A New Era of Video Games: The End of Shovelware

Video game analysts must be scratching their heads. How could Electronic Arts (ERTS), the former leader of third party publishers, suddenly produce such dire warnings about its business guidance? How could THQ (THQI), a company that was doing so well just a couple years ago, have a decimated stock price now trading just slightly above its cash position?

The major reason is actually not the economy, as video game sales are altogether not seeing dramatic declines. The major reason is the rise of Nintendo (NTDOY.PK).

During the last console cycle, these two analyst darling publishers were able to pump tons of shovelware onto the Sony console and they would sell. Shovelware is a derogatory term in the gaming community, referring to low quality software that is made to sell.

But these days, outside of the Nintendo platforms, low quality games are not selling. Video game buyers have become more discriminating and more segmented. And some publishers in particular have not adjusted well.

Specifically, the shovelware crowd has moved exclusively onto the Nintendo platforms, where Nintendo titles tend to dominate. Microsoft's (MSFT) Xbox 360 and Sony's (SNE) Playstation 3 have been left for the discriminating crowds, who demand high quality products which include online play, such as this year's top seller, Take Two's (TTWO) Grand Theft Auto.

In years past, EA and THQ relied not just on their top selling products (most of which were licensed products as opposed to higher margin internal intellectual property, such as Activision's Call of Duty), but they also relied heavily on shovelware for the less discriminating gamers.

Today, THQ continues to produce tons of shovelware aimed at children and casual gamers. But the kids and casual gamers are clearly more impressed with Nintendo's offerings these days, and many wonder how THQ will even survive given this new environment.

Electronic Arts, on the other hand, was slightly more forward thinking and has recently produced some high quality intellectual property for the Xbox 360 and PS3. But it's too little, too late as years of reliance on low quality products finally caught up, and moreover, new brand names often require a second and third sequel to really make a significant claim on the market. Consider, for example Take Two's Bioshock, which was highly regarded as the top ranking game of 2007. Sales were good, but not great. You can expect Bioshock 2 in 2009 to either kill the brand name or be a high quality monster hit. In this case, I would bet on the latter considering the publisher's track record.

Overall, the video game investor ought to do what game buyers are doing and become more discriminating. For years, Electronic Arts has been given a much higher valuation than Take Two Interactive, for example, which is considered a higher risk video game publisher. But it has become clear that relying more on well known high quality products provides less risk than producing casual and children's titles that now compete directly with Nintendo. The game has truly changed.

Disclosure: Short ERTS, long TTWO.

Comments

[Ishortyou:]

the other thing about the consumer is that they hate the churning business model of neglecting the prior versions of the game for newer version, customer support is dropped because of the new versions, the customer feel angry, betrayed and manipulated by this business model and simply they stop buying evern the new releases, they want a continuity of the game with online upgrades probably wiht a subscription business model for cents of a dollar as long as they get adequate customer support and continuity of the game they love to play but not you have to have the constant churning of Counterstirke 1, then 2 then 3 and so on, and thats what people are hating at the moment.

2008 Dec 11 07:22 AM

[jhaw:]

In my opinion, the best way to discriminate is to buy the best company in the industry, which would be Nintendo. Ninendo's stock price is way off the 52 week high, just like everyone else, but sales of both the Wii and DS hardware and software continue to grow at a very healthy rate and new products like Wii Fit are difficult to find in stores. It is reasonable to ask if Nintendo has peaked with this generation of products, but it appears that they continue to grow stronger and should see significant price appreciation on the back of strong holilday sales and a (hopefully) improving general economic climate.

2008 Dec 11 09:44 AM

[Gaucho420:]

I beleive you mean massmarket as oppossed to shovelware. Some would say movies are quality and TV is shovelware....but its just called TV, not shovelware. The Hard core crowd needs to get over itself and realize its playground is now everyone's playground.

I have a Wii & 360, and while I love my 360 games, MSFT poor customer service & horrible quality have me thinking that if the shovelware buyer is the fool...then all 360 owners are those fools, myself included. Almost everyone I know has had their 360 break down and some up to three times. The hard-cores are hard-core, that's for sure...some would say hard-core stubborn.

My Damn Super Nintendo from 1991 still works, but my 360 only made 2.5 years? Shovelware is perhaps a kind word to use...thank god the games are good, as the 360 is perhaps the least reliable machine in history.

And this year's top seller, my good man, is not GTAIV (I own TTWO), its MarioKart.

Wait until the end of the year and you'll see.

The future will be with the first machine that does Wii motion controls coupled standard hardcore gaming graphics with Gears of War style, but clearly the days of the joystick rulling the roost are numbered. I'm not sure why people don't get this, the average person has 0 interest in 16 buttons. Again, I love hardcore gaming, GTAIV is the best game this year and perhaps ever...but the future lies in non-traditional joysticks that will take GTAV and put it to good use.

As far as stocks, I am long TTWO (waiting for another ride up to cash in once again), THQI has they could be taken over and I would avoid ATVI and ERTS. I would also not be suprised in seeing Japanese companies buy out or merger with one these, maybe Capcom or Konami to give it more weight and depth worldwide.

UBISoft I would say now is the 2nd largest in the world and I too would recommend them. Paris Stock exchange.

2008 Dec 11 11:13 AM

[sachakin:]

Ubisoft is the largest player in Europe. They beat every single year the estimates. To my eyes, they will beat once again the previous target of 1, 050 million Euros in sales this year. Christmas is 45% of the annual sales, and this year will be the best year ever for Ubisoft. We will know their Q3 on 21st of January and I think that it will be great, thanks to theire sales on Wii and DS.

The stock has plunged (losing 25% in 3 days between 16th of December and 22nd of December) because FMR LLC (Fidelity investment has sent half of their shares...)

A good opportunity, to my Eyes

Take an eye on this stock here:
www.boursorama.com/cou...

2008 Dec 28 06:06 AM