PS3 Pricing No ‘Impediment’ to Sales, Activision CEO Says

A consumer can buy a PS3 and use it as a Blu-ray player for less than the cost of a standalone Blu-ray deck, Kotick said: “So just from the hobbyist’s and enthusiast’s perspective, we do not see a lot of obstacles to consumption right now at that price point,” Kotick added.

But Activision Publishing CEO Michael Griffith said “it is still too early to say whether the tie ratio has improved” for PS3 hardware and software. Some have blamed the low initial PS3 software-to-hardware tie ratio on the fact that many early consumers bought a PS3 just to sell it off at a high price on eBay and didn’t bother buying games for the system before getting rid of it. It’s “no secret there was the shortage of hardware and the eBay effect that kept the tie ratio down in the early days of launch” but “I think intuitively and anecdotally, we believe that demand is going to continue for both the hardware and software that is attached to it,” Griffith said. That will especially be the case after the European PS3 launch, he said. Therefore, Activision is “really not concerned about the tie ratio on PS3,” he said, adding his company is convinced “we have 3 solid contenders” for the current console cycle. There will also likely be greater “cross-ownership” by consumers of multiple next-gen consoles than ever before, Kotick later predicted.

However, Kotick was the latest publishing executive to concede his company had yet to take full advantage of PS3’s capabilities: “We are taking advantage of the capabilities today, but when you think about, for example, finding people with multi-thread programming experience, other than JPL there are not a lot of places to go. So, we are building it from the ground up and really taking advantage of the multiprocessor architecture. [But] truly taking advantage of all these co-processors is going to take some time. The good news there is I think it is going to allow for new genre development and then you are going to see new kinds of features… In prior cycles we really haven’t had the same opportunities for the advancement of new features. We are hard at work looking at the hardware and trying to figure out what that is going to mean in future feature sets, but it is going to give us a lot of room for growth that we have not had in prior generations.”

Activision predicted 4 million PS3s will be sold in N. America during this calendar year -- the same number as PS2s and Nintendo Wiis. But it predicted Xbox 360 will widen its lead over PS3 and Wii, with another 5 million units sold. Activision projected about 10 million units of handheld game systems will be sold this year, including PSP and Nintendo’s Game Boy Advance and DS. But Activision didn’t break the handheld figure down by platform.

The publisher ended the holiday quarter “as a top 3 publisher in the U.S. for the 360, PS3 and Wii and we were the only publisher to achieve this status,” claimed Kotick, who boasted his company “recognized the Wii opportunity early on and we had one of the largest lineups at launch.” Activision “will double our product offerings on the Wii and DS” during its next fiscal year -- fiscal 2008 -- “as we plan to be even more successful on these platforms,” Kotick said. Activision properties that will arrive on the Nintendo platforms include Guitar Hero, Shrek, Spider-Man and Transformers, said Griffith, who boasted Activision “was one of the first publishers to go deep on the Wii and it paid off [because] we had 3 titles in the top 10 and ended the quarter as the number 2 independent publisher on the platform.”

But Activision didn’t offer a specific target it’s hoping to achieve in Wii market share, unlike rivals Electronic Arts and THQ, which each said last week it hoped to become the #2 Wii publisher, behind only Nintendo (CED Jan 5 p6). Based on Griffith’s comments, Activision was the #3 Wii publisher in Q3. Asked by an analyst if Activision expects to remain within the 14% market share ballpark on Wii, Griffith said only: “I think we've all been pleased with the strength of the Wii launch and the consumer acceptance. We've been pleased with our product performance on the Wii. We're learning more about how to take advantage of the Wii controller and deliver the consumer an exciting and exceptional game performance. So, I think we've got a good, solid foundation to build on. Our strategy and I think our expectation is that we'll map pretty well to the market across platforms, so we would expect going forward that we're going to have a fair share on the Wii platform compared to others.”

The comments came as Activision reported stronger “preliminary” results for the 3rd quarter ended Dec. 31 and boosted its estimates for Q4 and fiscal 2007. The company said Q3 sales are expected to increase to $822.8 million from $816.2 million a year ago. Profit is expected to soar 84% to $124.8 million (41 cents per diluted share).

