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Electronic Arts’ Titanfall Is a Big Deal

By Jayson Derrick – Mar 5, 2014 at 9:00PM

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Like the gamers impatiently awaiting Titanfall's release, investors should share a similar enthusiasm.

Microsoft (MSFT 1.05%) and Electronic Arts (EA 2.58%) announced a promotional $500 Xbox One Titanfall bundle, which is a great deal for consumers, as $500 is the same retail price as the stand-alone Xbox One. This arrangement should add a nice tailwind to Xbox One console sales and help expand Titanfall's attach rate. The bundle will be available to consumers on March 11.

Michael Pacther, video game analyst with Wedbush Securities, stated in early January that he believes Electronic Arts will sell between 6 million-10 million copies of Titanfall, depending on the game review scores. "If it gets above a 90, it will likely be at the high end of that range, below an 80, at the low end," Pacther said.

Since then, a beta testing of Titanfall was played by over 2 million unique users, according to the developer, Respawn. Initial reviews have been extraordinarily positive.

Cnet's Jeff Bakalar has covered video games for more than five years, and in his review he wrote, "to the average gamer, Titanfall will likely be the closest feeling of 'next-gen' they'll have on an Xbox One for the foreseeable future."

How does Microsoft fit in to this?
Gregg Moskowitz of Cowen & Company asked Microsoft management to clarify why Xbox platform revenue grew $1.2 billion year-over-year in the second quarter, but at the same time related cost-of-goods-sold rose $1.6 billion.

Amy Hood, Microsoft's Chief Financial Officer, said that Microsoft is still in "launch mode" for the Xbox One and will continue to expand markets over the course of the year, implying the company could likely see costs exceed revenue in the near term.

Hood added that "many people are excited about the launch of Titanfall in March, and we'll continue to add and expand markets over the course of the year. So, I would continue to think about our investment in being the leading next-generation console as certainly extending."

Microsoft is also using its Xbox platform to demonstrate the power of its cloud computing services. Abbie Heppe, Community Manager at Respawn said: "We are one of the first games to take advantage of Xbox Live Cloud and have engaged in throughout the world to provide a consistent and incredible experience for players servers. Of course we also make some of our calculations of artificial intelligence through the cloud, and all this just promoting our game."

Microsoft's heavy investments in exclusive deals places Xbox One at a tremendous advantage when factoring in the growth trajectory of video game sales. According to PWC, consumer spend on video games over the next five years will increase at a compounded annual growth rate of 6.5% to reach $86.9 billion in 2017, up from $63.4 billion in 2012.

If demand proves to be as strong for Titanfall as expected, consumers have no choice but to purchase an Xbox One to be able to play the game.

Will GameStop be left in the dark?
Holiday season sales for GameStop (GME 6.20%) were disappointing, with new software sales down 22.5% year over year. Rumors that both Microsoft and Sony are prepping diskless consoles are causing some investors to wonder if GameStop can remain relevant.

According to Forbes, Microsoft has dismissed rumors of a diskless $399 Xbox One. "No, you cannot believe everything you read on the Internet," tweeted Microsoft's chief of staff for the devices and studios group. Wedbush's Michael Pachter also commented that such a device would be "dumb, dumb, dumb."

Sony, however, has been more vocal about the future potential of cloud-based, or diskless, gaming with its PlayStation Now, which was announced during CES in early January. But, PlayStation Now's effects are unlikely to impact GameStop's business model for several reasons.

First, many gamers continue to place an important value on disc-based games, many of which are collectible items such as a GameStop's exclusive $150 Grand Theft Auto collectors edition set. Second, there is a major infrastructure constraint (i.e., bandwidth speeds) for the average gamer, which could limit adoption rates. Third, Sony and GameStop have shared a positive relationship as retail partners, as GameStop provides critical marketing and distribution outlets.

Additionally, the ongoing bandwidth battle between Netflix and Comcast may cause Sony to second guess its strategy of relying on customers to utilize large amounts of Internet data to access games.

Foolish take
Investors may also be under-appreciating GameStop's balance sheet. The company's strong free cash flow can allow buybacks and dividends to play a larger role in shareholder returns. GameStop's $5 per share in cash and zero debt prompted Barron's on Jan. 18 to forecast that shares have an upside potential of 20% or more.

Electronic Arts and Microsoft could grow together over the years as demand for video game consoles and games continues to rise. Granted, Xbox One console sales aren't a primary money-maker for Microsoft, but the Xbox gives Microsoft direct access to the living room and could play a vital role as part of the company's broader mobile/pc/entertainment ecosystem.

Jayson Derrick has no position in any stocks mentioned. The Motley Fool owns shares of GameStop and Microsoft. 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.

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