Industry Snapshot from IBD
Monday, July 9, 2001
Printer-Ready Version
Edu-tainment:
The latest, greatest game machines should spark strong software sales
By David Isaac
Investor's Business Daily
‘Get ready to rumble!” So shouts a ring announcer in a Midway Inc. (MWY) boxing game. He doesn’t need to tell game makers twice. As new consoles hit the market, the developers are itching for a fight. And even the losers could come away richer.
Last year, the video game industry was on hold. Old platforms were on the way out. Game players stopped buying. They wanted the new machines. Sony (SNE) shipped its PlayStation 2, but couldn’t meet demand.
The future looks brighter. Sony’s PS2 shipments are back on track. Nintendo’s new hand-held, Game Boy Advance, launched June 11. Microsoft’s (MSFT) Xbox and Nintendo’s Gamecube are due out in November. Analysts see a new sales up cycle through 2004.
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Image: Trends To Watch
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IBD’s Computer Software — Education/Entertainment industry group includes Net-based e-learning companies. The market has three sectors: K-12, higher education and corporate training.
1. BUSINESS
Third-party publishers develop and market PC and console games independent of console makers. They’ll make 70% of the games for Sony’s and Microsoft’s new consoles. For Nintendo, the number is 50%. It has strong in-house development.
The largest publisher is Redwood City, Calif.-based Electronic Arts (ERTS). Sales topped $1.4 billion for fiscal 2000. It’s best known for its sports games. “Madden NFL 2001” was the No. 4 seller in April, says NPD Group Inc. “That franchise is an $80 million-a-year business every year,” said Tony Gikas, analyst with US Bancorp Piper Jaffray.
EA held 44% market share through December. CFO Stan McKee says such a large share is “unsustainable,” but that EA will remain dominant.
Nipping at EA are smaller players. Among them: Santa Monica, Calif.-based Activision (ATVI); THQ (THQI) in Calabasas Hills, Calif.; and France’s Infogrames (IFGM).
Name of the game: It’s games. But rising development costs make having hits more important. That’s why companies seek mass-market appeal. They hope to reach beyond the hard-core gamer. As a result, controlling the right brands is crucial. “A racing game named ‘St. Louis Racing’ simply won’t do as well as ‘Nascar 2001,’ ” Gikas said.
Being first to market is important for e-learning companies. The biggest say customer relationships are key.
2. MARKET
Video games are not just for teens. A 2000 survey by research firm Peter D. Hart says 60% of Americans, about 145 million, play video games.
The industry saw flat sales last year after a double-digit gain in 1999. Still, analysts expect major growth ahead. Schelley Olhava of International Data Corp. sees U.S. sales rising from $11.4 billion this year to $21.1 billion by 2004, including hardware, console and PC software and online play.
Publishers also must choose the right ally. Sony has the largest base. PS2 is in 3 million U.S. homes after just six months.
“We think there will be 20 (million) to 25 million installed worldwide by the end of next March,” EA’s McKee said.
EA will focus on Sony in this cycle. But it’ll support Nintendo’s Gamecube and Microsoft’s Xbox. “Nintendo is definitely a player,” McKee said. “We’ll see how it goes with Microsoft. They’re the new kid.”
Publishers can’t play favorites, says Bobby Farrell, THQ’s CEO. He admits Sony is the most exciting because of its numbers. “But we’ve made a huge living from people counting Nintendo out,” he said. THQ is the top third-party publisher for Game Boy.
On the console side, THQ’s enjoyed success with its World Wrestling Federation franchise. In 2000, three of the top 20 titles were WWF games.
E-learning is also a growing market. IDC sees corporate e-learning nearly tripling to $11 billion by 2003.
The largest corporate e-learning company is SmartForce (SMTF). Until 1999, the Redwood City, Calif., company only sold software on CD-ROMs. But now it offers courses over the Web and licenses its technology to others creating e-learning businesses.
The switch to e-learning “basically increased the volume of products we can sell,” said CEO Greg Priest. SmartForce is making headway with small to midsize businesses. They represent about 15% of sales, Priest says.
The K-12 e-learning market will expand thanks to tech spending in schools. Spending will rise to $6.8 billion in 2003 from $2.9 billion in 1998, says Mark Marostica of US Bancorp.
Renaissance Learning (RLRN) is the top player in that segment. The Wisconsin Rapids, Wis.-based company’s most popular product is “Accelerated Reader.” It tests kids’ reading skills and is used in over 55,000 U.S. schools.
The company is expanding its market with more products and is looking abroad to Canada, Australia, New Zealand and the U.K.
3. CLIMATE
“If I was going to put the climate on a scale of hot to cold, I would put ‘extremely hot,’ ” said IDC’s Olhava. High sales projections, new consoles and advanced games fuel those hopes.
Last year saw some consolidation. Companies were hurt by slow sales as old consoles ended their runs.
Infogrames bought Hasbro’s (HAS) failing Hasbro Interactive and Games.com units for $100 million. In May, Interplay Entertainment (IPLY) said it was in talks with a buyer. The Irvine, Calif., company has lost money since its IPO despite popular franchises like “Baldur’s Gate” and “Icewind Dale.”
Some companies just wanted to expand their offerings, Olhava says.
For e-learning, the new administration will help the K-12 market. “Renaissance Learning has software called ‘Star Early Literacy,’ which helps assess very young readers,” Marostica said. “Bush’s program, with its high-level focus on identifying problem readers before they’re in fifth grade and helping them is a key part of what this software’s all about.”
4. TECHNOLOGY
The new consoles are a big step up. Central processing units, memory, storage, graphics — the improvements are staggering. But every console has these improvements. Most industry watchers say there’s little difference technically among the consoles. “It’s like going in and getting a set of high-end stereo speakers,” says EA’s McKee. “Only the real aficionados will be able to distinguish.”
There are improvements in games, too. THQ uses Geo-Mod technology in its new game, “Red Faction.” It lets you change your environment. In past games, you could only destroy your opponent. Now you can shoot holes in walls, floors and ceilings.
Another development is online games. Sega recently signed a deal with Sony. Sega Dreamcast users can play against PS2 owners online. The deal pertains only to the Japanese market. But most game makers say online play will spread soon.
In e-learning, getting everything to work together is a hurdle. “It’s an area overall that the industry’s been grappling with for some time,” said Marostica. He credits SmartForce. It’s moved forward rapidly to make the various components work seamlessly.
In the K-12 market, Renaissance has added features to its “Accelerated Reader,” like a voice-activated quiz.
5. OUTLOOK
After last year’s lull, new machines raise hopes for big gains this year.
Upside: Four new, technically advanced devices will be out by fall. This will attract new gamers and new spending by die-hard ones. Analysts predict this up cycle will be bigger than the last. “The question is: Does it grow at 20% this cycle or 40%?” asked US Bancorp’s Gikas.
In a recent poll by the Interactive Digital Software Association, 34% of Americans said computer and video games were their top leisure activity.
Risks: Analysts are hard-pressed to say what could go wrong. Possible delays in shipments of new consoles could slow things. Piracy is a huge problem. No one knows exactly how much is lost. The IDSA put losses from piracy at $3 billion last year. |
