Alan Farley
The video-game industry underperformed the broad market by a wide margin in the first quarter. There's little doubt this is a seriously troubled business, in which growth assumptions taken for granted last year now require a major overhaul. And things could get even worse.
The problems began in late November when Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) released fewer than expected units of its long-awaited Xbox 360 console. This baffling move set off a buying frenzy on eBay but left game developers and retailers scratching their heads. After all, the holiday season was just beginning and developers and retailers planned to sell a boatload of new games as users upgraded their console systems. Instead, major industry players were forced to hit the wires, one after another, reporting year-end sales that couldn't meet modest expectations. Curiously, one game-related company has prospered this year, despite declining holiday sales in 2005. Mall retailer GameStop (GME Quote - Cramer on GME - Stock Picks) has tagged a series of new highs since early January. But a closer look suggests this maverick performance won't help the industry, because it's largely due to cost savings from its merger with Electronics Boutique.
Microsoft recently indicated it will finally be able fill store shelves with enough consoles to meet demand. However, Sony(SNE Quote - Cramer on SNE - Stock Picks), its main competitor, has pushed back the launch of its long-awaited PlayStation 3 to November. Adding to Sony's woes, movie studios and retailers are pulling away from the PSP-compatible UMD format after months of poor movie sales.
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