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Game Sales Poised to Hit Record

Entertainment: Launch of new consoles sends revenues soaring in 2001. Industry is expected to surpass $10 billion this year.


The launch of new consoles in 2001 positioned the U.S. video game industry to hit a record $9billion in sales, but game publishers and analysts expect this year and next to be even better.

As production constraints ease, Nintendo Co.'s GameCube and Microsoft Corp.'s Xbox machines should be available in greater numbers, which in turn should fuel the sale of more software. Some project the U.S. games industry to surpass $10billion in 2002--and widen its lead over box office receipts.

"2001 is not the year to get excited about," said Bobby Kotick, chief executive of Activision Inc. in Santa Monica. "The blockbuster years are going to be 2002 and 2003."

That growth is expected to bolster Southern California's growing importance in the video game industry, which relies on the region's entertainment expertise to develop more interesting and lifelike experiences for more powerful machines.

Already, video game industry revenues surpass movie revenues. Domestic box office receipts are expected to total $8.4billion in 2001.

Although the full year's tally is not yet available, game sales for the first 11 months were $7.5billion, according to NPD Group Inc., a market research firm in Port Washington, N.Y. The industry typically makes 20% or more of its sales in December, which would bring the total to $9 billion.

"December looks like it'll be around $2.3 [billion] and $3 billion," said Miguel Iribarren, analyst with Wedbush Morgan Securities in Los Angeles. "We've been projecting as far back as May that sales would be $9.6 billion for 2001, and the industry is doing better than we expected. So I wouldn't even be surprised to see $10 billion."

In 2000, sales of games, consoles and peripherals slipped 4% to $7.9 billion from $8.2 billion in 1999, primarily because many consumers either put off buying a new console or couldn't get their hands on Sony Corp.'s PlayStation 2.

Last year, though, a plentiful supply of PlayStation 2s and strong sales of the Xbox and GameCube, as well as Nintendo's GameBoy Advance hand-held console, pushed hardware revenues into record territory despite a weak economy and reluctant spending by holiday shoppers.

"I don't think this industry was affected at all by the softness in the economy," Iribarren said. "The year was driven by hard-core gamers, and those people show up rain or shine."

In addition, 2001 was a banner year for software, including such titles as "Metal Gear Solid 2," "Tony Hawk Pro Skater 3," "Star Wars Rogue Squadron II," and "Harry Potter and the Sorcerer's Stone." Sales of "Metal Gear" nearly topped $25 million the day the game was released.

An expected price war among console manufacturers this year probably will increase the number of boxes in the hands of consumers and accelerate demand for games, Kotick said. GameCube is priced at $199, Xbox and PS2 sell for $299 each. Many in the industry predict Sony will cut the price of the PS2 by as much as $50 before next holiday season.

"It'll happen" this year, said Brian Farrell, chief executive of THQ Inc., based in Calabasas. "Then you'll see a tremendous upswing on the software side."

Such bullish expectations helped drive up share prices for the major industry players last year amid a deteriorating stock market.

Shares in Activision, the nation's second-largest independent games publisher, nearly tripled last year. Electronic Arts Inc. in Redwood City, Calif., the country's biggest publisher, saw shares rise 54% last year, while THQ's shares more than doubled. Shares of Take-Two Interactive Software Inc. in New York, which released "Max Payne" and "Grand Theft Auto 3" this year, jumped 49%. Even Acclaim Entertainment Inc., maker of "Mortal Kombat," pulled back from the brink, ending the year at $5.30, up from 44 cents on Jan. 2.

"In the late 1990s, there was the perception that everything of importance was happening on the Internet," Kotick said. "Companies that sell products on store shelves was old news. This year, a lot of institutional investors who were blindsided by the Internet all of a sudden stepped back and saw that this was an industry that's growing 20% annually and making money. Before, we never got the attention from the Goldman Sachses and the Merrill Lynches that we do today."

Not all companies rode the industry's wave of prosperity. The 3DO Co. in Redwood City saw its stock slip 14%, and shares of Interplay Entertainment Corp. in Irvine plunged 80% as both companies struggled with mounting expenses and a lack of hit releases. Their predicament points to the likelihood of continued consolidation in the industry.

"It's getting more difficult for smaller companies to compete," Kotick said. "This business continues to require scale. Projects are getting riskier and more expensive. You'll start to see folks realize that they have to consolidate even further."

Although much of the attention was focused on console games in 2001, PC games have also grown, albeit less rapidly. From January to November, sales of PC games grew 7% from the same period a year ago to more than $1.1 billion, according to Steve Koenig, an NPD analyst. Koenig said sales of PC games are likely to be between $1.3 billion and $1.5 billion in 2001.

Next year, Koenig expects the spotlight to once again be on console games. "Games have come full circle since the days of the Atari, when they started in the living room," Koenig said. "Then the PC was born, and consoles became the lower-end gaming platform. For in-depth graphics, you had to have a PC in the early 1990s. Now at the dawn of this new decade, the graphics capabilities of consoles have become identical to if not better than the PC, and you're seeing games come back to the living room."

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