Video Game Publishers Feel the Pinch

The video game industry is feeling the strain of slower summer sales and console transitions, with stock prices of several of the top publicly traded game publishers taking a big hit this June.

With talk of options backdating becoming the next major Wall Street scandal — more than 30 companies are under investigation and several executives have already been fired — the stock market has seen some overall declines lately.

However, video game giants cannot attribute their collective US$6 billion in market capitalization entirely to general stock market conditions.

Since May 1, the Big Four game publishers — Electronic Arts, Activision (Nasdaq: ATVI), Take-Two (Nasdaq: TTWO) and THQ — have seen market capitalization drop about 25 percent while the overall Nasdaq declined 8.5 percent and the Standard & Poor’s 500 saw a 4.2 percent drop.

Slower Recovery

The firms’ situation could reflect investors’ fears that the gaming industry is not going to see large gains from next-generation consoles. The Xbox 360, Nintendo Wii and Sony PlayStation 3 are set to compete for market supremacy this winter.

Investors can’t merely blame the console makers’ slower than expected introduction of new hardware, though. Game publishers have their own issues, such as increased development costs and the threat that online gaming will erode traditional software sales.

Michael Pachter, research analyst at Wedbush Morgan Securities in Los Angeles, isn’t buying the “sell now” advisories. From where he sits, the gaming arena offers good buying opportunities. He admits, however, that stocks may go down more before they rise again.

“Investors expected a smoother transition and were overly optimistic months ago and were probably overly pessimistic now. Investors will revert back to the median in a few months,” Pachter told TechNewsWorld.

Online Evidence

Still, there is plenty of evidence that the overall U.S. video game industry, worth more than $12 billion according to Parks Research, is about to undergo a marked change in software delivery. Seventy percent of the Internet-equipped households in the nation include at least one game-playing person. Half have at least one gaming console.

Parks Research estimates some 3 million people pay for subscriptions to massively multiplayer online games, or MMOGs. Two million console owners pay for online games. That number is expected to grow in the future. Microsoft has seen more than 24 million downloads since its Xbox Live, a platform for high-definition on-demand content, was launched last November.

At the same time, high-speed Internet connections and cost savings are driving game publishers to the Web. Electronic Arts, the world’s largest video game publisher, is experimenting with online distribution, as are Valve and NCsoft. With broadband becoming so ubiquitous it is more feasible today to download a game from the Internet than ever before.

Some Exaggeration

Patcher chalks up some of the industry pessimism, though, to media reports featuring analysts who are downgrading the industry based on what he calls questionable assessments.

“Every day there’s another article about how nobody’s watching movies anymore and how nobody is buying video games anymore and how Sony is not going to get the PS3 out. It’s all exaggerated,” Patcher argued. “Investors are waiting for good news and there isn’t much good news until the fall.”

In the fall, the industry starts gearing up for the holiday season, during which it claims most of its sales for the year.

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