The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
In December, none of the covered publishers reported results.
Last week, Wedbush Securities introduced its video game industry growth model through 2016, and made the model available to clients. The model has our hardware and software sales forecast for 2014-2016, as well as historical data from 1994-2013. We expect Sony (NYSE:SNE) and Microsoft’s (NASDAQ:MSFT) new consoles to thrive over the next three years. We do not expect Nintendo’s (NTDOY.PK) Wii U to fare as well.
Software sales for the next-generation consoles are expected to grow to $12.2 billion by 2016; in contrast to the last cycle, we expect software sales for PS4 ($5.9 billion) and Xbox One ($4.9 billion) to dominate, with Wii U software capturing only 11 percent share. We expect overall software sales growth (including PC) in the U.S. and Europe combined (the addressable market for covered publishers) of 10 percent in 2014, 7 percent in 2015, and 6 percent in 2016. We expect combined Xbox 360/Xbox One/PS3/PS4 software sales growth of over 50 percent over the next three years.
The Wedbush Video Game Index, our market cap-weighted index of video game companies, was up 3 percent for the month of December as investors reacted positively to two new console launches. Each of the covered publishers except Majesco (NASDAQ:COOL) was up for the month. The index outperformed the broader market averages, which were also up (the S&P 500 and the Russell 2000 were both up 2 percent) as rising consumer confidence and continued corporate strength offset concerns about the impact of the Federal Reserve tapering its bond buying program.
Nintendo had a strong month, up 7 percent, from handheld hardware strength and an improving release slate. Take-Two shares were up 6 percent for the month as November retail sales according to NPD were better than expected, led by Grand Theft Auto V and NBA 2K14. Ubisoft (EPA:UBI) shares were up 6 percent as it continued to rebound from the large October sell-off caused by the delays of Watch Dogs and The Crew. On a constant f/x basis, the Index was up 3 percent. Excluding Nintendo, it was also up 3 percent.
November U.S. console/handheld software sales were $1.09 billion, down 24 percent year over year, and below our estimate of $1.25 billion. The sales decline was in part attributable to the debuts of Microsoft’s Halo 4 and Ubisoft’s Assassin’s Creed III last November (the newest Assassin’s Creed was initially released in October this year), and a sales decrease for the newest iteration in Activision Blizzard’s (NASDAQ:ATVI) Call of Duty franchise. Nintendo software sales were well below our expectations, with the 3DS and Wii U failing to generate sales close to the levels that we expected.
Wallets were drained by the two new consoles, and supply constraints lasted through month’s end, likely having a negative impact on software sales. Combined next-gen console hardware unit sales were above our expectations, while current-gen console and handheld hardware unit sales were well below our expectations, resulting in total hardware unit sales being below our estimates, but up year over year.
Key December headlines:
- December 3 — Sony announced worldwide PS4 sell-through had surpassed 2.1 million units as of December 1. It had previously announced 1 million PS4 units sold-through in its first day of release. PS4 launched in U.S. and Canada on November 15.
- December 6 — Bungie announced a September 9 worldwide release date for Destiny (XB1, PS4, 360, PS3), which will be the first game published under a 10-year agreement with Activision. It also announced the game’s beta will begin in summer 2014.
- December 11 — Microsoft announced Xbox One sell-through of more than 2 million units in 18 days. It launched in 13 markets on November 22. That day, Microsoft announced more than 1 million consoles sold-through worldwide in under 24 hours.
- December 12 — NPD announced worse-than-expected November U.S. console/handheld software and hardware sales.
- December 26 — Wedbush Securities introduced its video game industry growth model through 2016.
Key January events:
- January 13-17 (est.) – Best Buy (NYSE:BBY) to report holiday sales results.
- January 13-17 (est.) — Majesco to report Q4:13 results.
- January 14 – GameStop (NYSE:GME) to report holiday sales results.
- January 16 — December NPD U.S. video games sales data release.
- January 23 (est.) — Microsoft to report Q2:14 results.
- January 29 — Nintendo to report Q3:14 results.
Michael Pachter is an analyst at Wedbush Securities.