one sector defying the slowdown: video games

for the longest time, i never understood the importance of video games in peoples' lives; and entertainment in general, for that matter. no more - are video games the 'talkies' of the '00s? during the depression, millions of ordinary people thrilled to the exploits of the park avenue set on the silver screen, swilling martinis and living it up - an escape from reality.

obviously, we're not in a depression - but the slowing economy has led consumers to cut back sharply on discretionary spending. but they still appear ready to pony up for the latest video games, as the sector has appeared relatively immune to the broader tech slowdown.

on thursday night, we should get further confirmation of that trend, as market-research firm NPD will report march retail sales figures for the industry. here's what to look for.

the first focus for investors will be the growth in software sales. given the blockbuster nintendo wii release super smash bros.: brawl, analysts are generally looking for growth of around 40%. other key software releases during the month include erts' army of two, and france-based ubisoft's rainbow six: vegas 2. however, i would not be surprised to see software sales growth exceed 50% or even 60%, as analysts have tended to underestimate the strength of key releases. in addition, follow-through of hits from past months, notably sales of activision's call of duty 4, should remain strong.

as far as individual titles' impact on stocks, i am eagerly awaiting sales of thqi's frontlines: fuel of war, which was released in late february and got off to a decent start at retail. however, army of two and rainbow six: vegas 2 probably hurt frontlines' follow-through in march, and a weak performance from frontlines could result in thqi missing its guidance for the fiscal fourth quarter.

next-generation hardware unit sales should stay on the upswing as well, especially for sony's playStation 3, ahead of the release of ttwo's grand theft auto 4 next month. in fact, i expect the playStation 3 to handily outsell the msft xbox 360. for investors in software stocks such as erts and acti, the ideal scenario in this battle is to see the playStation 3 pick up as much steam as possible. this is because the software attach rate on playStation 3 consoles should increase substantially this year due to a dramatically improved game lineup.

and, of course, the wii should continue its impressive momentum given chronic shortages at retail, which have been driven by significant interest from mainstream consumers and nontraditional gamers. plus, super smash bros.: brawl is a true mega-franchise to nintendo fiends and has probably tipped the supply-demand imbalance even further for the foreseeable future.

as far as the stocks go, i continue to like acti due to the dominant game lineup that will come out of the merger with vivendi games. gme remains a top name for me. i expect the stock to rally in reaction to blockbuster industry sales numbers over the next few months. i'm still not really a fan of erts, thqi, or mwy, and i believe that profit-taking is imperative with ttwo, even with the potential for erts to raise its bid above $26 a share.

also, there's more than grand theft auto 4 on the way to keep the industry humming. over the next few months, we'll see the release of metal gear solid 4, mario kart wii, gran turismo 5: prologue, wii fit, lego indiana jones, haze, ninja gaiden 2, and rock band for the wii.

and later in the year, the momentum should keep pumping, courtesy of highly awaited titles such as star wars: the force unleashed, world of warcraft: wrath of the lich king, too human, soul caliber 4, prototype, resistance: fall of man 2, killzone 2 and gears of war 2.