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WMS Expects At Least 32% Growth for January Game Sales January often brings about a post-holiday lull, but Wedbush Morgan Securities believes January was very strong for the U.S. games industry. Analyst Michael Pachter also showed optimism for the PS3 and had some interesting comments on Microsoft's 360 hardware cutback. If Michael Pachter and the analysts at Wedbush Morgan Securities (WMS) are right, January (technically a five-week period ending Feb. 3 under NPD's schedule, as opposed to last year's four-week period) was another big month for the video game industry. WMS is expecting U.S. console software sales to be up "at least" 32 percent ($475 million vs. $359 million) for the month. Moreover, WMS noted that its estimate is "quite conservative" because it's based on "modest sales forecasts for the PS3 and Wii." WMS forecasts that Sony sold through 300,000 PS3s and that Nintendo sold through 500,000 Wiis, both with an attach rate of 1.5 software units. Despite the low attach rates, WMS said that January should mark the first month in which next-gen software sales finally exceed current-gen software sales, and next-gen sales are also expected to lead current-gen sales going forward in 2007. WMS' estimate includes a decline of $31 million in current-gen software sales, which was easily offset by an increase of $148 million in next-gen and portable software sales (PS3, Wii, 360, PSP and DS). Overall, next-gen software sales should total $250 million and current-gen software sales will come in at $225 million, according to WMS. January game sales were likely driven by recent releases, as January was a light month for new releases. Predicted top performers were Microsoft's Gears of War, Activision's Guitar Hero II, Nintendo's The Legend of Zelda: Twilight Princess, and Electronic Arts' Madden NFL 07. While 119 games sold over 100,000 units in December, only 7 are expected to do so in January (compared to 4 during January 06). Thanks to "strong sell-through performance over the past seven months and negative high teen percentage comparisons for the next three months," PS2 software sales are expected to remain strong through at least March. The GameCube and Xbox, however, are all but dead. Pachter noted that those platforms will see considerable declines this year. "Beginning in February, we expect software sales for these platforms to decline on a year-over-year basis by as much as 40%. We expect the rate of sales declines for GameCube and Xbox software to accelerate throughout 2007, and to all but evaporate in 2008 and beyond," he said. While it's easy to attribute a strong year-over-year increase to NPD's extra week for January reporting this year, WMS is confident that the results would be quite positive anyway. "While [the extra week] skews the comparison with the prior year (which only had four weeks), we believe that overall sales growth was still strong," said Pachter. "Most of the major U.S. publishers have already announced solid December quarter results and have stated that sales strength from the holidays continued in January. We expect the publishers to continue to deliver solid results during the March quarter, and believe that robust software sales January will reinforce investor confidence that the industry is on solid footing." Pachter also showed optimism for the PS3, and revealed an interesting viewpoint on the recent cutback on Microsoft's 360 hardware estimate. "We think that PS3 sales will recover once consumers are made aware of the supply situation, and think that investors may be positively surprised by the hardware sales figures in January," he said. "We have seen little advertising at the Sony level for the device, and no advertising from retailers. We expect advertising to begin soon, and think that consumers will be drawn to stores in greater numbers as software is released for the PS3. We also expect Blu-ray to drive sales to movie fans, as more Blu-ray film content is released." As for the 360, cutting back slightly on production may allow Microsoft to drop the 360's price in the future, Pachter explained. "In our view, the Xbox 360 manufacturing reduction is more likely due to an oversupply situation in 2006. We believe that Microsoft was determined to gain a first mover advantage over Sony, and the company's strategy dictated that it deliver 10 million units by year-end. It accomplished this goal, with the consequence of oversupply at retail. Because Xbox 360 production costs are likely still above the wholesale price, Microsoft loses money on each unit produced. By slowing its manufacturing, the company is able to allow component prices to further decline, positioning itself to lower its loss per unit (or to even generate a profit) on future Xbox 360 hardware produced," Pachter said. He added, "Further, should Microsoft choose to cut the price of the Xbox 360 in the future, it would be required to provide price protection to the retail channel. This price protection would impact its earnings in the quarter of the price cut, and the impact would be magnified if the retail channel is oversupplied. By slowing its manufacturing, Microsoft has given itself greater financial flexibility to cut price on the Xbox 360 in the future. Unfortunately, many investors read Microsoft's decision as a reflection of poor demand. We think that the January NPD hardware sales figures will demonstrate to investors that the Xbox 360 demand situation is healthy." NPD results for January should be released this Thursday. Stay tuned.