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.

Michael Pachter - analyst - Wedbush Morgan Securities "I don't think there are four million people in the world who really want to play online games every month." "At the end of the day, we don't play games for social interaction … We play games to escape." Microsoft's strategy is "absolutely flawed," he said. “Take-Two is cheap and Atari is really cheap. Investors mistakenly look at the group as either being big and going to thrive or small and going to go broke.” “Warcraft is so good and so good-looking that it got this immediate attraction; everybody who would ever consider playing an online game said, 'This is the one. I gotta try it.' And what'll happen is inevitably, like the health club model, after you pay your 30 bucks a month for 3 or 4 months and you only go once a week, you realize it's not worth it and you split. That's what will happen with Warcraft ... I think it's going to roll back to a million. I'm not predicting it's going to happen in three weeks; I'd guess it has a half-life of 6 months to a year,” “Given continued uncertainty among consumers about the availability of Xbox 360 units, we think that slow sales may persist in December.” “The best business for a publisher is to give people what you know they want. And what you know they want is a sequel to what they wanted last time. So we don't see a whole lot of innovation.” “Clever and different and new doesn't necessarily work unless you convince consumers that they really want it.” "Who might Amazon tap for third-party distribution? Why not Blockbuster, suggests Pachter. Blockbuster probably wouldn’t mind helping out a competitor, because Amazon would probably be satisfied with 10% of the market, he says. Pachter also reasons that an Amazon partnership with Blockbuster would put pressure on Netflix and possibly eliminate a competitor, while an Amazon partnership with Netflix probably wouldn’t inflict much damage on Blockbuster." " Netflix is a worthless piece of crap with really nice people running it. I don't mean that they're doing anything wrong. They have a wonderful idea, but it's not a sustainable business. I wish they would make it — they deserve to make it. But in the Internet, all the success stories tend to be multiple channels, [offer] multiple products, or have a brick-and-mortar component. At the end of the day, there's only one line of business going on at Netflix." Just in case anyones missed his earlier pearls of wisdom.

Well his numbers seem reasonable but this guy has consistently overestimated X360 sales by nearly 50% and in december he also overstimated Wii sales so much that when the numbers actually appeared he couldnt believe them and even put in doubt NPD .

I have this information posted already in the January NPD thread, and it has been mentioned in the will Wii catch 360 thread I actually think Wii will be in the 400k-700k range and PS3 will be in the 150k-350k range, so Patcher could be right, or way wrong - above or below.

I can't understand why Pachter is so prominent. The man doesn't know what he's talking about. Anyone who watches "Bonus Round" knows this. He was talking about how next-gen prices are a bargain in the last episode. And after his December prediction of what? 1+ million Wiis is all I remember... I don't trust these numbers either.

Well I'd take what he says with a pinch of salt... That said - vgcharts is reporting 1.71m sold in NA - 400k isn't out of the question?

Still, I found it interesting that he said there is evidence that Microsoft way oversupplied the market in 360 consoles to reach 10 million shipped and has cut production back.

