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Holiday 2004: The Value of Low Expectations December 16, 2004 For the past few years our December articles have followed a consistent pattern. Throughout the year there is a tendency to build up the holiday season. Then in early December fears start to arise over warning signs that holiday sales might be slower then expected. The common trend has been for interactive entertainment company stocks to start to decline in November into December. This has generally been followed by an increase in stock prices in the first half of the new year. This year is different. The stock prices of most interactive entertainment stocks have been soaring in December. It appears that by setting expectations low, the game industry has been able to exceed estimates. There were a great deal of concerns about this holiday season. The feeling was that the industry was entering the end of lifecycle for the current systems and getting ready to face another difficult platform transition. There was also the sense that holiday 2004 was going to be dominated by a handful of titles. Thus if a company did not have products with names like Halo 2, Grand Theft Auto: San Andreas or Half-Life 2, they would be out of luck. We feel this sense of caution was well warranted. It has always been our belief that given the uncertainty of consumer spending, prudence is best served by keeping expectations of the low side.
The good thing about keeping expectations low is that success brings a pleasant surprise. In both 2002 and 2003 holiday sales were near record highs. However, they could not meet lofty expectations and thus were considered by manyy to be a disappointment. In 2004, of the five companies in this article, only Take-Two Interactive (NASDAQ: TTWO) has not seen a significant December increase. Not surprisingly, Take-Two, with Grand Theft Auto: San Andreas, was the company that went into the season facing the highest expectations. On December 16, Take-Two reported that fourth quarter revenue (quarter ending 10/31/04) was up 58%, with net income up 138% to $62.6 million. It is clear that Grand Theft Auto: San Andreas has been a smash success, but nothing less was expected. The other interactive entertainment companies shown in the chart do not have a title with anywhere near the sales potential of Grand Theft Auto: San Andreas. However, they are performing well above expectations. Activision (NASDAQ: ATVI) is arguably the company on the strongest streak, with a very diversified product line that includes console hits Tony Hawk Underground 2 and X-Men Legends, Lemony Snicket and Spider-Man 2 movie tie-in games, Call of Duty games and some summer/early fall PC hits with long legs in Doom III and Rome: Total War. THQ (NASDAQ: THQI) is another company doing better then expected. THQ had a weak first part of the year in large part because they backloaded their product line for the holiday season. In the summer of 2004 there was no replacement for THQ’s smash hit summer 2003 Finding Nemo games. However, for this holiday season THQ has three big movie to game titles in The Incredibles, Spongebob Squarepants: The Movie and The Polar Express. Critics generally do not rave about these games, but in a season dominated by mature rated titles, these THQ products become some of the most high profile family friendly fare. Then there is Electronic Arts (NASDAQ: ERTS). EA’s holiday 2004 lineup was rather tepid, with most of the big titles (Madden, Burnout 3, Sims 2) being released in late summer. However, it now looks that Electronic Arts can simply buy the hits it doesn’t own. In one pen stroke, Electronic Arts eliminated what was becoming significant competition in the football game market. EA now has an exclusive five-year license with the NFL.
In terms of percentage increase, the best performing company so far this December has been Atari (NASDAQ: ATAR). Of course, in many respects this is a case of a company having nowhere to go but up. Atari’s stock is still down significantly over the year. Nevertheless, Atari has released a new Dragon Ball title and some strong PC games in Roller Coaster Tycoon 3 and Sid Meier’s Pirates. The big question is whether interactive entertainment
stocks can continue their run into 2005. The chart below shows how stocks
started a nice run up in late December and January last year (in 2002, the big
increases did not start until the March to June quarter). Can a similar
run-up occur in early 2005? This is a very interesting question. If
there were concerns about a slowdown in 2004, these will only be amplified in
2005 as the PlayStation 2 enters its fifth year and new platforms start to
appear on the horizon. Consumer spending is likely to continue to be strong,
but it will become increasingly diversified across platforms and genres. There
are no safe bets. This becomes a time when companies need to be at their
sharpest from a marketing and publishing standpoint. The year 2005 is likely to
be a year of winners and losers and there is likely to be a significant
disparity between individual company performance. For what it is worth, our
forecast is that 2005 will be rollercoaster ride, with some big surprises and
some major disappointments. As part of our ongoing research efforts DFC Intelligence is delivering free monthly briefs on hot topics in the interactive entertainment and video game industry. You (or a colleague of yours) have signed up to receive these briefs. DFC Intelligence’s research services provide detailed strategic analysis of the interactive entertainment industry. A sample of reports on the video game and PC game market include: Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Complete five-year forecasts for all individual console and portable game platforms by region (Asia, Europe, North America, rest of world)) through 2009. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as new portable game systems. The Business of Computer and Video Games This report includes an historical analysis, overview of individual hardware system, top-selling games, game genres, consumer demographics, business models, retailer profiles, marketing elements and case studies, industry trends. Market Leaders in the Video Game and Interactive Entertainment Industry This 600+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 15-40 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company. The Online Game Market This 660 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles.
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