“We expect a repeat of the 2002 phenomenon in 2008. We expect hardware sales to be flat to slightly negative for the industry in 2008, with dramatic increases in Wii and PS3 dollar sales offset in full by dollar sales declines for the PS2, PSP, DS and Xbox 360. We expect overall Wii and PS3 dollar sales to grow by approximately $400 million per console in the U.S., but expect the other consoles to decline by around the same amount. At the same day, we expect the Wii supply situation to increase by 150,000 per month, on average, with allocations of hardware favoring the mass merchants once supply and demand are in balance. We expect the first glimpse of that allocation shift to

occur on May 19, when Nintendo launches Wii Fit. that device is not aimed at hardcore gamers, but is instead intended for more casual (and out-of-shape) consumers. We have learned that Nintendo of America intends to support the Wii Fit launch with the biggest marketing campaign in its history, and believe it is unlikely that such a large marketing campaign is intended to disproportionately benefit GameStop. Rather, we think that the Nintendo campaign is likely to feature key retail partners such as Target and Best Buy, notorious for attracting so-called ‘couch potatoes’. GameStop’s belief that it can grow its hardware sales in that competitive environment sounds overly optimistic to us.

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