GameStop CEO Says Hardware Doing Fine, ‘Happy’ with Current PS3 Pricing

Thu, May 22, 2008

Yesterday, we suggested that industry analysts would be a far more reliable source of prognostication than cautiously spinning studio executives, but we forgot that there is another semi-reliable source that has even greater access to sales data — the GameStop corporation. Following today’s quarterly earnings report, CEO Dick Fontaine told investors that the industry is in “an explosive growth cycle” when it comes to hardware, the cycle will last longer than ever before, and that the PS3 price is fine just the way it is.

During the Q1 Earnings conference call this morning, Fontaine spent considerable time discussing longevity. He believes the business cycle is changing:

In previous quarters we’ve made the case that many of the metrics tied to the analysis of the business on a predictive cycle model have changed.

We’ve stated in the past that we believe that this business will be deeper, wider and longer than at any time or any cycle in the past, and the evidence keeps growing that that’s the case. Deeper in that the power and the pull of the games is continuing to attract an increasing number of core and avid gamers, purchasing games like Super Smash Bros Brawl, GTA4, Army of Two and purchasing these titles in record numbers.

But since we’re talking about GameStop, concepts of business cycles and hardware cycles are practically synonymous:

The cycle is also going to be much, much longer. Last week, 3 of our top 20 titles were for PlayStation 2, a console now in its 8^th year, and I fully expect given the competing power of the PlayStation 3 and the 360, we’ll be seeing longer life as developers use the horsepower of these systems for more creative applications into the future.

Like EEDAR analyst Jesse Divnich, Fontaine demonstrated that looking at yearly, rather than monthly differences in hardware sales, we can see that video game hardware is doing just fine:

I want to address one element of the somewhat dated cycle model that still does hold water, namely that software sales follow hardware growth. The ‘razor and razor blade effect,’ if you will. In 2005 and 2006, the industry – and this is according to NPD data, and US data only – added almost 44 million consoles to the total installed base, at that time a combined two-year record. Yet in 2007 alone, that number was over 31 million, and we are forecasting 2008 console and handheld numbers to be over 32 million industry-wide. In short, we are in the middle of an explosive growth cycle.

A question-and-answer session followed the call, and the first voice to break the silence was that of Lazard Capital Markets analyst Colin Sebastian, who — after reminding us that GameStop itself predicted $50 price cuts for both PS3 and Xbox 360 back in March — asked if the company still believed they would materialize. Fontaine replied:

One of the things you may have noticed was that Kaz Hirai about two weeks ago indicated that at this time, they were not planning any price cuts on the PS3, but that certainly doesn’t mean that as market conditions evolve that they may not change that, and the truth of the matter is that we have been sufficiently happy with the rate of sale on the PS3 at its current price points, that assuming it continues at that rate, I think we’d be just fine with withholding the price. If it shows any sign of weakening, or if they make a move to decide they want more market share, I still think that option is open, but right now we’re okay with that announcement.

And as far as the Grand Theft Auto IV effect is concerned, GameStop CFO David Carlson says regardless of what the NPD numbers showed, the company noticed “a significant increase” in the sales of both current-gen consoles, with sales nearly doubling from one week to the next. Carlson states that GameStop was “actually very happy with the number of Xbox 360s and PS3s that tied along with Grand Theft Auto,” and they continue to see an impact in May.

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