as consoles are currently priced at the same point as the introductory prices for the last generation in 2000-01," Pachter said. (The most recent Xbox 360 price cut came in July 2008.)

Also, strong sales of such music-based games as "Guitar Hero" and "Rock Band" in recent years have made for tough comparisons, which at times were inflated by including sales of accessories like plastic guitars. Some also cite piracy and competition from Apple's iPod Touch having hurt handheld-game sales.

"Until sales growth rebounds and remains positive, we believe that [gaming stock] investors will wait for several months of affirmation before becoming positive on the sector," Pachter said. "Despite relatively difficult percentage [up 5%] and dollar [$649 million] comparisons," he added, "we expect September software sales to be up year-over-year for only the third month in 2010 due to the release of 'Halo: Reach' and Sony's [PlayStation 3] Move motion controller [and despite tough music comps last September]."

But he added that monthly sales gains through the remainder of the year "could help restore confidence in the sector," noting that tough year-ago comparisons in November are a key obstacle.

Experts will have an eye on how "Black Ops" performs compared with the record-setting previous title in the "Call of Duty" franchise.

"I don't think it will sell as well as the last one overall, but I have no idea what promotions they plan to try to pump up first-day sales," Pachter said. "It could sell better the first 24 hours and worse overall."

Williams also sees positive signals for overall game sales ahead. Strong Xbox 360 and PlayStation 3 console sales "augur well" for the rest of the year, he said.

The current games sales decline started 18 months ago, "but there have been several months between then and today where software sales have shown an increase," NPD analyst Anita Frazier said. For example, September 2009, March and May showed year-over-year growth. "So it's a bit of a mixed bag."

But the data also don't account for some bright spots in the gaming business.

"[It doesn't] provide an indication of how games are performing in international markets, which can surpass 50% of any given quarter's publishing revenue for some publishers," like movies often do these days, Williams said.

Although NPD said it is looking to add more data points in the future, its data don't cover digital and mobile sales, rentals, used-game sales, social-network gaming and other emerging and fast-growing forms.

"As those areas grow, it could be that there is a shift in the consumer spend," Frazier said.

Indeed, the digital age and recession might have affected the behavior of gamers.

"When money was tight, I would go back to playing old games that were still fun, or downloaded really old-school video games to my PC and play those," said Jack, a 26-year-old game fans. "But when a game is awesome, you don't care how much it costs."

Michael, 35, said he stopped buying console games several years ago when he started playing "World of Warcraft" online. "It is so all-encompassing that I just don't have the time to play anything else and stay married," he said.

Given the bright spots and the changing face of gaming in the digital age, some say video game sales might remain more solid than the NPD data alone show.

PricewaterhouseCoopers projects that U.S. spending on games hardware, software and accessories will rise at an average compound growth rate of 6.4%, from $13.7 billion in 2009 to $18.8 billion in 2014. It mentioned digital downloads, microtransactions and online games as key drivers.

And hits certainly will help. That's where "Reach" comes in. In the game, which has been described as cinematic, users play soldiers they can create and customize.

Industry followers hope it will allow the sector to gain new steam, particularly given that it is the last "Halo" game from Bungie.

UBS analyst Brian Pitz explained the title's chances by highlighting two figures: "The game is the No. 1 most-wished-for game on Amazon, and the Xbox install base is about three times as large as when 2007's 'Halo 3' was released," he said. Pachter said he expects 10 million copies to be sold during the first year.

Holmes said his "Reach" team focuses on total sales rather than Day 1, but he predicted that the new game will exceed sales of previous "Halo" titles because of the expanded installed base of the Xbox and prerelease expectations.

To mark the $60-a-pop marquee game, Microsoft, Bungie and Best Buy -- which opened 400 stores at 12:01 a.m. this morning to sell the game, in a move mindful of "Harry Potter" releases in bookstores -- are giving "Halo" the Hollywood treatment.

They celebrated the launch Monday night at Best Buy Theater (previously Nokia Theatre) in New York's Times Square by letting fans play the game for the first time, meet the creators, get autographs and pick up preorder copies or buy the game at midnight. Rapper Kid Cudi was set to perform at 11 p.m., with select fans in attendance. By 8 p.m., about 80 people were lined up to grab a copy of "Reach."

At a launch event in Seattle, a Spartan super-soldier, the hero of the franchise, was expected to make a big entrance via jet pack. On Monday morning, a jet-packed Spartan flew over London's Trafalgar Square as two others stood guard, according to reports.

Such blue-chip brands as Mountain Dew and Doritos have run co-promotions with the "Reach" bow.

"Every 'Halo' release is a big, worldwide event, and gamers know and expect (a major celebration)," Holmes said.

Experts will keep tabs on whether a recent piracy scare will have an effect on sales figures after an unauthorized copy of "Reach" leaked a couple of weeks ago.

Microsoft shot back by saying that people who get the pirated product via a modified Xbox 360 console will see the company void their warranty and ban them from broadband game service Xbox Live.

"Microsoft global security and legal teams work closely with law enforcement around the world to aggressively pursue any suspected piracy or theft related to our IP," the company said.

Hollywood and "Halo" fans also will keep a close eye on one other issue: whether "Reach" could help lead to a long hoped-for "Halo" movie. Peter Jackson at one point was involved in a film project, with Universal and Fox potential distribution partners. But budget issues plagued the project, and Hollywood has had a hard time translating video game success to box-office magic, with a few exceptions like "Resident Evil," the big winner at the box office this past weekend.

Microsoft continues to hold movie rights, though, which leads some to hope that Monday's Hollywood-style "Reach" launch will turn out to have been a test for a similar film launch effort. And Holmes said he is interesting in continuing the franchise.

"We'll continue to consider opportunities to develop the universe with more 'Halo' experiences, including new game experiences," he told THR. "And there is always a lot of interest around the prospect of a 'Halo' film. For all of us here, we'd love to see a great 'Halo' film one day."