Gears of War 2 Launch Taking Up Other Video Game Money (MSFT, ERTS, THQI, ATVI, TTWO, GME)

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In about 36 hours, the highly awaited release of "Gears of War 2" comes to stores for a midnight opening.  The Microsoft (NASDAQ: MSFT) Game Studio published game developed by Epic Games Inc. comes on the heels a highly successful "Gears of War" which sold more than 5 million copies.  We have started seeing signs that the video game sector might not be so recession-proof, but some of the weakness may be due to the high-demand spending for this game at $59.99 or the collectible limited edition for $10.00 more.  The figures are going to be hard to compare, but "Gears of War 2" has a shot at being one of the top video game releases of this year.  The game already achieved Gold Status early last month.

The video game sector has been beaten up and there is even more negativenews tonight.  THQ Inc. (NASDAQ: THQI) said its CFO was taking medicalleave, but the company also issued downside numbers.  It now sees itsnext quarter sales far below estimates after just posting a much widerloss.  The new target is $400 to $420 million in sales for the quarterand $875 to $900 million for fiscal March-2009.  First Call had thoseestimates pegged at $566+ million and $1.12 billion respectively. At$6.55 today, it is at the bottom of its $6.29 to $29.94 range of thelast 52-weeks.

Electronic Arts Inc. (NASDAQ: ERTS) also gave an earnings warning just last week.  We criticized EA’s management over its announcement of layoffs, but it looks like THQ is following suit by closing down multiple studios.

Activision Blizzard, Inc. (NASDAQ: ATVI) also just came out withearnings and it posted a loss after charges.  The owner of the wildlypopular "World of Warcraft" and "Guitar Hero" franchises did say that itexceeded its internal plans, reaffirmed some 2008 targets, andauthorized a $1 billion stock buyback plan.

Take-Two (NASDAQ: TTWO) would probably give anything it could right nowto get back that old buyout price.  Shares have fallen by more thanhalf since that deal first came.

It is obvious to discuss the major consumer weakness affecting the video gamesector.  But it also comes at the time when a major title is coming outthat will sell massive numbers of copies.  If we take the same 5million copies from the first "Gears" and pretend that the same numberof the sequel will sell in two quarters, you generate roughly $300million in sales.  If the other game publishers are losing that much,then it could be mostly due to this one launch.  Years ago Take-Two hada Grand Theft Auto release within a month of Halo 2, and those twogames combined within a one month period sucked up much of the entireconsumer’s video game budget.  Competitors missed their estimates.

"Gears of War 2" is another massive title to what is now the "Gears ofWar" franchise, which is second for Microsoft in this Sci-Fi FPS genreto the wildly famous Halo games.  Microsoft soft sold $170 million from"Halo 3" in its first 24-hour period and the three Halo releases havesold more than 20 million copies combined since released. 

GameStop (NYSE: GME) may be the only public winner here, and Best Buy(NYSE: BBY) is too large to use for any pure-play (particularly as thespending in tech dries up).  The closest GameStop store has confirmed amidnight launch part, but only guarantees that a copy will be therewithin the first two days.

Trouble at other video game publishers is definitely due to theeconomy.  But the expected surge in "Gears of War 2" demand may be someof the problem that hasn’t been disclosed.  Marcus Fenix may be noMaster Chief in total sales yet, but being a number two in this race isstill a major win.  If the game is a fraction as good as the many gamepreviews and reviews and anywhere as good as the first "Gears of War,"then it is a safe bet that this will also be one of the big Christmasgifts and video game events of 2008.

Jon C. Ogg
November 5, 2008