Good times are ahead

Looking at the monthly results since the first quarter 2007 two factors become apparent from the chart below: one is that sell-through pretty much stagnated in the first three quarters of each year and that the predominant portion of the annual growth was concentrated in the fourth quarter. The second is that software propelled the growth of hardware and not the other way around. There is no reason to assume that things will be different this year.

In fact it is striking to see how closely software and hardware correlate to each other according to the chart below tracks Hardware and Accessories on one side and Software on the other on NPD-based moving annual totals. If you assume that accessories are really part of the Hardware segment, they are not only pretty identical in sales volumes, they also totally mimic each other’s movement:

My friends at the large retailers – particularly on the store level – are seeing an increasing interest from the side of the consumers in the software titles coming down the pike during the second half. This is particularly striking when you look at pre-release sales bookings. In addition, we see a similar pattern in terms of web traffic if you compare ToysRUs, the epitomen of a toy retailer, with that of GameStop:

What we see is a clearly accelerating upwards trend in the case of GameStop if you compare the curve this year with the one at the same time last year. In fact, the pattern is much more akin to what you saw two years ago. In contrast, the ToysRUs curve continues to predict a slower second half that what you had last year.

There were inordinately heavy comps to overcome during the first half of last year as shown by the split of the top ten games last year [units, as per NPD]:

The first half of 2008 accounted for a 62.7% split for the top ten games last year even though seasonality would suggest a significantly lower number. This is also reflected in the first half/second half sales split overall. Whilst the first half in 2007 for total software accounted for 33.6% of the year, the number for same period in 2008 was 39.7%

The basis for predicting a much better second half of this year compared to the first six months is the much greater strength of the new software offering. The buyers at the large video game retailers have identified those games with the greatest potential [500,000 units and up] in yellow below:

This is approximately double the number of strong games in the second half if compared to the first half of 2009.

Lutz Muller is an analyst for Klosters Trading Corporation

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