Move Over PS3 and Xbox 360... This Unlikely Source Could Save the Video Gaming Industry

by Tony D'Altorio

Move Over PS3 and Xbox 360... This Unlikely Source Could Save the Video Gaming Industry

by Tony Daltorio, Investment U Research

Wednesday, February 17, 2010

During the Super Bowl, Electronic Arts (Nasdaq: ERTS) shelled out the necessary millions to advertise its newest big game: Dante's Inferno.

Ironically, the life-or-death picture it painted did a good job of capturing how, just about, the entire gaming industry must feel these days amid slumping sales and equally weak stocks.

The one exception to the rule - Nintendo ADR (OTC: NTDOY) - sold an admirable 3.8 million Wii units in the U.S. back in December, not to mention large numbers of Wii Sports Resort, Wii Fit Plus and New Super Mario Brothers. So naturally, its shares went up 18% in January.

Outside of Nintendo though, video game stocks fell nearly 10% last month on less-than stellar holiday numbers.

Investors might not have reacted quite so badly to those figures if they hadn't come on top of an all-around hellish 2009. According to research firm NPD, the U.S. portion of the industry saw revenue slide by 8% to $19.66 billion last year.

That's a world of hurt no video game can truly capture. But it's also a pain that one company could delete with just a well-placed touch or two.

The Gaming Industry's Fight To Survive

It's hardly child's play to keep up in the gaming industry these days.

France's Ubisoft Entertainment ADR (PINK: UBSFY) has already warned of lower revenues after game titles like Avatar didn't perform as well as expected. The company has since had to push back the launch dates for two other games.

Microsoft (Nasdaq: MSFT) didn't do much better. Year-on-year Xbox 360 and PC sales fell 12% in the last quarter, while sales of its consoles dropped 13%. And while Sony ADR (NYSE: SNE) did push 87% more Playstation 3 units in the U.S., that happened only after it slashed the console price significantly.

Even Activision Blizzard (Nasdaq: ATVI), the world's largest video game publisher, had to declare poor sales for its latest Tony Hawk game. It recorded a further $409 million write-down when its Guitar Hero hit a sour note with consumers as well. In fact, the entire music genre - once a big growth driver for the industry - declined last year. U.S. sales halved from $1.4 billion in 2008 to about $700 million in 2009.

Number two player, Electronic Arts, didn't do too well with its Rock Band franchise either, though it did sell two million copies of Mass Effect 2 in its debut week last month. Similarly, Activision's Call of Duty: Modern Warfare 2 earned more than $1 billion since its release in November. And Microsoft and Sony have high hopes for their motion sensing controllers, due out later this year.

The entire gaming industry hopes to grow software sales by at least 10% this year on big titles like Sony's God of War III, Take-Two's Bioshock 2 and Electronic Arts' Fifia World Cup South Africa.

Electronic Arts in particular predicted 26% growth in digital and online sales this year, lifting its overall software sales by 8%. But it has a surprising source to thank if that does happen.

An Apple a Day Could Strengthen the Gaming Industry

Apple (Nasdaq: AAPL) probably didn't mean to give its competition a leg up, but that's exactly what it did when it started the app revolution.

Take Electronic Arts, for example. It first entered the lucrative business a few years ago by acquiring the early phone gaming company, Jamdat. More recently, it snapped up Playfish, one of the three revenue-leading specialists in social games. So far, the larger company seems to know what it's doing too, because it had four of the five best selling App Store games of 2009.

But the company and its competitors have a lot further to run in this race, especially since Apple introduced its iPad console.

When it officially hits the markets next month, the iPad won't feature any games of its own; at least, not right away. But industry insiders see that changing very quickly.

Just ask Michel Guillemot, the CEO of Gameloft, who sees Apple's latest product as "a new beginning" ushering in "a new category of gaming."

Clive Downie, the head of marketing at iPhone developer Ngmoco, couldn't agree more. He believes the iPad "could signal a very interesting future in terms of Apple versus Sony and Microsoft within the home domain."

In other words, move over PS3 and Xbox 360.

But even while it strikes a blow at its more direct competition, Apple could very well save the rest of the video gaming industry. The investment world simply can't know just yet what impact the iPad will have, but it's a situation worth watching closely all the same.

Good investing,

Tony Daltorio

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