The company was “the number one U.S. console and handheld publisher” during Nov. and, for Q3 overall, “we were the number 2 U.S. publisher,” and had 4 of the top 11-selling titles, “more than any other publisher,” said Kotick, citing NPD data. He said Activision “grew our 2 largest established franchises, Call of Duty and Tony Hawk, [and] elevated our 2 new properties, Guitar Hero and Marvel Ultimate Alliance into the top 10, and in the case of Guitar Hero, into the top 5.” The company’s 4 major holiday releases “were well-received by consumers across all platforms, yielding the largest, most profitable quarter in our history,” Kotick boasted.

Activision released Guitar Hero 2 worldwide during Q3 and “our team was able to overcome significant guitar [peripheral] supply challenges, nearly tripling available supply and executed well to make this the number 2 SKU in the U.S. for the quarter, and reaching number one in December,” said Griffith. Activision backed the release “aggressively this holiday season with a full suite of marketing elements, including in-store demonstrations,” he said and again pointed out Activision “secured over 7,500 demo stations and kiosks in almost every major retailer” for the game.

Activision increased its fiscal 2007 revenue estimate to $1.40 billion, up from the $1.37 billion forecast provided late last month. It also boosted its diluted earnings per share (EPS) estimate to 21 cents, up from 20 cents predicted last month (CED Jan 29 p5). Excluding impact from equity- based compensation, the company expects diluted EPS of 26 cents, up from the 25 cents forecast last month, it said.

The company also boosted its Q4 sales estimate to $200 million from $170 million, “based on better visibility regarding the allocation of PlayStation 3 hardware to its European distribution business,” the publisher said. The company now expects a loss per share of 9 cents for the quarter. Excluding the impact of equity-based compensation, it expects a loss per share of 8 cents vs. its previous loss per share estimate of 9 cents. Activision again said it expects Q4 results “will be significantly impacted by higher legal expenses and professional fees relating primarily to its internal review of historical stock option practices,” including its special sub-committee review, Nasdaq proceedings, an informal SEC inquiry and derivative litigation and the company’s decision to move the release of its game Enemy Territory: Quake Wars into fiscal 2008. Upcoming Q4 Activision releases include Call of Duty Road to Victory for PSP and a Call of Duty 3 downloadable map pack for 360, said Griffith, noting, “to date, the Call of Duty maps have been our best-selling and most profitable downloadable content.” The only other releases planned are 3 PS3 games for the console launch in Europe during March, he said.

Activision also again stressed that its fiscal 2007 results and estimates “do not take into account any adjustments for additional expenses that may be required in connection with the ongoing review” of its controversial stock option grant practices. The company had yet to file 10-Q SEC reports for Q3 and Q2 and its preliminary results for those quarters didn’t take into account any “restatements that may be required in connection with that review, or the determination of the company’s audit committee” Jan. 23 that financial statements relating to those periods -- and other periods dating back to fiscal 1992 -- “should no longer be relied upon,” it said.

Activision still expects fiscal 2008 sales to “exceed $1.6 billion” as it starts benefitting more from the new game consoles, it said. It expects to release about 60 SKUs in fiscal 2008, said Griffith, adding the company will be “representing about evenly our major launches across all major platforms.”

Echoing other 3rd-party publishers, Griffith said PS2 sales continue to be strong. “The massive installed base of the PS2, combined with growing demand for all 3 next-gen systems bodes well for continued acceleration in the installed base. Also, we believe growth will be fueled by continued strength in handheld platforms and eventually, lower-priced current-gen hardware. So in total, the hardware dynamics are coming together as expected,” he said.

Game software pricing, however, “remains one of the major risks to our operating plans,” said Griffith. But he said “we expect software launch pricing for the Xbox 360 and PlayStation 3 will hold at $59.99 and for the Wii at $49.99.” On the other hand, “pricing decisions for front-line, current-gen console titles will be made on a title-by-title basis, based on quality and other factors,” he said. But Activision released 3 PS2 games during Q3 at $49 or higher, Griffith added. Kotick later noted that one major risk on game pricing is that “people are spending more time on the Internet and they're doing other things and there is always the risk that people will be gravitating towards activities that are not game play.”

The publisher also continues to see downloadable game content on the consoles as “a long-term growth driver,” Kotick said, adding, “to date, we have generated almost $5 million in revenue from this new mechanism for enhancing our retail products.” Griffith later said he believes Nintendo and Sony are keeping close tabs on what Microsoft is doing successfully with Xbox Live and the publisher expects Nintendo and Sony will offer some of the same kind of features as part of their online console initiatives.