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October Preview Report

Jesse Divnich
November 12, 2007

Key Points

  • Wii and Nintendo DS expected to lead their product groups
  • 40GB PS3 Model expected to increase sales
  • Activision expected to dominate the holidays
  • First-person shoots are cannibalizing each other's sales
  • Halo 3 sales not affected by PS3 hardware news or PS3 exclusives
  • Sony continues to struggle with its PS3 exclusives
Introduction

This report is intended to aid industry professionals and the press in drawing insight and discovering trends occurring in the video game industry through the use of the simExchange video game prediction market (www.thesimexchange.com), a data aggregation system in which gamers, developers, and industry investors trade virtual video game stocks and futures to predict how video game products will sell and how they will be critically received.

Results based on NPD data have consistently shown that The simExchange prediction market can predict results not only more accurately than traditional models and surveys, but also more quickly adjust forecasts based on industry and product news.

The simExchange's Market Predictions



Hardware Sales

Continuing trends over the last 6 months (the last month being an exception), the Wii will top the console charts with 467,000 units according to the results of the prediction market. The Xbox 360, a close second, is forecast to sell 412,000 units, while at a distant third, again, is the PS3 at 136,000 units. On the portable side, the trend persists with the Nintendo DS selling 460,000 units and the PSP selling 251,000 units, according to the prediction market.

NPD Futures for November and December indicate that we can expect the Nintendo Wii and the Nintendo DS to remain on top in their respective categories for the remainder of the year. The prediction market is pricing in these market share forecasts with a high degree of certainty as it is far too late for the console/portable manufacturers to change their current advertising and pricing strategy to greatly upset the market share break down.

Although the PS3 is severely lagging behind its competitors, the prediction market still expects the PS3 to sell 52 million units globally throughout its lifetime compared to the Xbox 360's 59 million units. These estimates are a strong indication that we can expect more PS3 price cuts, stronger exclusive titles, and a deeper market penetration of Blu-Ray movies.

PS3 40GB Model

Since the announcement of the 40GB PS3 model, the prediction market has been slowly increasing its holiday forecast of the PS3 console for the months of November and December. Currently, the prediction market expects 359,000 PS3 units will be sold in November compared to a forecast of 292,000 units prior to the announcement. Expectations for December were also elevated marginally from 650,000 units to 687,000 units. The increase can also be contributed to more competitively priced HDTVs this holiday season, which makes the PS3 a strong complimentary purchase with its Blu-Ray HD capabilities. As Wedbush Morgan's Analyst, Michael Pachter pointed out in a recent Game Informer article.

".. [I] think that Blu-ray becomes more relevant, and its relevance is perfectly correlated to HD TV adoption rates. People without HDTVs probably care a lot less about Blu-ray than people with high-definition monitors. As we see greater adoption of HDTV, we should see greater sales of PS3."

Software Sales

For October, the prediction market currently expects retail software sales to be $565 million a 53% increase over last year. These large year-over-year increases are contributed by the continued success of Halo 3, The Legend of Zelda: Phantom Hourglass and from newcomers, Half-Life 2: Orange Box, Guitar Hero III, and Ratchet & Clank Future: Tools of Destruction.

Looking forward, the prediction market expects these sales trends to continue with November and December ringing up, $1.4 billion and $2.15 billion, a 29% and 24% increase over last year, respectively. These predictions would result in the highest monthly sales on record for both November and December—a record that won't be broken for some time.

Activision

Activision is expected to have its most dominant holiday season in years with the releases of both Guitar Hero III and Call of Duty 4.

For October, the prediction market expects Guitar Hero III to have robust sales on all three of its next-generation titles: Xbox 360 – 502,000 units, Wii – 213,000 units, PS3 - 113,000 units. Most notably, the Wii version of the title is expected to sell more units than the PS3 version— something not typical of multi-platform titles. The prediction market's expectations reinforce the already common theory that Wii consumers prefer originality over conformity, innovation over similarity, and more importantly, titles that are just simply fun to play. Given the strong first month performance, Guitar Hero III will likely be the top selling multi- platform title this holiday season.

For Call of Duty 4, the prediction market expects 700,000 and 620,000 units for the Xbox 360 version for November and December, respectively. These expectations, combined with its multi-platform release will likely make the Call of Duty 4 title the 2nd best selling multi-platform title this holiday season--Guitar Hero III being #1. Despite comments of a short single- player, the prediction market is likely expecting massive results due to its strong multi-player component of the title—something often ignored among other first-person shooters. Other factors include the game's setting, which for the first time in the series takes the game outside of the World War II setting, a setting clearly over-played at this point.

The Year of the Shooter

2007 is proving to be the biggest year for first-person shooters—as if Halo 3 alone wouldn't warrant such a claim. BioShock, Halo 3, Half-Life 2: Orange Box, and Call of Duty 4 are all first- person shooters struggling for the consumer dollar in this blockbuster packed genre. This has unfortunately led to some cannibalization among the group.

Halo 3's effect on BioShock's second month sales is expected to be only the first casualty of many AAA titles released in one genre. Originally, the prediction market expected Halo 3 sales to surpass 1.4 million units in October. The market progressively downgraded those expectations throughout the month to its current expectation of 738,000 units, a 47% decrease. The cannibalization theory can be seen as Halo 3 sales expectations declined while expectations for Orange Box increased.

This phenomenon will not only hinder first-person shooter sales this holiday season but will likely play as a barrier to those AAA titles pushed back into Q1 of 2008—as if being delayed wasn't bad enough on sales.

Sony's continued struggle with first-party titles

Ratchet & Clank Future: Tools of Destruction is among one of the highest anticipated titles for the PS3 this holiday season. In previous months, highly anticipated PS3 exclusives Heavenly Sword and Lair both disappointed in sales. The same story emerges with the release of Ratchet & Clank with the prediction market only expecting 131,000 units, just shy of Heavenly Sword's 139,000 units in September. Although it should be noted that Heavenly Sword had more days of sale on the retail market in September than Ratchet & Clank did in October. This comes as a huge disappointment as critics have scored Ratchet & Clank much higher than Heavenly Sword. The prediction market's expectations helps emphasize the markets concern over the software attachment rate of PS3 software titles.

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Interview Requests

Both Jesse Divnich and Brian Shiau are available for interviews and direct comments from the media or the investment community. Please see this reports footnote for their contact information.

Media

This report and all forecasts on the simExchange Web site are available for your use. Please provide your readers context on the nature of these forecasts, for example: "The simExchange is an online virtual stock market in gamers, developers, and investors trade stock to predict how games will sell."

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About The simExchange

The simExchange (www.thesimexchange.com) is the online prediction market for video games. Launched in November 2006, The simExchange allows thousands of gamers, developers, and industry watchers to forecast the video game industry. Participating in The simExchange is completely free and no real money is involved.

About Jesse Divnich

Jesse Divnich has been working in the video game industry for over 10 years. During that time he has assumed many professional roles including: beta tester, programmer, publisher analyst, and for the last 6 years, a private analyst and consultant for buy-side investment firms. Jesse Divnich has received many awards for his work in the private investment sector as an analyst covering publicly traded video game companies. Currently, Jesse Divnich has switched from the private sector to the public sector as an Analyst for The simExchange where he writes analytical articles on various industry topics.

Copyright and reprinting

The simExchange, LLC retains the right to the content of this article but permits the reprinting of this article with proper credit to The simExchange and Jesse Divnich.



The simExchange, LLC does not issue any investment ratings or investment recommendations for any publicly traded company. The accuracy of the opinions or data in this report is not a guarantee.

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