The market was a challenging one for the video game industry in 2009, and judging by the recently released January NPD sales data, things aren't much better in 2010 - not yet, at least. According to Janco Partners analyst Mike Hickey, in order for the market to see some positive gains again, console price cuts will be needed across the board. Hickey believes that Nintendo in particular will face further market weakness if they don't act quickly.

"We acknowledge that a traditional hardware cycle would now be nearing completion, leaving further market growth dependent on continued and aggressive hardware price cuts, software price cuts, hardware extensions and an economic lift.  We remain optimistic for near term PS3 and 360 market growth opportunities, vis-à-vis an emerging secondary casual market cycle, as accessory innovations potentially target an established Nintendo casual market.  We expect continued market weakness through ’10 for Nintendo related products, as the Wii cycle fades meaningfully and the DS platform faces considerable competition from Apple related mobile gaming devices.  We recognize new hardware from Nintendo is on the horizon," Hickey began.

He continued, "We think console manufactures need to dramatically cut price points in calendar ’10, to continue hardware sales momentum from the holiday.  However, we expect Microsoft will not cut the price of their hardware in front of the introduction of Natal motion technology this holiday, as they are likely hesitant to offer a price induced inflection point for their installed base growth, favoring a hardware innovation as a more sound medium term sales catalyst.  Importantly, Nintendo built the majority of their casual mass market oriented installed base from a $250 price point. We believe Nintendo needs to cut the price of their console from $200 to $150 immediately, as they should establish as meaningful of an installed base as possible before the Natal and Arc are introduced.  We believe they also need to generate strong hardware sales momentum into their competitors release or face the draconian consumer perception of the Wii having a dramatically reduced entertainment value proposition over a faded technology innovation; Rock Band anyone?"

Not only does console hardware pricing need to come down, but Hickey believes the software market will not sustain as many triple-A releases at the current pricing level. "We expect continued pricing pressure on front line releases for the majority of games in calendar year ’10, whether through immediate pricing action at drop and/or accelerated promotional activities by retailers and supported in-part by publishers; regardless the perceptual value or effective price to most consumers will likely trend lower into holiday ’10," he said. "We believe there [are] still too many triple-A games in the market, as the market will likely support a decreasing number of releases, leaving many high quality games without an addressable market sufficient to offset their high production and development expense."

Interestingly, Hickey also sees new casual market opportunities as a portion of current Nintendo customers will look to upgrade to more powerful or new experiences. The upcoming Project Natal and Sony motion controller could be just what they're seeking. "We believe a new casual game market will emerge in calendar 2010, which could be very beneficial for Microsoft, Sony, Apple and 3^rd party software developers like Electronic Arts, Activision, THQ, Ubisoft, and Take-Two.  The casual hardware extensions from both Sony and Microsoft will likely drive both additional hardware and software sales, for casual and non-gaming mass market opportunities," Hickey said. "We expect a potential up-migration from a portion of Nintendo’s Wii market, as many new gaming console households choose to upscale their game entertainment experience, enjoy a broader array of multi-media options and experience 'the new' casual gaming opportunities.  We expect 3^rd party publishers could benefit significantly over the emerging casual cycle, as their prior experience at the casual market was often tortuous from Nintendo’s software domination."

http://www.industrygamers.com/news/wii-cycle-to-fade-meaningfully-in-2010-aggressive-price-cuts-needed-says-analyst/