Hardly anything about Rambus except a mention but worth the read anyway. It sounds great to a RMBS long.
A telling line -
personally I suspect I'm going to be a sucker for the PlayStation whether or not my 5-year-old is interested.
washingtonpost.com
Tracking Toys Before They're Put in Play
By Fred Barbash
Sunday, February 13, 2000
My wife says you can tell the men from the boys by the cost of their toys. I agree. But when the kid and the dad converge on one fad, that's an exception.
Such a convergence may come with the Sony PlayStation 2, which debuts in Japan next month and here in the autumn. PlayStation 2 will be the most advanced game console in history, says the hype, but it will be no mere toy. Faster than a speeding Pentium, more powerful than the most powerful graphics engine, able to play DVD movies and someday download from the Internet, this could become one of the all-purpose, do-everything techno-boxes that will help render the PC obsolete.
Don't take my word for it. It was cited in "The World In 2000," published by the very serious Economist magazine, as one of the four great toys for the coming year.
The investment angle is not necessarily just Sony Corp. (SNE), a massive conglomerate with vast revenue to which PlayStation 2 may make a relatively modest contribution. PlayStation 1--and Sony games for it--comprised roughly 12 percent of the company's sales last year.
Nor is it PlayStation itself. It's always possible it won't be ready in the United States in time for Christmas, or that Sony won't meet the challenge of keeping the price under control (at or around $300), or that it simply won't live up to expectations. Indeed, a problem has already cropped up with its ability to play some games made for PlayStation 1.
My aim is to show how any investor with access to the Internet can deconstruct a potential blockbuster of a product--be it PlayStation or Sega Enterprises Ltd.'s new Dreamcast, or Pokemon--learn something about its value chain, and begin determining whether any of its links are worth your investing dollars.
It's a method of discovery, yet another device for individual investors left to their own devices.
Often in this process I find companies that I should have known about before, that might be good targets for independent research. I first studied and wrote about BEA Systems, a technology provider to Internet companies, when deconstructing E-Trade for a column six months ago. Since then, BEA Systems (BEAS) is up 762 percent and E-Trade is down 5 percent. I could not buy BEA Systems then--ethical standards preclude, among other things, purchasing a stock that I'm writing about until three months have passed. But I bought it two weeks ago.
How big might PlayStation 2 get? Last year, Sony produced and shipped 71 million PlayStation 1 consoles. Console users and game-rental companies purchased roughly 600 million units of software games licensed by Sony and produced by dozens of companies for PlayStation. A PlayStation console is currently in one of every four American households. If the next generation lives up to the hype--and we'll get some hint of that in Japan next month--the possibilities are mouthwatering.
Begin your research with a visit to the mothership--in this case, Sony.com. Look at the news releases. Over the past two years, Sony has provided information in news releases about the companies supplying components and services for building this complicated toy. Supplement that with a Web search through Google using a phrase such as "sony playstation partnerships," which may turn up announcements from supplier companies of deals with Sony.
My surfing turned up LSI Logic (LSI), Rambus Inc. (RMBS) and MIPS Technologies Inc. (MIPS). I had hoped for more, but Sony, teamed with Toshiba, is doing much of its own design and manufacturing. The ones I found are all large and successful companies, so large that whatever they make for Sony, while useful, it may not necessarily provide a pop in the stock price.
On the other hand, you should know about them anyway, rather than allowing them to be the sole province of fund managers and technology specialists. They have their own Web sites, which often announce partnerships with other companies.
LSI Logic, for example, makes the I/O (in/out) processor for Sony, the chip that should allow the console to be backwards compatible (usable for PlayStation 1 games) and to accept plug-ins of DVD and Internet connections. LSI Logic will make money with every PlayStation sold. But it's greatest growth, said company spokesman Kevin Brett, is coming from chips for telecommunications, especially wireless telecommunications. LSI became a $2-billion revenue company last year on the back of telecommunications.
Return to Sony's site map, click the link to "Third-Party Software" and see the companies that are licensed to make games for the PlayStation 2.
Visit their Web sites. It's a trip. Having not yet been exposed to these games, and being duly stodgy about them, I was surprised that it wasn't the parade of horrors I expected. While I wouldn't want "Duke Nukem: Time to Kill" in my home, I could live with "Roadrash Jailbreak," "Tomorrow Never Dies," "WWF Attitude," and all the soccer, football and basketball titles among the hundreds I saw.
