mad2,
ELBO and others in the video game industry to be reviewed by Individual Investor Online. Here's the link and the preview for the upcoming in depth article.
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Zap! Zoom! Kabooom! Can Video Game Stocks Soar to the Moon?
individualinvestor.com
by Adam P. Lowensteiner,
Senior Research Analyst
(9/27/99)
Part I
Editor's Note: This is the first installment of a four-part series on the video-game sector that individualinvestor.com will publish this week. Today's piece focuses on the overall market and the reasons for the generally bullish outlook on its prospects. Subsequent segments will examine the investment outlook for console makers, game publishers and two specialty retailers of video games.
Only a few years ago, the video game industry was a poor cousin to the much larger movie and entertainment industry. But by the end of this year, it's expected that the poor stepchild will be larger than the aging adult. In 1998, the last year for which figures are available, video game sales were approximately $6 billion. While movie industry revenue was slightly ahead at $6.3 billion, video games have been growing at double-digit rates. By contrast, movie revenue has leveled off after peaking at $6.5 billion in 1997. The divergence in growth rates is expected to continue.
As has been the case with the revenue picture, the video game's technological underpinnings have also leapfrogged those of personal computers. In the early 1980s, when games were still in their infancy, they were dependent upon early generation personal computers. But that's changed drastically in recent years as hardware consoles from manufacturers like Sony Corp. (NYSE: SNE - Quotes, News, Boards), Nintendo Co. (OTC: NTDOY - Quotes, News, Boards) and Sega Enterprises (OTC: SEGNY - Quotes, News, Boards) now match ? and in some instances exceed ? the processing power, video processing capabilities and modem speeds of most PCs.
The latest generation of consoles can also be used as digital video-disc (DVD) or CD players, which only adds to their entertainment appeal. The games' sound and graphics have become remarkably detailed and lifelike, and the games have essentially become interactive movies, where endings vary depending upon players' choices.
To take advantage of the consoles' increased power, nearly 70% of entertainment software today is written for game consoles, compared to 55% just two years ago. The remainder is written for other platforms, including PCs. The trend toward console software should also continue.
In addition, this year's holiday shopping season is expected to be a turning point as new consoles are introduced and publishers of game software come out with products to take advantage of the increased power.
Along with the rapid revenue growth and the technological advances, the demographic picture also bodes well for the sector. According to industry sources, 56% of game players are 18 or older. This suggests that an older audience is stuck on playing video games, unlike a decade ago, where the typical video-game player was an adolescent male. The age statistic also suggests that adolescent video game users from the 1980s are still playing games into their 20s and 30s. The technological improvements could keep them loyal.
Despite the steep declines suffered in the major indexes in the past few days, now is an opportune time for investors to explore this sector. The fall is typically the time when products are introduced for the holiday shopping season. But this year might even be the sector's best in recent memory.
Sega has just introduced a powerful 128-bit console, and Sony is expected to do the same early next year. Nintendo's current console is 64-bits and its 128-bit station isn't due until later in 2000, but it has perhaps the most diversified product line. Plus it owns the rights to Pokemon, the hottest game in years. These three companies will be examined in more detail in Tuesday's segment.
In addition, the video game business has matured into a major source of revenue for many entertainment companies. Well known conglomerates like Walt Disney Co. (NYSE: DIS - Quotes, News, Boards), Viacom Inc. (NYSE: VIA - Quotes, News, Boards) and Time Warner (NYSE: TWX - Quotes, News, Boards) are clearly competitors to some of the companies that will be examined in the next few days. But for the purposes of this piece, the media giants are important primarily as possible acquirers of some companies, particularly the video game publishers, several of which could be takeover targets.
Wednesday's segment will focus on game software publishers Electronic Arts (NASDAQ: ERTS - Quotes, News, Boards), GT Interactive (NASDAQ: GTIS - Quotes, News, Boards), THQ Inc. (NASDAQ: THQI - Quotes, News, Boards), Take-Two Interactive (NASDAQ: TTWO - Quotes, News, Boards), Activision Inc. (NASDAQ: ATVI - Quotes, News, Boards), Acclaim Entertainment (NASDAQ: AKLM - Quotes, News, Boards), Midway Games (NYSE: MWY - Quotes, News, Boards), 3DO Company (NASDAQ: THDO - Quotes, News, Boards), Eidos plc (NASDAQ: EIDSY - Quotes, News, Boards), Interplay Entertainment (NASDAQ: IPLY - Quotes, News, Boards). These companies fit the pure-play label much better than the media conglomerates.
It's worth noting that the entertainment giants may be in no hurry to purchase game makers since several of the giants stumbled when they entered the game business a few years back. They don't want to relive a bad experience. But with broadband Internet access making its way soon to a home near you, it might only be a matter of time until a bidding war for some game makers emerges. Toy merchandisers like Hasbro Inc. (NYSE: HAS - Quotes, News, Boards) and Mattel Inc. (NYSE: MAT - Quotes, News, Boards) could be eyeing them as well.
Thursday's piece will look at specialty game retailers Electronics Boutique (NASDAQ: ELBO - Quotes, News, Boards) and Funco Inc. (NASDAQ: FNCO - Quotes, News, Boards). The competitors of the two companies include some mom-and-pop shops and more diversified retailers like Wal-Mart Stores (NYSE: WMT - Quotes, News, Boards) and Toys 'R' Us (NYSE: TOY - Quotes, News, Boards). Wal-Mart happens to be the largest toy retailer in the United States, and might see some help from the video game sector come this fall, but its stores usually sell only the top ten game titles. Hardcore video game junkies usually will not head to Wal-Mart for a specific title. But Funco and Electronics Boutique are better guides of the game industry's performance.
Toys 'R' Us is a bit of an interesting case. As the video game sector matures, the company could grab a larger part of this market as it attempts a turnaround. What's more, the company announced that it sold everything Sega sent it on September 9, the day of Sega's launch of the Dreamcast console. But Toys 'R' Us sells almost every toy category imaginable and can't fairly be considered a video-game pure play.
Finally, it's worth noting that some of the companies that will be covered are solid bets. Some are turnaround candidates, and some have their best shots as takeover targets. In the next three days, individualinvestor.com will offer investors a strategy for each stock.
As a cautionary note, individualinvestor.com would like to remind readers that there are competitors in each of the three segments that could not be included in this overview. We tried to include the stocks that are most accessible to investors through the major US stock markets.
Tuesday's segment will cover the game console makers Sony Corp. (NYSE: SNE - Quotes, News, Boards), Nintendo Co. (OTC: NTDOY - Quotes, News, Boards) and Sega Enterprises (OTC: SEGNY - Quotes, News, Boards).
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Good Luck,
RBL |
