E3 to focus on cheaper hardware, new games

The Electronic Entertainment Expo, or E3, is also a chance for investors to look under the hood of a $30 billion global industry that rivals the movie and music businesses as it expands beyond a traditional audience of teenage boys.

This year's E3 is forgoing the huge crowds, gaudy displays and scantily clad "booth babes" of years past in favor of smaller, more dignified proceedings scattered among venues in the Southern California seaside city of Santa Monica.

The biggest expectation is that Sony will slash the price of its PlayStation 3, which is stuck in last place among new gaming machines due to its $600 price tag and thin lineup of games.

However, if Sony does cut the PS3's price by $100, the impact could be blunted if Microsoft responds by trimming prices on its own Xbox 360, which comes in three models now costing from $300 to $480.

"The biggest potential would be maybe announcement of price cuts for both the PS3 and the 360," said Mike Hickey, an analyst with Janco Partners.

Nintendo almost certainly won't tinker with its prices. Its Wii console is enjoying runaway success, outselling rivals by several times due in part to a $250 price that hits a sweet spot of mass-market affordability.

Instead, Nintendo may announce new features for the Wii or unveil a redesign of its popular DS handheld gaming device.

"The only thing I think Nintendo may announce is a headset and microphone for the Wii. They are also inching their way into online gaming. They are not as focused on communications as they should have been," said Peer Schneider, vice president of content publishing for IGN, a games-oriented Web site.

Price cuts for two of the three consoles may be just the thing to juice sales and build a larger base of hardware ahead of the year-end holiday shopping season that accounts for more than half of the industry's annual sales.

But Evan Wilson, an analyst with Pacific Crest, said Sony may not cut prices until just before the holidays. Sony already loses several hundred dollars on each PS3, and management's drive to get the giant electronics company back on track financially may force it to stay the course on price.

"Any meaningful price cut on the PS3 would drag down the profitability of the game unit," Wilson said.

Many are looking forward to checking out a dizzying array of new games at E3 that analysts think will mark a turning point for the industry after a longer-than-expected transition to new consoles.

"The migration to next-gen consoles has taken longer than expected, which is prolonging the early stages of this product lifecycle," analyst Eric Handler wrote. "But an increasing slate of games being readied for market offers the potential for strong growth."

A small sample of the titles expected to grab the spotlight this year includes Grand Theft Auto IV and Bioshock from Take-Two Interactive Software, Killzone from Sony, Super Smash Bros. Brawl from Nintendo, Rockband from Electronic Arts and rival music game Guitar Hero III from Activision.

"Last year was all about hardware. This year is software, and software drives hardware," Hickey said. "In a few years, they'll be selling software to a gigantic installed base and at a higher price point. The economics are phenomenal."

The new game titles could be a catalyst for publisher shares, many of which have traded flat to lower this year.

Wilson of Pacific Crest estimates industry total revenue could jump 20 percent in 2007.

The fast growth is drawing increasing attention. Lehman Brothers recently began covering four major U.S. video game publishers, saying that returns in the industry were better than in all other media and entertainment sectors.

Electronic Arts and Activision are two favorite picks by analysts due to their broad array of games and strong movie tie-ins.

Investors have frowned upon publishers that are overly reliant on one or two hit games, such as Midway Games, which has dropped 10 percent this year and Konami, which has shed 23 percent.