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'); //--> | | | | Game On A Very Dangerous Game Chris Morris 10.07.08, 6:00 AM ET As panic grows on Wall Street, even safe harbors are starting to look choppy to investors. The videogame sector has ridden through recessions in the past, but this time, it may not be immune to the market's roller coaster. Even before Monday's dizzying market drop, Activision Blizzard (nasdaq: - - ) shares had sunk to nearly the same level as Activision's stock traded at before it announced its giant merger last December with Blizzard. (It closed at $12.16 on Monday.) Electronic Arts (nasdaq: - - ) is at a five-year low. The story's the same at THQ (nasdaq: - - ). "We're probably more uncertain today than we've ever been in the 15 years I've looked at the category," says Edward Williams, an analyst with BMO Capital Markets. Exactly how the gaming industry will hold up during the holiday season won't be clear for several weeks. Data on the the industry's September sales are due out from market research firm NPD Group on Oct. 15. Those numbers are expected to look dismal in a year-over-year comparison--but not, oddly enough, because of the downturn. Last September's release of "Halo 3" by Microsoft (nasdaq: - - ) caused such a significant spike in software (and hardware) sales that this year can't help but look shabby (even with the long-awaited release of "Spore"). Investors trying to assess damage to the industry from the downturn, therefore, should ignore the September data and instead keep an eye on sales figures for October. Of course, investors are so skittish now they may not factor such nuances into their selling plans. "We believe that September NPD data scheduled for release in mid-October could add to near-term concerns over industry sales trends and that shares in the sector are likely to remain choppy until there is better visibility for the key holiday period," wrote Lazard Capital Markets analyst Colin Sebastian in a note last week. No one expects the industry to collapse this holiday season. And, every analyst I spoke with said they continue to believe sales will remain relatively strong, compared to other industries, as the year marches on. Few are counting on stocks to rebound anytime soon, however. "There are a lot of people who are looking for anything they can sell to lock in gains they've made throughout the year," says John Taylor, an analyst with Arcadia Research. "So you've got people just going after this group. It was the most resilient for a long time." BMO's Williams agrees. "The stocks are not reflecting the reality of the current business trends," he says. "I think what's happening is sheer panic, and everything's being tossed under the bus right now." Among hardware manufacturers, Nintendo (other-otc: - - ) should once again be in the best position going into the holidays. The Wii, while no longer the least expensive system, still has the widest appeal--and at $250 is still a palatable price for consumers. Despite increased production, it's far from certain whether the company will be able to keep up with demand, making this the third consecutive holiday it has been a hot gift. "There's no drop in demand for this at all," says Taylor. Microsoft is in a somewhat better position than Sony (nyse: - - ), thanks to a recent price cut to the Xbox 360 to $200. Both companies, though, are more reliant on customers who want to upgrade their gaming machines either from the PS2 or even the Wii. "Microsoft and Sony, in particular, are going to have a harder time getting that person to upgrade," said Williams. "It's going to be easier, based on current economic conditions, for people to say, 'Let's wait until a later time.' " Game publishers are likely to see overall softer demand. Top-tier titles are likely to still post strong sales. Popular titles from earlier this year, such as "Mario Kart Wii" and "Grand Theft Auto IV," are also likely to remain strong. But new franchises and mid-level games may fall flat. "I think most retailers believe that the industry is going to have a really strong fourth quarter," says Taylor. "It may be later in coming than they thought, but the video game aisle is going to be the strongest area of any business." Beyond the holiday season, however, there may still be problems for gaming companies. While the U.S. is in the throes of a crisis now, Europe, a big market for gaming companies, is just beginning to feel the impact. A strengthening dollar could also create formidable headwinds for U.S. publishers. Regardless of how 2008 sales turn out, the Wall Street sell-off of video game stocks could tarnish its reputation as a recession-proof investment. For what it's worth, though, that reputation might not have been entirely justified in the first place. The gaming industry ebbs and flows depending on how long it has been since new systems were introduced. As new hardware hits the market, sales escalate for a few years, typically peaking after three or four years, then begin to fall off as people anticipate another new machine. Happily, those past peaks occurred when the economy was trending downward. "Historically, the video game industry has looked recession-resistant primarily because of the coincidence of where it was in the hardware cycles more than anything else," says Williams. "I'm sure if the economy were stronger, they would have sold more games." 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