Jewish World Review August 8, 2001 / 19 Menachem-Av, 5761
James K. Glassman
Game makers poised to profit
THE economic landscape may look pretty dreary with GDP
growth churning below 1 percent. And in technology
markets, it's hard to see the silver lining amid all the clouds,
or as they call them in the securities business, "lack of
earnings visibility." But there's at least one tech market
where the sun is shining. Sales of video games are booming,
and we're not even into the Christmas season yet, when
Microsoft will release its heralded Xbox video game console
and Nintendo will offer its latest, greatest device for
This is a wonderful time to be a game developer --
someone who writes game software -- because there's a
rapidly expanding number of platforms on which to run this
software. Microsoft is entering the fray, this time as a
company offering hardware as well as software with their
new game player, and the company is bringing along about
$500 million to promote the Xbox. This of course will only
encourage Sony, Nintendo, and Sega to step up and spend
millions more to market their machines and defend their
turf. The bottom line is that the box makers will be fighting
like crazy to get more machines into the hands of
youngsters. And each one of those youngsters is then a
motivated customer for software -- games to run on their
This is not news to people who follow this industry, so
many of the game software stocks are not exactly cheap.
But they definitely seem poised to grow, even if the
economy continues to muddle along. Entertainment
companies tend to hold up pretty well in tough economic
times. Furthermore, these are software companies, and
software is a great business that only gets better as more
and more customers download their purchases instead of
buying packaged CDs or diskettes. In other words, the
marginal cost of manufacturing and distribution in this
business will approach zero. And that means an opportunity
for very high profit margins, especially since this is an
intellectual property business with unique franchises. A kid
doesn't want just any football game - he wants John
Madden's NFL 2001. Young gamers don't want just any
adventure babe - they want Lara Croft.
Gaming also may be well suited to the subscription sales
model that many software companies want to develop.
With the possibility of ongoing competitions against players
around the Internet, game makers might eventually be able
to charge monthly fees the way cable TV operators do,
creating ongoing revenue without additional marketing
The giant of the industry, with most of the best-selling
titles, is Electronic Arts (symbol: ERTS). As Dean Takahashi
notes in the technology magazine Red Herring, "EA's gaming
revenues of $1.3 billion are more than double its nearest
competitor, and it has the development clout to make or
break a console." That's why it was such a big win for
Microsoft when Electronic Arts agreed to develop games for
the Xbox. ERTS is the market leader and a great company
for the long term, but you might also consider one of the
smaller players. Number two in this game is Activision
(ATVI), which specializes in games related to extreme
sports. ATVI markets games based on skateboarding legend
Tony Hawk, among others. THQ (THQI) makes games based
on the World Wrestling Federation and Eidos (EIDSY) owns
the Lara Croft Tomb Raider
JWR contributor James K. Glassman is the host of Tech Central Station. Comment by clicking here.
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