U.S. Video Game Makers Face Eastern Invasion

An interesting blurb in the New York Times on one of the sectors still exhibiting relatively decent (non-government) performance in the U.S. - video games. Electronic Arts (ERTS) just seems to have lost its way - and judging by its stock, it seems to have missed the notice that we're in a new bull market.

Meanwhile Activision Blizzard (ATVI) took the reins of leadership during this last console cycle - however the stock has fallen off a cliff of late, and really has been range bound.

Smaller players like Take Two (TTWO) and THQ (THQI) seem to rely on just 1 or 2 big hits (or busts) ... or face management issues. So perhaps there is an opening for Chinese players to come into Western markets despite the very obvious cultural differences.

First a quick look at the domestic industry, per CBSMarketwatch

• Video game publishers are gearing up to report financial results for the September quarter starting next week, but the industry is facing even more pressure in the year-end period, which will have to produce a lot of sales to make up for a long slump earlier in the year.
• Results for the quarter ended Sept. 30 are largely expected to be solid, given the release of strong titles such as "The Beatles: Rock Band," "Guitar Hero 5" and "Madden NFL." The quarter also benefitted from price reductions on game consoles.
• However, sales in the industry are still down from last year. And analysts are growing more skeptical that a strong holiday season can help the year fully recover.
• He (analyst) now expects sales of game software for the U.S. and Europe to be down 4% in 2009 from the previous year. He had previously predicted a 4% gain in sales for the period.

As we entered the don't-call-it-a-recession in latter 2007/early 2008, I thought this niche of consumer discretionary would be among the least affected, since gamers tend to be hard core and willing to give up a lot of other things. Also $40 is a relatively cheap form of long-lived entertainment. I still think that to be true, but it appears the casual gamer has been hit harder than even I (being Mr. Dour) thought. [Apr 14, 2008: Stuff I've Been Negative on Since Fall 2007]

• According to data from the NPD Group, game software sales in the U.S. were down 12% by the end of September compared to the same period last year.

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So do we have an opportunity for an Eastern invasion by the Shanda Interactives (SNDA), Perfect Worlds (PWRD), Changyous (CYOU), Giant Interactives (GA), and Netease.coms (NTES) of the world? (full list of Chinese online gaming names via TickerSpy here)

Perhaps... via New York Times

• Armed with cash from recent listings, Chinese online game makers are gearing up to play in Western markets, challenging the industry’s leaders, Electronic Arts and Activision Blizzard, on their home turf. Having prospered at home, companies like Changyou and Shanda Games want to join China’s export machine by sending their wares abroad.
• Changyou, which raised $120 million in a Nasdaq initial public offering in April, is in the final testing stage for a martial arts multiplayer online game, Dragon Oath, for the U.S. market. It plans to start selling the game at the end of 2009 or early 2010. The company began testing the game in Europe in August.
• Many game players in the United States still prefer consoles like the Microsoft Xbox and the Sony PlayStation to online play. However, analysts said a slow but sure shift toward online gaming, which allows for flexible formats and multiple players and can be played at Internet terminals and cellphones, is taking place and should benefit Chinese online game developers.
• “The Western markets are changing; it is a console-driven market but I think M.M.O. games are the next wave,” said Atul Bagga, an analyst at the research company ThinkEquity, referring to what are known as massively multiplayer online games. “E.A. and Take Two Interactive are strong on the console side, but online gaming is a very different animal.”

Any of you who play World of Warcraft or have kids who do - know how multiplayer online games have taken off in certain niches.

• With more than 50 million online players, China is expected to have more than 40 percent of the global market by 2011, according to Samsung Securities.
• Where Asian game operators have a head start is in their microtransaction business model, whereby players get the game free but pay small fees each time they want an upgrade for their character, like a map or a weapon. This differs from the business model in the United States and Europe, which is subscription-based. (not sure if that business model will go over in the States)
• Analysts said Chinese computer game companies like Changyou and Perfect World have the operational expertise and business model to take on global rivals. In September, Shanda Interactive spun off its gaming unit, Shanda Games, to expand overseas.
• The U.S. console market makes up about half of the global gaming market, with console software set to bring in an estimated $26 billion in revenue in 2009, according to Samsung Securities and UBS.
• The online game sector is growing rapidly, with revenue expected to grow 21 percent to more than $13 billion in 2010, according to Samsung Securities.
• South Korean game makers like Nexon and NCsoft have had success in overseas markets, but Chinese companies may find it tougher because of the competitive landscape, high entry costs and cultural baggage.
• “The issue with most Chinese gaming companies is that the games they have are very Asian-themed, so for the Western audience it is difficult for them to associate with,” said Mr. Bagga of ThinkEquity. Unfamiliarity with Western gamers’ tastes is also a potential pitfall for the Chinese companies in that they will have to spend much more than they do in China to promote their products in those markets.

