More Console Cuts Coming?

Shares of video game developer THQ (Nasdaq: THQI  ) rose nearly 10% in morning trading today following its announcement of upbeat fiscal Q3 and nine-month financial results. The numbers themselves are worth a peek, but as we must look ever forward -- not backward -- I'd like to focus instead on some information contained toward the bottom of the THQ release.

In providing its guidance for fiscal 2005, THQ -- which currently projects 7% and 12% sales and EPS growth, respectively -- is counting on a price reduction to $149 for both Sony's (NYSE: SNE  ) PlayStation 2 and Microsoft's (Nasdaq: MSFT  ) Xbox video game consoles. Such moves wouldn't be surprising, since both machines are long in the tooth by sector standards.

After all, Nintendo, fighting to stay relevant in the console business, cut its Gamecube price to $99 last year. (All three can be bought for considerably less used.) But the big picture here is a clear example of the dynamics of the video game business in action. Roughly speaking, hardware cycles in the sector last approximately five years. PlayStation 2, which started this hardware "generation" back in 2000, is now graying somewhat.

At the start of each cycle, just about any game that doesn't self-destruct upon opening will sell to gamers eager to try out their new boxes. Once that thrill passes, the responsibility for driving game sales (and license revenue to the box makers) falls largely to the game publishers themselves. They've got to produce blockbusters. Now, it seems, we're seeing the final stage: game makers and box makers teaming up to juice the market with sharp games and hardware price cuts. (It helped retailers like Electronics Boutique (Nasdaq: ELBO  ) this holiday season.)

How long this stage will last is unclear. No new system -- say, a PlayStation 3 or Xbox 2 -- is expected to hit the market before late 2005. (Rollouts rely on new chip production for systems, not to mention the delivery of "development kits" to the game makers from the console companies.)

The pressure is constantly on the game makers to produce. (Check out our recent take on Atari (Nasdaq: ATAR  ) for more context.) It's even more so as the fight to maintain sales growth intensifies.

Talk about the state of the video game market on our Video & PC Games discussion board, or brush up on the last on THQ at its discussion board.

Dave Marino-Nachison can be reached by email.