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Gaming Investors Prematurely Drop The Controls?

Posted: Feb 17, 2009 12:04 PM by Eugene Bukoveczky

Tickers in this Article: ATVI, ERTS, THQI, TTWO

While the recession continues to cut into the sales and profits of many industries, video game publishers continue to cash in on the growing popularity of this entertainment form.

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Latest Sales Numbers Belay Fears Of A Slowdown
After scoring an impressive 11% growth in unit sales and 23% growth in revenues in 2008, the gaming industry's numbers show no signs of dropping off so far this year. According to market research firm NPD, in January, U.S. sales of video game software increased 10%, while hardware sales soared 17%.

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Surprisingly, these numbers appear to run counter to earlier indications from industry players that a general slowdown in business is in the cards. Activision Blizzard (Nasdaq:ATVI) recently forecast that 2009 earnings would fall short of expectations. Earlier, rival games publisher Electronic Arts (Nasdaq:ERTS) reported weaker than expected results and forecast a loss for the current fiscal year. THQ Inc. (Nasdaq:THQI) also turned in a loss and announced spending and job cuts, while Take-Two Interactive (Nasdaq:TTWO) declared that it would be reporting a first quarter loss, too.

So, is the January sales data merely the echo of last year's record sales? Or will 2009 turn out to be another solid year for the industry? The industry's fundamentals are strong enough to make the latter scenario a distinct possibility. (Be sure to read What Are Fundamentals? to learn more about what this term really means.)

Gaming Globally
For starters, one of the key successes of this industry has been the establishment of an enormous, installed base of users around the globe. And the numbers here are quite impressive.

During 2008, total industry sales of video game software came in at 297.6 million units. Top-selling title "Madden NFL", released by Electronic Arts, sold 6.5 million units last year. Over the course of its 20-year run, this game alone has sold more than 75 million units. To put this in context, recent estimates put total sales of Beatles albums at 113.5 million units.

Innovation Key To Ongoing Sales
The key to the industry's continued revenue and profit growth is the harvesting of new sales from this installed base by releasing a steady stream of new and innovative products. However, this job gets easier for those companies that have a solidly embedded franchise already.

For two of the more popular franchises - "Guitar Hero" and "Call of Duty", both of which are properties of Activision - keeping the sales flowing simply involves coming up with add-on variations, involving new bands in the case of the former, and new battle scenarios in the case of the latter. Like the "James Bond" movie franchise, variations on a theme seems to work well with each retelling of the story. So far, this seems to be the right marketing formula for video games as well.

Online Gaming Could See Significant Growth
If the resale business coming from this core market of gamers eventually flatlines, plenty of new business opportunities still remain for the game publishers. In addition to the console-based game players, a rapidly growing market of online gamers has emerged. It is not uncommon for these gamers to spend hours interacting with other players in total immersion fantasy worlds like "World of Warcraft".

More popular in Asia than in the U.S. or Europe at this point, the online gaming market comprises approximately one-fifth of the total gamer market. Growth here depends on broadband penetration, which is projected to surpass the 70% level in both the U.S. and Europe by 2012. Another growth area is among mature players who may see certain benefits from the mental and physical stimulation certain games can provide.

The Bottom Line
At their currently depressed levels, video game stock prices so far reflect a sales slowdown for 2009. However, the reality of solid sales numbers and strong prospects for growth should come as a relief to investors, as well as to the game publishers themselves. (To learn more about which companies thrive during times of economic slowdown, be sure to read Industries That Thrive on Recession.)

By Eugene Bukoveczky

Eugene Bukoveczky is a freelance writer and investment researcher. He holds a CFA designation and has spent several decades working in the investment business in places like Toronto, New York, London and Dubai. He currently resides in Nova Scotia, where, when not writing, he devotes his time to chopping wood, growing his own vegetables, riding his bike to the store, and thinking about other ways to reduce his carbon footprint.

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