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A lot has changed in the gaming market since my grandparents bought me a Nintendo NES for Christmas when I was 5 years old. One thing that hasn't changed is how fragile a company's competitive position is as technologies and platforms change in the blink of an eye.
Recent gaming results show the old model of making games for consoles and selling them at retail operations like GameStop (NYSE: GME ) is getting less and less value for developers. It's not good enough to make a great game anymore; it needs to provide a long-term revenue source. Let's take a look at how gaming giants Activision Blizzard's (Nasdaq: ATVI ) and Electronic Arts' (Nasdaq: ERTS ) strategies are playing out in this environment.
Activision moves to subscriptions
While console games for Microsoft's (Nasdaq: MSFT ) Xbox 360, Nintento's Wii or Sony's (NYSE: SNE ) PS3 are still a majority of revenue for both EA and Activision, Activision Blizzard has moved to a subscription model, which provided more than a third of its revenue in the most recent quarter.
The Blizzard brand has attracted online gamers willing to pay ongoing fees to play StarCraft, World of Warcraft and Diablo in a multiplayer world. The revenue model focuses less on the initial cost of the game and instead creating an interface that will bring subscribers back again and again. Even the large market of Chinese gamers pay to play, as NetEase.com (Nasdaq: NTES ) has picked up Blizzard games. While this hasn't exactly led to blowout returns for shareholders, Activision has recorded $329 million in net income over the last year and made a profit three of the past four years, a pillar of consistency in the gaming world. This allows investors to take a more long-term view instead of counting on one blockbuster game to boost the stock.
The death of the console game
Electronic Arts has had a harder time moving past the console and as much as you may like the new Madden 11 or Need For Speed these games haven't driven returns for investors for years. Over the last two fiscal years alone EA has destroyed $898 million in stockholder's equity, not exactly the performance investors are looking for. In its most recent quarterly release, as EA talked up the performance of 2010 FIFA World Cup South Africa and Battlefield: Bad Company 2, it was still projecting a loss of up to $330 million for the year.
Take-Two Interactive (Nasdaq: TTWO ) is suffering from the same ties to consoles and bad performance as EA. With net losses in three of the last four years it needs to start generating consistent revenue from a solid slate of titles like Grand Theft Auto.
Games still matter
As important as we've seen a revenue model be, big-name games still matter in the developers' fight for gaming eyeballs. In this arena I think Take-Two has the best content with stalwarts like Grand Theft Auto, Civilization, and the new Red Dead Redemption. Creating new innovative ways to shoot thugs and start gangs is not a problem for Take-Two.
Activision Blizzard still relies heavily on older brands but has a slight advantage over EA with solid brands including Guitar Hero, DJ Hero, Call of Duty, Starcraft, and World of Warcraft. It also recently added Halo developer Bungie, who should be able to do big things now that the Xbox shackles from Microsoft are off. Electronic Arts still relies too much on the EA Sports brand that has lacked the ability to reinvent itself for years.
Foolish bottom line
As an investor I want to see a gaming company make consistent winning titles and command consistent revenue. Consistency has never been a common trait in gaming but Activision Blizzard seems to have figured out a way. Beware of the developer hype around upcoming games; it could save you some money.
What's your take on the gaming industry? Leave your thoughts in the comments section below.
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