Here is my take on Patcher: If Wii is under supplied...360 was over supplied...and PS3 is somewhat close to demand...wouldn't it mean that Wii has the most to gain when supply issues are ironed out? Theoretically, selling a profitable console also gives Nintendo the most capacity to up manufacturing capability by buying more factories...However, Sony and Microsoft are both huge companies and can dig in to their pockets to up supply as well to offset incredible short term loss with the potential for even larger gain later. It seems that since Wii is fairly close to GC internally, upping capacity should be easier than normal, unless there are manufacturing bottlenecks from incorporating motion-sensing technology into the Wii. I think of the Wii as similar to the DS in terms of manufacturing. Originally, making two screens was problematic. But, looking at the sales numbers, it seems Nintendo sells about 1 to 1.5 million DS's per month. Wii should realistically be able to see manufacturing levels rivaling the DS allowing for say 500k sales per region/per month, should demand continue to rise. As for the 360 and PS3, Microsoft is far closer to reaching the all important tipping point. At this point, Microsoft will no longer lose money on 360 hardware because the component costs will drop. I believe this will predicate a price cut, and eventually allow Microsoft to release a more potent XBOX 360 (XBOX 480?..). This, strategically, would come after Halo 3 has worn off in boosting sales. Ideally for Microsoft, this comes next year, just as Sony starts to pick up steam and Nintendo threatens Microsoft's leadership position world wide. Sony is going to have issues this year. Although from a software stand point, PS3 is only successful (over a million units sold) in one market right now (North America), in terms of manufacturing, Sony is having its best launch ever. When demand begins approaching supply, the stories of PS3 sitting on shelves will dissappear. I actually expect the PS3 to become scarce for a week or two with the European launch, as that is the one territory where hype seems unmarred by dissapointing reality. I think at least temporalily (averages untl June), Sony sells 80-100k units in Japan per month, 100-180k in North America, 150-250k in Europe per month. Here is how I see the rest of the year: 300k and 500k may happen for January, but demand will slow for PS3 I think before it slows for Wii. SSX Blur, Wario Ware, Wii Play, Sonic, Zelda, Wii Sports, Rayman, Trauma Center, Elebits, Monkey Ball, Red Steel, Madden all will keep portions of the Wii audience busy in February, while helping to spread the word of what Wii does. I would say about 6 of those are worth purchasing for any type of serious (Zelda, Trauma Center, SSX, Elebits, Sonic, Monkey Ball) or casual gamer (Zelda, Wii Play, Wario Ware, SSX, Elebits, Rayman). Compare that to PS3 for which Resistance and Madden are the primary sellers...The 360 will sell in January-February because Gears, Lost Planet, and smaller hits will continue to help carry it. Consider this: I play adventure, action, baseball, racing, boxing, fighting,role playing, party, strategy, and ecclectic games ( some fun ecclectic games: Jet Set Radio Future, Jet Grind Radio, Killer 7, Viewtiful Joe, Pikmin, Blast Corps, Parrapa the Rappa, Gunstar Heroes, Kid Icarus...). Right now, the Wii has what I want in party games (Wii Sports, Rayman, Monkey Ball), ecclectic games (Trauma Center, Elebits), adventure (Zelda) games. Sonic, Wii Play and SSX Blur all have potential to add to what I want, this month. Once DDR, Fight Night, Mario Party 8, Fire Emblem, Day of Disaster, Mario, Metroid, Dragon Quest, Smash Brothers, and Paper Mario are released, my game library for Wii will be approaching 20 games and meeting just about every expectation I have for the system. Although unannounced, I also believe baseball and racing games will be alot of fun with the Wii remote, which leads me to believe they are in development. I do not think I am that atypical of a gamer, which is why I think the Wii can make up serious ground in 2007. I think the 360 will be punctuated by occassional titles like Lost Planet, which get alot of hype, sell fairly well, but only appeal to hardcore gamers. PS3 has to bank on alot of new IP this year. Sony is now capable of making great games, but in terms of success, the record is..mixed, not Sony wants to count on in North America. Japan will be far less receptive to IP that does well in America for either 360 or PS3, unless it is made in the same vein as what has proven to be a hit in Japan. It seems only Nintendo has a good read on all three markets. With all that said... Wii sells the most units/month this year 360 sells 2nd most for most of the year...until the end when PS3 sales begin picking up in Japan and matching 360 sales in the West with games like MGS4 (if it stays exclusive)

I see your reason for your numbers. I think PS3 sales will be lower in Febuary than in January. However I expect march to be the biggest month for PS3. (USA/Europe) and possbily japan. I plan on buying 9 games between now and april 3rd. (well would like to buy) They are not out yet. They come out between now and April 3rd. My point on that is... there are 3 (or more) A or AA games. between now and then. EDIT: oops. Wrong post.