While I've been a video game player all my life, I haven't always been a video game investor. My trepidation has always stemmed from the fact that to a large extent, the business dynamics in the video game industry are a lot like those in fashion retailing -- one day you've got the hottest thing around and you're the king of the world, but if you stop to celebrate for even half a second, you're already behind. In investing terminology, the best way to express it is that video game companies, on the whole, just don't build a lot of durable moats.
The winds of change
That, at least, was the traditional model. Toward the end of the '90s, a new breed of video games began to emerge called massively multiplayer online role-playing games. These MMORPGs plugged millions of basement-dwelling geeks into alternate realities where nerds like myself could battle each other for digital loot and glory. There, of course, had been multiplayer games before the dawn of the MMORPG, but no other genre connected so many gamers at once, and perhaps no other genre had as much of an influence on shifting the entire video gaming experience from being antisocial to becoming a social one.
The pinnacle of this metamorphosis is no doubt apparent in Activision-Blizzard's
The power of the MMORPG business model
Despite the vast valuation differential, a lot of the same rules apply. Cloud hosting means more efficient allocation of assets and generally higher returns on capital. As an example, Activision-Blizzard's World of Warcraft subdivision generated an operating margin of about 51% last year, whereas its more traditional, flavor-of-the-month Activision division only pulled in an 18% operating margin. It's like this across the board. In fact, competitors such as Take-Two Interactive
On the flipside, you look at some of the Chinese video game companies that specialize in MMORPGs like Perfect World
Time to re-evaluate nerdom?
Those are respectable figures any way you look at them -- respectable enough to almost make you feel proud for pulling an all-nighter raiding the night elf capital city, claiming that it's just "market research."
Sean owns shares of Activision-Blizzard. Salesforce.com is a Motley Fool Big Short short-sale choice. Salesforce.com, NetEase.com, and Take-Two Interactive Software are Motley Fool Rule Breakers picks. Activision Blizzard is a Motley Fool Stock Advisor recommendation. Motley Fool Options has recommended a synthetic long position on Activision Blizzard. The Fool owns shares of Activision Blizzard and Take-Two Interactive Software. Alpha Newsletter Account LLC owns shares of Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.