Interactive software companies that wrote these games are already gearing up for the new PlayStation. Among them are Acclaim Entertainment Inc. (AKLM), Activision Inc. (ATVI), THQ Inc. (THQI) and Electronic Arts Inc. (ERTS.)
For THQ, PlayStation game sales have represented 30 percent to 40 percent of gross revenue.
Electronic Arts, among the largest of these companies and famous for its Sim City and FIFA 2000 soccer games, reported in the last quarter that 48 percent of its net revenue of $600 million came from sales of PlayStation 1 games. It has announced that it will be going all out for the next generation.
John Riccitiello, president and chief executive of Electronic Arts, explained what he called the "symbiotic" relationship between a new generation of console and a new generation of games: As the console gets more exciting, so do the games. As people see how great the new games are, the more they want to buy the console. And so on and so on and so on. That's how PlayStation 1 sales ratcheted up, he said.
The fact that PlayStation 2 is supposed to be compatible with PlayStation 1 games will not limit sales of new software, he said. On the contrary. Backwards compatibility "is the biggest marketing idea since the beginning of time," Riccitiello said. "The kid begging for PlayStation 2 says, 'Look, Dad, I know you spent $700 on PlayStation software in the last three years. . . . Don't worry. My old library won't be outdated. You're not flushing that investment down the toilet.'
"So every 13-year-old can get one for Christmas and Dad won't be going through this massive heartache," said Riccitiello. "Truth be told, the new stuff is going to look so much better" on PlayStation 2 that the next-generation games will be irresistible.
Indeed, Standard & Poor's Corp. analysts project that Electronic Arts should be a "prime beneficiary" of what they predict will be the "huge success" of PlayStation 2.
The gamemakers occupy a highly competitive field, make products for a variety of platforms, including Sega, Nintendo and plain old PCs, and have high profit margins. All of that is good for investors, since their fates are not tied to a single device.
To find out who makes peripheral devices such as joysticks, steering wheels, game pads and stuff I don't think I want to know about, I departed Sony's Web site and ventured into one of the many Web-based video game magazines. These are probably great for kids and useful to investors interested in what's popular. I wouldn't stay too long, however.
InterAct, a division of Recoton (RCOT), was the only publicly traded company I located. Apologies to others I missed. InterAct makes, among other things, Game Shark. Don't ask me what it is. Recoton I know. Its wireless audio technology is in my home. It also has a deal with Sega Dreamcast for peripherals.
Dissection of a value chain can go much further. Game companies employ other companies for software writing tools, for example.
Once you find a stock that interests you, professional stock analysts could be helpful. You can find their ratings--strong buy, buy, accumulate and so forth--on many Web sites (MSN Money Central, SmartMoney.com, CBS MarketWatch). But it's difficult for the lone investor to get in-depth analyses on individual stocks.
The best source I've found is Standard & Poor's Personal Wealth (www.personalwealth. com), which charges $9.95 a month, a fee that includes intelligent market news and access to S&P's analyses.
This PlayStation sojourn was cursory. If it sells, retailers and distributors, game-rental outfits and assorted hangers-on should benefit as well.
I'm not recommending that anyone buy anything--though personally I suspect I'm going to be a sucker for the PlayStation whether or not my 5-year-old is interested.
Fred Barbash's e-mail address is barbashf@washpost.com. Of the stocks mentioned in this article, he owns BEA Systems.
Tracing the Stocks
Here's a look at the PlayStation-related stocks we've turned up, in order of mention:
Stock (Ticker symbol) Friday close 52-week range Price-to-earnings ratio
Sony (SNE) $261.12 $295.87-72.06 87.20
LSI Logic (LSI) $102.75 $111.94-23.88 93.41
Rambus (RMBS) $88.25 $117.50-51.50 259.56
Acclaim Entertainment (AKLM) $3.31 $9.88-3.00 9.20
Activision (ATVI) $14.88 $18.25-9.75 18.14
THQ (THQI) $19.50 $39.25-10.91 12.29
Electronic Arts (ERTS) $81.75 $124.43-38.00 39.88
Recoton (RCOT) $10.75 $17.25-5.43 N/A
SOURCE: Bloomberg News
¸ Copyright 2000 The Washington Post Company
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