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The
Dangers of Overhyping the Video Game Market Last month we looked at the solid revenue growth that had occurred for leading publishers in the interactive entertainment industry over the past year. This month we look at the downside of this story, how that growth failed to translate into increased stock prices for the leading video game companies. DFC Intelligence regularly publishes detailed profiles of companies in the video game and interactive electronic entertainment industry. Next week, we will be releasing a 400+ page report devoted exclusively to analyzing the leading game publishers. This report, Market Leaders in the Video Game and Interactive Entertainment Industry, tears apart each publisher’s history, financial performance, and the strengths/weaknesses of their corporate strategy, product lineup, development teams, marketing and distribution skills and future potential. Unfortunately, one of the big stories of 2002 was not market growth, but was instead the significant loss of investor value that occurred in the interactive entertainment industry. As the chart shows, stock prices of all the major companies we track were down from January 2002 to January 2003. The only exception was Take-Two Interactive, publisher of Grand Theft Auto III and Grand Theft: Vice City, the two top titles of 2002. Overall, the leading game publishers lost 35% of their market value from January 2002 to January 2003. The basic question of course becomes: why did this occur? The most obvious response would be to blame it on the poor economy and weak consumer spending. However, DFC Intelligence offers a more basic answer: the market was overhyped and Wall Street expectations were unrealistic about the growth potential for video game systems. There were no major surprises in the game industry in 2002 and consumer spending was quite solid. Therefore, we feel that the best explanation for the stock price declines is unrealistic expectations. Since 1995, DFC Intelligence has released detailed market forecasts for the interactive entertainment industry in the first quarter of each year. Our goal is to be both conservative and accurate. At the start of 2002 we presented a number of forecasts for industry growth in 2002. These forecasts ranged from 7% growth to a best case scenario of 14% overall growth in the U.S. When all the numbers are counted it looks like the actual figures will not be too far off our estimates. So we ask: where were the surprises? How did the market underperform reasonable, conservative expectations? The short answer is it didn’t. In the history of video game systems, arguably the most successful system ever has been the Sony PlayStation (PSX). Thus the PSX provides a good benchmark to judge the success of a new system. When one compares the performance of the PlayStation 2 with the PSX at a comparable point in its lifecycle it isn’t even close. The PS2 has blown away the original PSX in almost all comparable sales figures (total hardware sales, total software sales, average unit sales etc). To many this is probably not surprising. However, what may be more surprising is that both the Microsoft Xbox and Nintendo GameCube outperformed the PSX at its comparable point in the lifecycle.
In other words, it is very hard to be disappointed with overall consumer spending in 2002. Any investor that was anticipating greater consumer spending was making a bet against the established universe of the video game industry. It was kind of like betting on your football team to not only win the Super Bowl, but also beat the opponent by 50 points. It is not hard to see why there was so much money flowing into the video game stocks. This was one of the few markets where consumers seemed excited about spending money. Furthermore, the forecasts for 2003 and 2004 are for even more growth. However, it is important to understand what this growth means for individual companies in the industry. Poor analysis leads to over expectations and an inevitable disappointment. Companies in the interactive entertainment industry should be proactive about keeping Wall Street from becoming too exuberant. On the flipside of the coin, investors must realize there is a vast difference between 1) the company that says “our product line in 2002 did not mean expectations and we are doing A,B and C to correct that problem” and 2) the company that says “consumer spending in 2002 failed to meet our expectations and thus our sales did not meet expecations.” Consumers are out buying video games in record numbers, but there will be a big difference in which companies capitalize on that growth in spending | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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