For the game industry, E3 becomes EWii

NEW YORK (CNNMoney.com) -- Christmas really does come in July for video game geeks. The industry's biggest event of the year, the E3 Media & Business Summit, will take place during July 11 through July 13 in Santa Monica, California.

The conference is typically a place that offers attendees sneak peaks of upcoming releases that will be out around the holidays. And even though the conference has been downsized compared to years past, E3 is as important, if not more so, to investors in shares of the big video game software publishers and console makers as it is to gaming aficionados.

Shares of Activision and Take-Two have surged this year but gaming rivals EA and THQ have fallen.

This year has been a year of transition in the industry as 2007 is the first full year that all three of the major console manufacturers, Microsoft (Charts, Fortune 500), Sony and Nintendo will have their latest console on the market. Microsoft's Xbox 360 came out in November 2005 while Sony (Charts) and Nintendo (Charts) released the PlayStation3 and Wii, respectively, last November.

And the Wii has caught the gaming world by storm. Sales have been so successful for the Wii that Nintendo's market value actually briefly surpassed that of Sony's in Japan last month, even though Sony's total revenues are more than eight times as large as Nintendo's.

So what does this mean for the big four game developers -- Electronic Arts (Charts), Activision (Charts), THQ (Charts) and Take-Two Interactive (Charts)?

"Lackluster sales of the PS3 and phenomenal success of the Wii has changed the composition of game sales for all the publishers. Those with most exposure to the Wii are at a distinct advantage," said Evan Wilson, an analyst with Pacific Crest Securities.

Wilson said he thinks THQ is in a good position to benefit from strong sales of the Wii. In its most recent quarter, THQ generated almost a third of its total sales from Nintendo platforms, which also includes the company's Nintendo DS handheld gaming device.

But Todd Mitchell, an analyst with Kaufman Brothers, said that the Wii may not benefit the big gaming developers all that much since many of the most popular games for the Wii are Nintendo's own games, such as titles from the Mario and Zelda franchises.

"The success of the Wii is a negative for the independent software publishers since Nintendo dominates its platforms," Mitchell said. That said, Mitchell expects all the major publishers to tell people at E3 that they are putting more resources in the short-term into developing games for the Wii and less for the PS3.

Wilson said that beyond the Wii, there also should be some interesting head-to-head showdowns that will take place at E3. He said gamers are eager to see how two key titles from Activision, which has been one of the better performing gaming stocks, will fare against tougher competition from Electronic Arts.

Two of Activision's biggest hits are games in its "Guitar Hero" franchise, which comes with a guitar-shaped controller that lets users play along with classic riffs, and its "Tony Hawk" series of skateboarding games.

Wilson said "Guitar Hero" will face new competition later this year from "Rock Band," a game that was developed by privately held Harmonix in conjunction with the gaming group of Viacom's MTV. EA will distribute the game. EA is also developing "Skate," a game that could threaten the "Tony Hawk" franchise.

Despite this, Wilson said he continues to like Activision's stock. He thinks the company will benefit not just from the popularity of "Guitar Hero" and "Tony Hawk" games but also from games tied to some of this summer's hottest movies such as "Spider-Man 3," "Shrek the Third," and "Transformers."

But Arvind Bhatia, an analyst with Sterne, Agee & Leach, said EA, whose stock has fallen 3 percent this year, compared to a 9 percent gain for Activision's stock, could bounce back later this year.

Bhatia said EA should do well thanks to its dominance in the sports gaming category. The company will release the latest in its extremely popular "Madden NFL" football series of games this August, just before the start of the next NFL season.

"Sports is very critical for EA," Bhatia said.

Mitchell is also bullish on EA. He believes that EA, which will release a new game in its "Medal of Honor" series, will benefit from strong demand for action games ahead of the holidays.

"EA will surprise some people. The Wii aside, the big category of this fall in this gaming will be first person shooter games," he said.

But Wilson worried that this could be a very crowded market.

In addition to a new "Medal of Honor" game, Microsoft will have a new "Halo" title out for the Xbox 360, Activision will be releasing a new "Call of Duty" game and in perhaps the most eagerly awaited release of all, Take-Two Interactive will finally be unveiling the latest in its controversial "Grand Theft Auto" series of games.

"The 2007 holiday season will be the most competitive year ever. There is intense competition for the 18-34 year-old male gamer. There will be a multitude of games," he said.

With that in mind, Wilson said he's worried about Take-Two's stock, which has surged 12 percent this year due to management changes as well as optimism about sales for the new "GTA" game, which is set to be released in October.

"Expectations for 'GTA' are too high and the company is so reliant on that one product, if it isn't as successful as people think, it's difficult to recommend the stock," he said.

Nonetheless, there could be some news at E3 that would be good for all the gaming companies. There is speculation that Microsoft may announce a price cut for the Xbox 360 and that Sony may do likewise for the PS3.

"A price cut would be a highlight of E3 if that happens. It would be a big positive for everybody," said Bhatia.

But Wilson said he does not think a price cut from either Microsoft or Sony is a sure thing.

Instead, Wilson believes Microsoft is more likely to lower console prices closer to the holidays while Sony, which is already faced with relatively low profit margins on the PS3, might not be inclined to cut prices any time soon.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies.