Mr. Sebastian: 2009 may be remembered as a perfect storm in the interactive entertainment industry, and software publisher performance has been very mixed. Although the year started off fairly well, by springtime consumers were buying fewer new games and console hardware on a comparatively light video game release schedule. And further exacerbating the situation was a drop-off in Nintendo Wii sales, which had been the biggest single driver of console cycle growth to that point, as mainstream consumers seemed to dial back their purchases of video games at premium price points. And then topping it all off, hardware prices on the Xbox 360 and Sony's PS3 were keeping those platforms out of reach for many consumers. So the hindsight analysis is fairly clear: The industry faced very tough growth comparisons from a record year in 2008, the economy began to take its toll on the sector and there weren't enough compelling products at the right price points to maintain the same pace of sell-through.
TWST: You mentioned customers are more price sensitive these days. Have these companies had to take significant price cuts?
Mr. Sebastian: We believe that software pricing is going to become a bigger issue, which is normally the case in the middle of a console hardware cycle. But this holiday, one of the takeaways for investors is that consumers tended to favor lower-priced video games, and retailers obliged with more aggressive discounting than in the past. As a result, we have seen some game publishers feel the heat on prices, such as Electronic Arts. And looking into 2010, we expect some additional decay. That said, we think the general rule of thumb will be very high-quality games with broad appeal should still be able to maintain top-tier prices. Activision's blockbuster game "Modern Warfare 2" sold extremely well at a high price point, as a case in point.
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