Seeking Alpha
Profile| Send Message| ()  
Very interesting commentary today from DFC Intelligence on the current state of the video game business. The research firm notes that the current market, with new consoles from Sony (SNE) and Nintendo, looks a lot like the market in November 2001, when the Nintendo GameCube and Microsoft (MSFT) Xbox were introduced to the market. DFC’s basic theory is that it is instructive to see how the cycle played out last time around.

The DFC reports notes that video game stocks had a pretty nice year, though with better gains for Activision (ATVI) and THQ (THQI) than for Take Two (TTWO) or Electronic Arts (ERTS). But what happens next? “”If history is any indication there must be some concern that the market may have over [reaching] expectations.” For one thing, DFC notes that this year, “the strength of the game industry has come not just from the Xbox 360 but more from continued momentum of the PlayStation 2 and a resurgence for Nintendo platforms.” The problem with this, DFC says, is that the PS2 is on the decline as a market for new software, and third-party publishers “have struggled to make money from Nintendo platforms.”

DFC notes that there was a rally in video game stocks in 2001, much like the one 2006 - but that the uptrend was followed by a slowdown in 2002 and 2003. “It is just a cold hard marketplace fact that it takes a while for a new hardware system to build an installed base. In the mean time, revenue and profits tend to sufer.”

Finally, DFC makes this interesting observation: for all the technical advances in the latest hardware, not much has really changed in the industry. “Despite all the hype about the Internet, MMOGs [massively multi-player online games], digital distribution, advertising in games and so on, games are still very much a retail driven business centered around big name franchises, often times licensed from other media.” DFC notes that the big software titles in the 2001 holidays included Grand Theft Auto III, Halo, Final Fantasy X and Madden NFL 2002. Among this year’s hot titles: Grand Theft Auto IV, Halo 3, Final Fantasy XII and Madden NFL ‘07. Five years later, people are basically playing the same games.

Source: 2007 May Be Rough For Video Game Stocks