Electronic Entertainment Design and Research - NPD analysis

Hardware:

Hardware unit sales came in a little under what the market was expecting, the big miss coming from the Sony and Microsoft camp as all their hardware units,
including Sony’s handheld, missed market expectations.

For the first time this year, PSP year-over-year sales were in the negative at 17% decrease. This trend will likely continue, as we do not see any significant PSP
titles in the short-term pipeline that could drive hardware sales in Sony’s favor. Furthermore, PSP software has consistently been last in software unit sales
among the next-generation consoles and handhelds. Additionally, the PSP was the only console not to have a title in the top 10 of unit sales, even the PS2
managed to creep into the top ten with sales from Iron Man.
Microsoft and Sony continue to struggle to sell above the 50,000 units a week at retailers with Sony barely surpassing that threshold this month—both
missed that mark last month.

Sony’s Playstation 3 can claim a relative small victory as its hardware unit sales were up 150% over last year; additionally, they managed to outpace their
closest rival, Microsoft’s Xbox 360. This will likely continue in June as we expect Metal Gear Solid 4 act as a bigger catalyst in terms of driving PS3 hardware
sales than did Grand Theft Auto 4. This is likely due to the exclusivity factor as exclusive releases on Sony’s platforms have historically shown to be a better
hardware driver than that of multi-platform releases. On average, PS3 exclusive games sell 45% more, throughout their lifetime, than multi-platform titles
available on the PS3. Exclusive titles for the other two systems, the Wii and Xbox 360, only boast a small increase in lifetime sales over multi-platform titles.
Of course, in all fairness, the first year of Xbox 360 titles were pretty much all exclusive since the other systems were not available on the market.

Although, both the Xbox 360 and the PS3 are showing healthy year-over-year increases in unit sales, it is impossible to ignore the 800-pound Donkey Kong in
the room that is the Nintendo Wii as they continue to dominate the other two next-generation consoles by a large margin. With E3 around the corner, we
can expect Microsoft to make some type of announcement regarding a hardware price cut, the introductory of a new hardware SKU with new features, or
both. If there is a hardware price cut, it is not known if Sony will follow suit right way, but it would be safe to assume that Sony would execute some type of
plan within a 2 month window of any hardware price cut from the Xbox 360.
On the Nintendo Wii, we have noticed a strong correlation in monthly unit sales and gray market prices from auction sites like EBay. Since February, we have
seen a steady decline in these gray market prices from a 40% retail mark-up down to a low of a 10% mark-up, which is a strong indication that the Nintendo
Wii is doing a better job at meeting market demand. For May, those gray market prices did not follow the current trends and actually showed a significant
increase to a 15% mark-up above retail MSRP. This would indicate that even though Wii sales did not surpass 700,000 units, it was likely due to the continue
hardware shortage and not an indication of deteriorating demand.

Software Titles:

Grand Theft Auto IV sales decreased by over 50% over last month, which is one of the largest month-to-month decreases for major marketed title with only
one week of sales in the prior retail month. We do not believe that to be significant as GTA IV was one of the year’s most anticipated titles—consumers just
could not wait to get their hands on the title.

Wii Fit sales came in under market expectations, but that is all due to a supply shortage. Gray market prices are 62% above retail MSRP, indicating a
remarkably large gap between supply and demand. We expect strong sales through the rest of the summer.

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