Pachter: Industry in permanent decline

We expect investors to remain spooked by the May results, as they are beginning to reinforce the notion that the video game industry is in a state of persistent secular decline.”

That’s the somewhat startling assessment of famed games analyst Michael Pachter in light of further declines in the US market in both April and May.

The May line-up was indeed stacked in favour of dramatic growth, but despite May’s easy percentage and dollar comparisons and long-anticipated debuts for a handful of games, it became clear that several of May’s games performed well below expectations as the month progressed,” he stated in his official reaction.

In particular, Pachter singled out Nintendo for the fact that software sales continue to dwindle despite its growing install base.

Wii software sales were down 29 per cent year-over-year and DS software sales were down 13 per cent, while PS3 software sales were up 58 per cent and Xbox 360 software sales were up 29 per cent,” he added.

We think this is remarkable, given growth in the Wii hardware installed base of 44 per cent and growth in the DS installed base of 33 per cent over the last 12 months. In our view, this indicates that Nintendo’s customers either are not finding enough software to satisfy their needs, or need less software than the typical Sony or Microsoft customer.”

That’s not to say that Nintendo was the only offender. Pachter also laments the fact that a number of key titles – Alan Wake, Prince of Persia, Blur, Shrek, Lost Planet 2, Iron Man 2 and Skate 3 all sold fewer than 200,000 units.

The conclusion Pachter draws from the continued slump in the US market is a dark one. He thinks that the games industry isn’t just in the downward part of the current cycle – he reckons it’s facing a permanent decline.

We expect investors to remain spooked by the May results, as they are beginning to reinforce the notion that the video game industry is in a state of persistent secular decline,” he warns. We think it is inevitable that there will be a shift in delivery of video games away from packaged products and toward digital downloads, but we don’t expect the shift to manifest itself in a material way in 2010.

Rather, we believe that the publishers and developers of games have created more robust multiplayer content in recent years that has resulted in core gamers playing the same games for much longer, on average, than they did in the past, leading to lower sales of new games.

We expect the publishers to monetise the value created by online play, led by Activision. We continue to expect Activision to find a way to monetize the 1.75bn hours of Call of Duty Modern Warfare 2 online play on the Xbox 360 in the first five months following the game’s release.

We expect investors to stay on the sidelines until they see evidence of a sustainable rebound in sales. The modest rebound in May is likely to be insufficient to convince anyone of sustainability, and we do not expect share prices to begin to rebound until later this summer.

The central thesis behind investment malaise is that the packaged goods business is in a state of decline, and that packaged products will continue to compete with alternative interactive entertainment experiences such as Facebook games and iPhone games.”