With the release of two highly anticipated consoles coming up very quickly, it is a very exciting time for the video game industry. The PlayStation 4 by Sony (NYSE:SNE) and the Xbox One by Microsoft (NASDAQ:MSFT) have created a lot of opportunities for many different areas of the tech sector, particularly the video game developers, like Electronic Arts (NASDAQ:EA), known simply as EA by those who are familiar with the company's games.
What is EA known for?
EA is known for some of the most popular video game franchises on the market, and their sports games are especially popular. The EA Sports label has been a leader in the segment since the games were played on Super Nintendo and Sega Genesis. The Madden NFL franchise, FIFA games, and others have been industry leaders for years, and the particular genius of creating a new annual version that fans feel compelled to buy every year has created surprisingly consistent revenues for the game manufacturer.
Although the sports franchises are perhaps EA's bread and butter, the company actually categorizes its games into five different labels with very specific products: EA Sports, EA Games, Maxis, PopCap, and All Play. The other labels produce such games as Battlefield, Need for Speed, The Sims, and Medal of Honor, which are all extremely popular titles. The company also has several gaming partnerships, such as the one with LucasArts that allows EA to produce Star Wars games.
The new consoles: immediate impact
With the launch of the new consoles expected before the holiday season, there will undoubtedly be an immediate impact on the game developers. Sony's PlayStation 4 is set to launch in North America on Nov. 15, at an introductory price of $399. The enhanced architecture of the new system has been met with almost universal praise, as did features such as a removable and upgradeable hard drive. Microsoft's Xbox One will be released a week later on Nov. 22, and at a price of $499, $100 higher than the PS4. Critics have been mixed in their praise of the new Xbox, thinking that the higher price and later release date could crush its holiday sales figures.
The list of games already scheduled for the two consoles is extensive, and on EA's end already includes such titles as Battlefield 4, NBA Live '14, Need for Speed Rivals, Madden NFL 25, as well as several others that should be available for this holiday season.
The lagging effect
Surprisingly, while most investors would expect the initial release of the new consoles to have the greatest impact on sales, this has not been the case historically. This holiday season could (and probably will) face such problems as a lack of supply of consoles, people who want to wait for the price of the hardware to drop, etc.
The last generation of video game hardware, the PS3 and Xbox 360, were released in time for the 2006 and 2005 holiday shopping seasons, respectively, but the sales data may surprise you. The PlayStation 3 sold about 1.5 million units before the end of 2006, and within the first year after its release sold a total of about 5 million units. During November and December of 2007, or PS3's second holiday season, 4 million units were sold, or 2.66 times the results from the first holiday season in which the console was available. Another 4 million were sold during the '08 holiday season.
The numbers for the Xbox 360 look very similar, just a year earlier due to its earlier release date. So, while it may seem logical to predict a spike in sales of consoles and games that fades after the holiday season, history tells us that this isn't the case.
The hardware refresh cycle is a compelling reason to consider an investment in EA. While you may think that the bulk of the impact of the new consoles (and the games that go with them) will be immediate and sort-lived, history tells us otherwise. The Sony PlayStation 4 and the Microsoft Xbox One should create a consistent revenue boost for Electronic Arts for several years to come.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. 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.