Outlook: Next-Gen Consoles Remain Supply-Constrained

Titanfall

After the market close on Thursday, February 13, NPD is expected to release the January 2014 (four-week period ending February 1) U.S. retail video game software sales data.

We expect console/handheld software sales of $300 million, down 20 percent compared to last year’s $373 million. We expect sales to be down significantly due to a shorter retail month this year and continued current-gen sales weakness, although we expect this to largely be offset by next generation sales. In addition, the release slate was light ahead of a number of high-profile releases later in Q1, including Activision Blizzard’s (NASDAQ:ATVI) Diablo III: Reaper of Souls (PC) and EA’s (NASDAQ:EA) Titanfall (XB1, 360, PC). The comparison to January 2013, which was up 1 percent, is deceiving, as January 2012 was a four week retail period and January 2014 is also a four week period.

Software sales were down 17 percent in December, driven by multiple factors that should also have impacted January results. Next-gen consoles remained supply-constrained, delaying next-gen spending for those gamers unable to buy a PS4 or Xbox One. For many consumers able to purchase a next-gen console, current-gen software spending was down as a result. The industry’s top-selling console game, Activision Blizzard’s Call of Duty: Ghosts, a November release, sold well below our expectations for the second consecutive month, and like two of the quarter’s other big releases, EA’s Battlefield 4 and Ubisoft’s Assassin’s Creed IV: Black Flag, ended up being down for the quarter from the prior iteration. Nintendo’s Wii U continued to perform well below the levels expected for a new console, with software sales lagging those of its predecessor despite a recent hardware price cut, an improving release slate, and only having been available for just over a year.

Exhibit 1: Estimated Console/Handheld Software Sales

By publisher ($ millions)
YoY                                     MoM
Jan-14E            percent change                          percent change
Activision Blizzard       $51           (29 percent)           (79 percent)
Electronic Arts              $45           2 percent                (81 percent)
Nintendo                        $34          (15 percent)            (78 percent)
Take Two Interactive (NASDAQ:TTWO)    $32    10 percent            (79 percent)
Ubisoft Entertainment         $31     (36 percent)        (79 percent)
Five Covered Publishers      $193   (17 percent)         (79 percent)
Overall Industry                    $300  (20 percent)        (77 percent)
Publishers as  Percent of Market                                              64 percent
Wedbush Estimates

Source: The NPD Group/Retail Track and Wedbush Securities estimates.

October and November releases should again lead console/handheld software sales. We expect January sales to be led by a multitude of games, including Activision Blizzard’s Call of Duty: Ghosts, EA’s Battlefield 4 and sports titles, Ubisoft’s Assassin’s Creed IV: Black Flag and Just Dance 2014, and Take-Two’s NBA 2K14 and Grand Theft Auto V.

We expect hardware sales of 350,000 Xbox One units and 375,000 PS4 units in their third month, and we expect 60,000 Wii U units (up 5 percent year-over-year). On January 6, Microsoft announced Xbox One worldwide sell-through of over three million units before the end of 2013. On January 7, Sony announced cumulative PS4 sell-through of 4.2 million units as of December 28. For current-gen, we expect 140,000 Xbox 360 units (down 50 percent year-over-year), and 100,000 PS3 units (down 50 percent year-over-year).

On Monday afternoon, Wedbush Securities will publish Post Hoc Ergo Propter Hoc, our latest video game industry report. The report details our expectations for the future of the industry and our covered companies, discusses emerging trends that we see impacting key players, and provides a comprehensive history of the industry up to now. In addition, last month we introduced our industry growth model though 2016. The industry note and model are both available to clients.

Michael Pachter is an analyst at Wedbush Securities. 

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