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An aging console cycle, a decline in the number of new game releases, and competition from online platforms are presenting a challenge to video game retailers and developers, according to Colin Sebastian, a senior equity analyst at Robert W. Baird & Co.
“We maintain a cautious view of the interactive entertainment sector, due to the current lull in sales brought about by the sluggish console market and slower growth in social games,” Sebastian said ahead of the gaming industry’s quarterly earnings reports for the period ending June 30.
Console game sales have declined seven months in a row, and social games on Facebook are showing signs of maturation, Sebastian said. However, he added that sentiment toward the industry remains overly negative, and he sees some potential in the second half of the year.
Sebastian estimated quarterly results for Call of Duty publisher Activision Blizzard will be around $810 million, based largely on strong catalog sales and sales of popular hack-n-slash role-playing game Diablo III, which sold 3.5 million copies on the first day. Sebastian said this will help offset the financial cost of Activision’s recent court troubles involving former Infinity Ward heads Jason West and Vince Zampella.
Although Sebastian predicted Activision Blizzard’s revenues will drop in the third quarter to an estimated $650 million, he said the publisher will also get a boost in the second half of the year due to high-profile titles Call of Duty: Black Ops 2, Skylanders Giants, and World of Warcraft: Mists of Pandaria.
Since many of EA’s high-profile games are scheduled to launch later in the year, Sebastian said product momentum will be slower for the publisher through 2012. He expects EA to report quarterly revenues in line with its own estimate of $507 million. However, he said earnings per share guidance — EA expects a loss of 43 cents a share — was significantly below consensus estimates of a loss of 36 cents a share, partly due to a drop in Star Wars: The Old Republic active subscribers, overall challenging industry sales conditions, and a more back-half weighted fiscal year.
Sebastian also said EA will face a difficult comparison during the holiday period due to strong performances last year by EA Sports titles and Battlefield 3.
Although preorders of Max Payne 3 may have fallen short of initial expectations and sales of Spec Ops: The Line have been modest, Sebastian noted that publisher Take-Two Interactive’s momentum will improve when it releases Borderlands 2, BioShock Infinite, and NBA 13.
“We continue to view Take-Two favorably as one of the highest quality console game developers,” Sebastian said. “In addition to GTA — one of the most valued titles in the games industry — the company has a solid lineup of other core franchises such as Red Dead, BioShock, 2K NBA, and Max Payne. However, as demonstrated by the long wait for Grand Theft Auto V, earnings remain somewhat lumpy and reduce visibility on a year-by-year basis.”
Sebastian added that GTA V will likely launch in March 2013, but an announcement for an earlier release of the game could give Take-Two’s stock a boost.
Sebastian reduced his estimate for Zynga’s quarterly bookings to $340 million due to the maturation of games on Facebook and the slow transition to mobile platforms. He said user metrics have declined over the second quarter; the number of Zynga’s monthly active users (MAUs) has declined by 10 percent since the beginning of May, according to AppData.
However, Sebastian noted that the decline could partly be due to seasonal trends rather than Zynga-specific problems. Gaming activity tends to slow during the summer, analysts say, when players are outside more and in front of computers less.
“Regardless of the quarterly outcome, we note that Zynga’s games continue to dominate the top 10 charts for Facebook, accounting for eight of the top 11 top-grossing games on Facebook as of 7/13/12, including the top four games,” Sebastian said.