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Game companies wary of transition period

DALLAS -- The Electronic Entertainment Expo in Los Angeles next week will be a feast for video gamers, as new software and hardware will be unveiled.

But while game players will bask in the extravaganza, game companies such as Microsoft Corp. and GameStop Corp. will be quietly calculating revenue projections, console launch dates, and hardware allocations.

That's because this is a delicate year for game companies, with Microsoft's Xbox 360 hopefully finding its balance and new consoles from Nintendo Co. and Sony Corp. hitting the market this fall.

As older Xbox, GameCube, and PlayStation 2 systems move into basements and closets, the industry is hoping there won't be a major sales slide as gamers pinch their pennies for the new technology.

''Whenever we go through these transition periods -- there's a pretty well-documented history of this -- it tends to freeze the market," said Doug Lowenstein, president of the Entertainment Software Association, which organizes E3, as the convention is commonly called.

Michael Pachter, an analyst with Wedbush Morgan Securities, issued a report this week projecting that game software sales, after falling 5 percent last year, will slip an additional 4 percent this year.

The good news is that software sales are predicted to rocket up 18 percent in 2007, once Microsoft, Nintendo, and Sony have all released their new game players.

But it's clear that the industry is slogging through the transition right now, said David Zucker, chief executive officer of Chicago-based game publisher Midway Home Entertainment Inc.

''There always was going to be one. It came, it's here, and we're in it," he said. ''We can see the Xbox really starting to tail off."

Midway reported a first quarter loss this week of $22.6 million, due partly to its focus on games for the new consoles, and expects to lose $66 million overall this year.

Part of dealing with a transition is managing pent-up demand for the new consoles.

When the Xbox 360 launched last fall, the shortages were so severe that GameStop, the largest games seller in the country, was still shipping systems out in March to those who had pre-ordered their consoles last summer.

''I don't want to be in a position where we take that many costumer preorders and come up that short again," said Dan DeMatteo, vice chairman and chief operating officer at GameStop.

GameStop is rethinking its preorder system for the launch of PlayStation 3, which is expected to be in even shorter supply when it launches in November.

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