A good example of over-optimistic sales forecasting

The games industry is a rich source of case studies for business studies. I liked this story about leading games developer Eidos which has had to admit that sales forecasts for its main product have proved to be over-optimistic…

The product development process for games console titles is fraught with risk. All the development costs come up front, with many titles taking 18-24 months to be designed and tested before launch to the consumer market. Getting the sales forecast right for such products is important. The games developer needs to be reasonably certain that a new title will earn a satisfactory rate of return. For Eidos, it could have used previous sales volumes of the earlier Tomb Raider titles as a guide. It would also have discussed market conditions with its distributors in key consumer markets to get their views on likely sales volumes.

For Eidos, their main product is the Lara Croft Tomb Raider franchise. The latest installment - Tomb Raider Underworld - was launched in November 2008. However, although the product has sold substantial quantities, these have been less than the market, and Eidos management, were forecasting. In fact the sales shortfall so far is around £20m. Eidos has admitted it sold only 1.5m copies of Underworld between 18 November, when the game was launched, and the end of 2008. Eido’s retail distributors have also had to offer heavy price discounts in order to shift the product.

The announcement of the sales shortfall triggered a profits warning from Eido and an admission that the company may breach key loan agreements with its banks. Not a good sign. The news marked a torrid 2008 in which 92 per cent has been wiped off the Eidos share price.