Long Perfect World in fund, no personal position

Comments

[TraderMark:]

As an annedum (sp?) China banning World of Warcraft as of late yesterday...

www.reuters.com/articl...

Nov 03 09:39 AM

[Graham and ...:]

China's biggest fear is that when they try to collect on the massive U.S. debt, we will respond by going to war with them to "throw them off the island" (as we did with the British in 1776).

China has a nasty habit of trying to suppress anything it doesn't like to hear.

Nov 03 09:43 AM

[Ergo:]

Blizzard has some monster games coming out. Three Starcraft titles coming soon. And Diablo III to follow. These PC games will be colossal hits, and everyone in their massive fan base will buy them. Blizzard's quality level isn't something that any cheap Eastern company can even dream about matching - and most Western companies haven't been able to match it either. (I don't regard Sony as a cheap company).

Generally, quality and creativity makes a huge difference to game sales. Blizzard manages this better than anyone, such as by refusing to set hard deadlines on their game releases. Cheap programmers spitting out garbage are zero threat. Even if a cheap Eastern company came up with an innovative gaming concept, any Western company can take the concept and make it better. (IP protections are likely too specific to really protect a concept broad enough to be a "game-changer." Most everything has been tried somewhere before, even if the right marketing twist hasn't been found).

As for WoW's problems in China, I don't expect them to go away any time soon: World of Warcraft is a time consuming game that generates a vast online community wherever it is sold. The Chinese government will be very, very reluctant to approve of such a thing. Imagine all those worker drones playing video games for hours at a time, and conversing freely while completing quests based on American values! Scandolous! Other titles like the Star Craft or Diablo series, could fare better, since they can be played individually in short segments. Or else there will be a massive black market - always a possibility in China.

Nov 03 10:37 AM

[GhostOfSpec:]

With MMORPGs, there is a threat from Asia. NC Soft from Korea is a big player in that market.

But the over all game market in the USA has not been strongly affected by Asian players due to the cultural differences. In fact, other than Nintendo, the Japanese videogame software makers have done quite poorly in the USA this console generation. The JRPGs have largely flopped.

So other than MMORPGs, the western publishers/developers do not have an immediate threat.

Nov 03 12:00 PM

[William M. ...:]

It's not that EA lost their way. It's that they let the expense side of the business get out of control. Easy to understand once you started to go for Movie quality stories you double your staff and double your cost. Plus EA purchased Playfish Inc., a maker of games for the social-networking sites Facebook Inc. and MySpace, for as much as $400 million. 15 years ago who would pay $200 million for a business that lost money? And major titles are not $40, try $59 and in a resession even the hard core gamers who have been cut off from the parents visa cards will cut back in this economy. Plus as the volume of games expanded gamers got smarter in choice selection. A publisher could double their advertizing budget but if the game got a below 8.0 rating gamers were not going to pay $59 knowing in 6 months it would be $29 and in 12 months $19.

Nov 10 09:36 PM

[ebworthen:]

Game prices have gone from $39 to $59 - tell me again that there is no inflation(?).

The trend is to online console gaming. It isn't that it is better, but it is a way get the young skulls full of mush used to paying $10 a month or more for an online subscription in order to play multi-player and get content.

Think of cable television at the beginning, MTV, you had to pay for it but no commercials; and then....

Before long they will be releasing games only online, you will have to subscribe to their online service (like Microsoft's "Live") in order to pay for and download the game, and they will charge $5 here and $10 there for "extra" content for the games (new maps, weapons, mods, alternate endings, etc.). They already do it, but will slide the consumption model that way.

It will be a cash cow! Each successive generation is more and more conditioned to need constant stimulus and is being trained (conditioned) to expect to pay monthly for it (cable t.v., satellite radio, cell phones, texting fees, etc.).

Nov 11 01:14 AM