Why Is No One Bearish About Video Games?

By Rick Aristotle Munarriz | More Articles
August 17, 2009 | Comments (6)

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I was on an island, marooned before a nationally televised audience on Friday. But this wasn't a reality show. It was CNBC's Closing Bell.

Kaufman Bros. analyst Todd Mitchell and I were being interviewed by Melissa Francis on the heels of disappointing metrics in the video game market. Marketing research specialist NPD Group announced that hardware and software sales suffered a steep 29% in July, the fifth consecutive month of year-over-year declines.

If this sounds bleak, join the club. Just be warned that it's a pretty lonely group.

My CNBC segment began with hordes of diehard gamers lining up for last week's debut of Electronic Arts' (Nasdaq: ERTS ) Madden 10. Mitchell also has a surprisingly upbeat outlook on the sector.

"We're cautiously optimistic on the quarter going forward," he told Francis.

Really? I disagreed on the air, so I may as well disagree now. There are several reasons to approach this industry cautiously right now:

Delays are natural occurrences in the game development cycle, but Activision Blizzard (Nasdaq: ATVI ) and Take-Two Interactive (Nasdaq: TTWO ) are bumping release dates at the worst possible time.
GameStop (NYSE: GME ) was holding up well earlier this year, as its high-margin resale business was making up for any weakness in new wares. Now even GameStop is projected to post a dip in quarterly profitability this week.
The economy isn't there for $50 and $60 games, drawing audiences to cheaper casual games being distributed through smartphones and computers.

That last point is important, because the moat is narrowing for developers. You don't need a war chest to market a game through the App Store or Microsoft's (Nasdaq: MSFT ) Xbox Live marketplace. Ad-supported freebies on smartphones and apps on social-networking sites are apparently just fine for all but the die-hard gamers.

In covering the NPD Group data, all four of the first readers to respond to my skepticism argued that the industry had not peaked.

I don't get the optimistic rush. It's not as if every entertainment option is smarting these days. The local multiplex is holding up well. Consumers are spending plenty of time watching Google's (Nasdaq: GOOG ) YouTube or socializing on Facebook and News Corp.'s (NYSE: NWS ) MySpace.

There is a distinct trend working against commercial console releases, and everyone seems to be dismissing it as a passing phase.

I'm on a lonely island, indeed, but the view is killer.

Where do you see the future of gaming? Did it peak for keeps? Let us know in the comment box below.

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Google and Take-Two Interactive Software are Motley Fool Rule Breakers recommendations. Activision Blizzard, Electronic Arts, and GameStop are Motley Fool Stock Advisor selections. Microsoft is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz loves playing video games, but he doesn't own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (5)

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Report this Comment On August 17, 2009, at 5:33 PM, MichalTod wrote:

You should be bearish about console video games. They are in decline right now, and might have peaked with their total sales (discounting inflation). In Asia consoles are completely avoided by players except in Japan; Asia would be the last place where consoles have not made a huge penetration where there are wealthy or soon to be wealthy consumers. The main places of growth in the video game industry remain in online, casual and social games. However, these markets combined are much smaller than the console market, and it will take a while before their revenue surpasses console revenue, plus the big guys are not as strongly in these markets as they should be.
Activision/Blizzard might be the sole bright spot with the big guys because of World of Warcraft, and any other potential future MMOs Blizzard might release. Assuming, of course, that those titles offset the decline in the console sales.
Report this Comment On August 17, 2009, at 6:00 PM, Varchild2008 wrote:

Wrong. In Asia, World of Warcraft remains King. Not talking about Japan. Talking about CHINA.
Konami's Dance Dance Revolution is still a money maker.
Sure we have seen monthly declines in Video Game and Console Hardware sales. That's to be expected in a Recession. But, now is not the time to avoid Video Game Stocks.... Take advantage of the stocks weakness cause when we pull out of the recession the 2009 sales figures will be extremely easy to TOP.
And CHRISTMAS may not be as bad as everyone thinks. Consumer Spending has seen a Gigantic BOOST mostly due to back to school sales....
www.gallup.com Survey's consumer spending and that survey has TWICE NOW seen Consumer Spending 3-day average more than $100 a day. It is at about $106 now.
Call of Duty Modern Warfare 2 is already set to sell far more copies than Call of Duty Modern Warfare 1.
Madden NFL 2010 has released this month and people will be coming back to Video Game stores because of that title. GUITAR HERO 5 is just around the corner too....
Now is not the time to throw in the towel. Those who do miss the TURN.... Look at (WHR) and ask yourself.. Did you buy WHR at $19 a share? NO????
Well... I DID. And I got into (ATVI) for $8.
Report this Comment On August 17, 2009, at 6:06 PM, Varchild2008 wrote:

