Analyst predicts industry growth of 6% in 2010 thanks to digital sales

By Stephany Nunneley, Wednesday, 10 February 2010 16:52 GMT

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Pacific Crest Securities analyst Evan Wilson has predicted that packaged games will maintain flatness in 2010 while the industry as a whole will show growth of 6 percent.

Wilson claims this is partly due to a 34 percent surge in digital sales.

According to the analyst, software sales fell in 2009 due to “a combination of factors” and those factors could make 2010 worse for the industry than what was seen in the previous year.

“We believe that fairly obvious factors…such as game delays, the economy, and the fall of the music genre, have simply added to the one main issue that we have faced all cycle: growth of development costs has outstripped sales growth,” he told Gamespot.

“The reductions [studio closures]were directly correlated to elimination of unprofitable games. The industry mourned the loss of promising new intellectual property, the closure of once-famous studios and the departures of marquee developers; over and over, the output looked high-quality and was well loved, but at the end of the day was unprofitable.

“Publishers came to the realization that certain IP would never be profitable, and thus began to hack away at themselves.

“Electronic Arts commented to us at a recent investor meeting that it expected its game costs to stabilize based on the investments in IP and engines that it has made this cycle. It pointed to Dante’s Inferno, a title that took only 24 months from conception to launch, as its template going forward. This may be a good attempt to compete at a lower price, but it is unlikely, in our view, that this type of title will really be able to compete and produce a meaningful profit.”

Digital sales, said Wilson, saw a 34 percent growth rate, which is still lower than the 45 percent growth in 2009 and 40 percent in 2008.

“Several pieces of digital revenue are growing significantly faster, but with declines in mobile gaming excluding the App Store and the relatively flat nature of World of Warcraft, which accounts for the majority of subscription revenue, overall digital revenue should end up growing at a more modest pace,” he said.

Wilson also predicts that PS3 will sell 5 million units, up from 4.3 million in 2009 while 360 sales will remain flat YoY at 4.8 million. Wii sales will slow at 8.6 million units for Nintendo through the year, causing a decline in total hardware figures.

He also said that third-party publishers have abandoned the hope of turning a profit on games produced for Wii, and this will force Nintendo to court gamers using its own catalog instead of relying on third-parties and possibly creating a new console.

To counter the decline, Wilson believes the gaming giant will forgo motion controls with its next console, and return to more traditional methods with its published games in 2011.

“Because Nintendo would like to see sales of third-party Wii games increase, and because third parties have been disappointed when attempting to develop for the Wii, we believe it is likely that Nintendo may support more ‘traditional’ controls for its next console, alongside motion controls,” he said.

“In the next generation, we believe Nintendo’s growth opportunity will be to focus on core-audience features like better visuals and a traditional controller, in an attempt to both cater to the core gamer and re-invigorate third-party software support. It will also likely extend its development of nontraditional control schemes.”

Rumors earlier in the month saw Nintendo already working on a new console, and debuting it as soon as GDC in March.

Earlier this week, Miyamoto admitted that the company was working on new hardware, but would not elaborate on what it was.

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