Shares of video game hardware, software, and accessories retailer Electronics Boutique (NASDAQ:ELBO) were among this morning's hardest hit following news that the company slashed its earnings outlook for its fiscal third quarter, which it will report on Nov. 20. Same-store sales for the quarter, originally seen rising year over year, are now expected to fall 7% from last year's levels.

The reasons for the company's near-term pessimism are interesting, especially as we head into the all-important holiday season. Late-summer software sales were strong, which the company interpreted as a good sign that game hardware systems continued to grow their installed base. (In a short announcement, competitor GameStop (NYSE:GME) today confirmed late-summer reports in saying it expects fiscal Q3 same-store sales to fall.)

Now, however, it looks like those sales were more a reflection of enthusiasm for new game titles -- new and current hardware sales haven't sold as well as expected this quarter. (This has been compounded, the company said, by delays in the production of some new software titles.)

The current video game hardware generation now has a few years of history behind it -- nobody's impressed when you come home with a Sony (NYSE:SNE) PlayStation2 or Microsoft (NASDAQ:MSFT) Xbox anymore. Heck, what took you so long? Sony, as Jeff Hwang recently noted when looking at software giant Electronic Arts (NASDAQ:ERTS), is scaling back hardware sales projections for the year.

Nintendo, meanwhile, recently slashed prices of its GameCube console to boost hardware sales. On a recent visit to a FuncoLand store, I was amazed at how cheap used and refurbished systems -- even high-end ones like Xbox and PlayStation2 -- currently are. (FuncoLand is owned by GameStop.) But we're not near the next-generation of systems yet: It doesn't look like we'll see much meaningful innovation from the console makers in the next few years, apart from efforts to grow online gaming.

Hardware sales, it appears, are slowing. So while software companies will always drive excitement in the market by developing hot titles, the hardware must sell if software companies are to continue growing sales and profits. Whichever side of this chicken-egg conundrum you might be on, this is a situation worth watching closely in the coming quarters.

Dave Marino-Nachison can be reached at