Oh and these numbers are all based on NPD GROUP (SKU) #s....
I am not entirely certain as to whether NPD Group bases their numbers on Video Games that are bought through XBOX LIVE or other Download service.
For example, instead of going to Gamestop, I can purchase the same brand new video game through XBOX LIVE (if it's available there). I can just download it straight to my Console.
I wonder greatly if anyone is factoring in the Tens of Thousands of XBOX and XBOX 360 Titles that have been downloaded this year. Or the MAP PACKS?
Earlier this year Call of Duty World At War MAP PACK #1 was downloaded 1 million times.
NPD Group didn't list "MAP PACK 1" in their Top 10 sales figure data. They never do list these downloadables.
Report this Comment On August 17, 2009, at 10:53 PM, zlionsfan wrote:

Wait wait wait. You're not really suggesting that movie theaters are doing well and video games have peaked for good? That the economy is there for $10 and $15 movie tickets (and similarly steep prices at the concession stands) but not for $60 games?
So the video game industry hasn't been able to hold steady through a pretty steep recession. That is supposed to mean that the market has peaked for good?
I don't get the pessimism. Look, these entertainment alternatives that you mention are not mutually exclusive. You can see a movie and spend time on Facebook and pick up Madden 10, all in the same week ... and let's face it, the vast majority of Facebook games are no replacement for console games, nor are they intended to be. Mafia Wars is no GTA. The market for "casual games" is a distinct market. Yeah, you can sell someone a handheld game for $5 or $10, but it's not the same as a console game, and again, it's not intended to be. A driving game on the iPhone isn't designed to compete with Forza 3 or GT 5.
As Varchild points out, there are some big releases coming up. You don't think anyone at EA should be cautiously optimistic about this quarter? Madden, NCAA, NBA, The Beatles: Rock Band ... this quarter is EA's equivalent of the summer for movie theaters.
Maybe the market's version of conventional wisdom holds that console games are now passe and that five years from now, no one will remember them, but I think that's old-school thinking. Five years from now, people will still be paying $60 (and $70) for console games AND buying handheld games for a fraction of that AND playing games on Facebook or its successor for free. At some point, I believe the market will reflect that.
Report this Comment On August 18, 2009, at 3:19 AM, DavidMountain wrote:

I think this statement about video games in general is pretty short sighted. I'm an avid gamer and until somebody comes up with a better value-for-money entertainment than a computer game I'll be in. At the moment you can pay (in NZ)$15 for a movie that lasts you about an hour and a half or $70 ish for a game that can last you weeks or years. For those "investing" in mmorpg games $14 per month is REAL value for money and blizzards stocks reflect the ROI on their efforts.
The real question is not will people pay the pricetag, its is the game going to soar or flop and in that lies the answer to whether its a good investment or not. Not video games in general but which gaming company do I invest in.
Report this Comment On August 24, 2009, at 12:20 AM, DrowsyJay wrote:

Another Failure By EA ~ all it's going to take is one more new entrance
(Game) to bury the BF franchise (loss of market share)
Battlefield Heroes is great and a fantastic opportunity for EA/Dice,
it isn't enough. Electronic Art's must recognize hardcore
warmongering gamers need the B.F. & C.O.D gaming environment, the root
of this gaming environment stems from the interest of PC users.
EA must consider this from a Marketing/ Public Relations perspective,
PC users build Websites, Clans, Promotions, and they also provide
the most effective(reach) source of advertising(Word of Mouth).In-
general PC gamers spend more quality time on PCs(Web) more than any
other platform, and In my opinion, The forced shift from PC to PS3
isn't going as intended.
Electronic Arts must figure out effective Consumer Relations
strategies and stay true to their base of origin.
Happy Hunting!
http://finance.google.com/group/google.finance.168725/browse...

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