The next generation of console video games will boast high-definition graphics – and higher retail prices.
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Analysts say the transition to new consoles offers a long-overdue opportunity for publishers to raise prices. New games that sell for $50 now could go for $60 when the consoles come out, starting in November.
“Everybody (in the industry) wants to see a price increase,” including game publishers and retailers, said Arvind Bhatia, an analyst with Southwest Securities. “So now it’s a matter of ‘Let’s try this out and see how consumers like it.’ And if it sticks, then you’ll see a bump.”
Activision (NasdaqNM:ATVI - News), the maker of top-selling games featuring Spider-Man and skateboarder Tony Hawk, intends to raise its wholesale prices by $10 for next-generation software. Consumers will be getting more hours of entertainment for the extra money, says Robert Kotick, chief executive of Activision.
“We haven’t raised prices as an industry in 20 years,” Kotick said. “Look at the movie business as an analogy. You’re not getting any more hours of entertainment – it’s the same two hours of a motion picture – and yet you’re spending twice as much as you did 10 years ago.”
Game development costs could jump 50% with the new consoles, says P.J. McNealy, an analyst with American Technology Research. That means new games would cost $10 million to $15 million to make.
“There’s definite consideration for higher starting price points (for new games) – $54.99 or $59.99 – because development costs are higher,” McNealy said. Game publishers feel there will be “more perceived value” to the new games because of their more realistic visuals and richer online game play, he says.
Analysts expect Microsoft (NasdaqNM:MSFT - News) to be first out with a new console, Xbox (news - web sites) 2, in November. Sony (NYSE:SNE - News) likely would follow with its PlayStation 3 machine in May 2006. Nintendo (news - web sites) also plans to come out with a new console in 2006 as a follow-on to its GameCube device.
Gamers will be willing to spend more for premium titles on the new consoles, Kotick says.
“People want to play the great games. There doesn’t seem to be a lot of price sensitivity to paying for the great games,” he said.
Game publishers are focused on the next generation of consoles because software sales for the current generation have peaked, says Anthony Gikas, a Piper Jaffray analyst.
Video game sales overall will be flat this year compared to last, Gikas says. He estimates console game software sales will fall 11% and PC game software sales will fall 8%. The main item propping up the industry is sales of games for handheld devices, such as Nintendo’s Game Boy Advance and its new Nintendo DS.
Handheld game software sales could jump 66% this year, depending on how successful Sony is with its new PlayStation Portable. The PSP, already on sale in Japan, is slated to hit U.S. stores March 24.
Total video game sales won’t pick up until the second half of 2006, Gikas says.
He forecasts 5% to 10% sales growth overall next year, with no growth in console software sales. He sees a 48% increase in handheld game sales and a 5% decrease in PC game software sales.
The industry will be back on its growth path in 2007, with 25% or more sales growth, Gikas says.
In 2004, video game software sales in the U.S. rose 4% to a record $7.3 billion, says the Entertainment Software Association.
The transition to the next-generation consoles will be good for the top four independent video game publishers – Activision, Electronic Arts (NasdaqNM:ERTS - News), Take-Two Interactive Software (NasdaqNM:TTWO - News) and THQ (NasdaqNM:THQI - News), analysts say.
“The big are going to get bigger. The midsize companies are going to struggle. And the small publishers are going to go out of business,” Gikas said.
The big four have the established brands, experienced managers and financial wherewithal to invest in big games and acquire new licensed content.
“No one else has any money to go out and compete for the next Harry Potter (news - web sites) brand that comes along or the next Lord of the Rings or the next Spider-Man,” Gikas said. “These four guys are going to get them all.”
All four have been busy cutting licensing deals and acquiring game developer studios in recent months.
Activision bought game developer Vicarious Visions in January. In February, it secured the game rights to DreamWorks Animation’s (NYSE:DWA - News) upcoming movie “Shrek 3.”
EA locked up exclusive rights to several major sports properties recently, including the National Football League and ESPN. EA also invested in international game developer UbiSoft Entertainment in February.
Take-Two reached exclusive license agreements with Major League Baseball and its players in January.
That same month it bought sports game development studio Visual Concepts Entertainment and its wholly owned studio, Kush Games, from Sega Games.
THQ acquired developer Blue Tongue Entertainment in November. Last year, it renewed license agreements with Pixar Animation Studios (NasdaqNM:PIXR - News) and Nickelodeon, a unit of Viacom’s (NYSE:VIA - News) MTV Networks.