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It's Time for a Rebirth in Gaming

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After seeing Medal of Honor gunned down last week, I got to thinking, what is going on with the video game industry? The past few years have given us not only poor financial results, but the games have gotten stale, leaving the casual gamer less than excited to spend $60 on a new game.

Fellow Fool Rick Munarriz pointed out that console and software sales were both down in September, showing gamer apathy heading into the holiday season. But the problem goes deeper than die-hard gamers who have come out in droves the last couple of months. StarCraft sold 1.5 million copies in its first 48 hours while Halo: Reach sales topped $200 million on its launch day. The problem, however, is casual gamers who don't look for games at launch and have become bored with the same concepts over and over again.

Asleep at the wheel
The gaming business has begun resting on its laurels after growing incredibly well through the middle part of the decade. Electronic Arts (Nasdaq: ERTS  ) estimates the game market grew from $15.7 billion in 2004 to $29.3 billion in 2009. But this also coincided with an explosion of new and exciting games. In 2004, Take-Two Interactive (Nasdaq: TTWO  ) released its most successful Grand Theft Auto game, GTA: San Andreas. The following year was the start of the Guitar Hero franchise. Nintendo Wii changed the way we interact with games when it was released just in time for the holidays of 2006. And I haven't even gotten into more classic shooter games such as Call of Duty, Halo, and Medal of Honor, which also exploded during this time.

Fast-forward to 2010, and these games are the same titles we see today. Electronic Arts' fall lineup could just as well be from 2007 with Medal of Honor, FIFA Soccer, and The Sims -- really? And this is an intentional strategy of fewer franchises but stronger brands. Great concept in theory, but what happens when one of your fabulous brands lays an egg?

Activision Blizzard (Nasdaq: ATVI  ) has had the same issues milking Guitar Hero for all it's worth. The difference is that it has a winner with World of Warcraft and 12 million subscribers driving profits. Take-Two Interactive and Electronic Arts aren't so lucky, relying on blockbuster games for survival.

Innovation is still out there
It isn't like innovation is lacking in the entire industry. Apple's (Nasdaq: AAPL  ) iPhone and iPad have given developers a new platform to develop new and inexpensive games. Just last week, Chillingo's new smash hit Cut the Rope passed 1 million units sold in just 10 days. As a casual gamer, I spend more time on iPhone games these days than on my console. I'm not suggesting $0.99 apps are the silver bullet big developers need, but it does show the innovative capability that's still out there.

A little innovation could also add some life to GameStop's (NYSE: GME  ) struggling sales as well. It will be a while before Sony's (NYSE: SNE  ) PlayStation 4 or Microsoft's (Nasdaq: MSFT  ) Xbox 720 have an impact, as neither is even rumored to be out until 2012. Until then, it's up to developers to come up with something better than the status quo.

Foolish bottom line
Until we see some new, exciting games come out, Activision is the only stock in the group I would touch, and that's only because of its superior business model. But even Activision doesn't get me excited when I hear about a new expansion pack for Guitar Hero or DJ Hero every other day.

I would love to say I saw upside in the other video game developers, but I just see the industry getting old and stale along with my video game library.

Interested in reading more about gaming? Add one of these companies to My Watchlist to find all of our Foolish analysis on this stock.

More games, please:

Fool contributor Travis Hoium wishes there were cheat codes for stocks like the old school NES games. He also does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his Motley Fool CAPS picks at TMFFlushDraw.

Microsoft is a Motley Fool Inside Value recommendation. Take-Two Interactive Software is a Motley Fool Rule Breakers selection. Apple, Activision Blizzard, and Electronic Arts are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. Motley Fool Options has recommended writing covered calls on GameStop. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Activision Blizzard, Apple, Microsoft, and Take-Two Interactive Software. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (5)

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  • Report this Comment On October 20, 2010, at 4:00 PM, gaucho420 wrote:

    I'd agree. I'd like to point out, however, that this console life cycle is different in two ways. 1) its much longer than the traditional life cycle, meaning that historically, we'd all be getting amped for new consoles and tech normally at about this time. Instead, some franchise are going on to their third installement on one console, which is rare. 2) the recession and its affect on consumer spending is something we haven't seen in 50 years, and 3) the innovation presented for this generation easily tops every other generation before it, so we're used to much newer stuff (DS, Wii, HD Gaming, online proliferation, music games, moting gaming), so things out there do look stale as compared to past innovations.

    The industry will rebound once the recession/employment picture rebound. But until then, and outsided of the 3DS, there isn't much to get too excitted about. MOH, by the way, has sold 1.5 million units worlwide since its launch.

  • Report this Comment On October 25, 2010, at 9:19 AM, jacobandersen72 wrote:

    every activision game is now a 1st person shooter.

    they make war simulators over and over.

    and once they get something that works they milk it to death with 5 versions that year as activision did with both the tony hawk series and with Guitar hero.

    they just burn out the customers quickly.

    what happened to the days of mario and sonic the hedgehog?

    creativity is long dead

    in matter of fact, though their games are simple and graphics even simplier -- the games on iphone and facebook are more creative today.

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