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The video game industry has come a long way since 1966 when Ralph Baer, commonly credited as the inventor of the video game, designed a series of seven prototypes that played several video games.

The first playable video game was one in which two squares chased each other—exciting, huh? The first agreement was signed with Magnavox in 1971 and the first video game system was released in May 1972: Odyssey. Atari would later hit the market in November 1972 with their first PONG arcade game.

Today, the computer and video game industry is a multi-billion dollar industry. Sales for U.S. computer and video game software grew 6% in 2006 to $7.4 billion—almost tripling industry software sales since 1996, according to the Entertainment Software Association [ESA]. A number of other statistics that caught my attention:

  • The average game player is 33 years old and has been playing games for 12 years.
  • The average age of the most frequent game buyer is 40 years old.
  • 93% of computer game buyers and 83% of console game buyers were over the age of 18.
  • 44% of gamers are age 18 to 49.
  • 25% of gamers are age 50 or older.
  • 38% of all game players are women.
  • So, how can one profit from this ever-growing industry? I have outlined a few companies below that are some of the top players in the video game industry

    GameStop Corp. (NYSE:GME) GameStop Corp. operates as a retailer of video game products and personal computer entertainment software. The company is also the largest reseller of used video games. GME currently operates 4,778 retail stores across North America and Europe. The great thing about this company is that no matter which game console or software titles eventually win out, GME will succeed by selling the most popular consoles and titles in its stores.

    We believe GME will continue to benefit from the current video game cycle, which is still in the early stages, and is being driven by next-generation video game consoles. These include Xbox 360, PlayStation 3 and Nintendo Wii. Furthermore, GME also stands to benefit a great deal from its merger with Electronics Boutique. This resulting size of the combined company is expected to provide GME with many competitive advantages and cost savings that should help drive solid sales growth and profit margin expansion for years to come. The company exceeded analysts’ earnings expectations in six out of the past eight quarters. Consensus estimates for both this year and next are up over the past 30 days. GME has a return on equity of 13%, compared to 9% for the industry.

    Electronic Arts, Inc. (ERTS) engages in the development, marketing, publishing and distribution of interactive software games worldwide. Its software games are playable by consumers on devices such as in-home video game players, personal computers, mobile platforms, including handheld video game players and cellular handsets, and over the Internet and other online networks. ERTS produces one of the most popular video games around—Madden NFL. The PlayStation 2 version sold 1.8 million copies, helping to make the game the top seller of 2006.

    On Feb 1, ERTS raised both its revenue and profit guidance for fiscal 2007. The company now expects revenues to be between $3.025 billion and $3.075 billion, versus its previous outlook of between $2.950 billion and $3.125 billion. Earnings per share are now forecasted to be between 15 cents and 20 cents per share, up from its previous expectation of breakeven to 15 cents. On Mar 1, ERTS announced that the best in videogame music from its best-selling games will be available for purchase from the iTunes Store via ea.com. Also, in late-March, the company announced the creation of a full-service music label, called The Artwerk label, in a joint venture with Nettwerk One Music Ltd. ERTS beat the Street’s earnings estimate in each of the past four quarters by an average margin of 95.2%.

    Activision, Inc. (NASDAQ:ATVI) is a leading international publisher of interactive entertainment software products. ATVI maintains a diverse portfolio of products that span a wide range of categories and target markets and can be used on a variety of game hardware platforms and operating systems. The company’s portfolio of games has been anchored by four key titles: Call of Duty 3, Marvel: Ultimate Alliance, Tony Hawk's Project 8 and Guitar Hero II.

    Following in the footsteps of Electronic Arts, on Feb 7, ATVI raised its fiscal 2007 net revenue guidance to $1.40 billion, from its earlier projection of $1.37 billion. The company also boosted its earnings per share outlook to 21 cents. For the fourth quarter, net revenues are now expected to come in at $200 million, compared to its prior outlook of $170 million. Profits for the quarter are expected to amount to a net loss of nine cents per share, versus its previous projection of a loss of 10 cents per share. The company is poised to benefit from a slate of big summer movies. During the first quarter of fiscal 2008, which ends in June, ATVI anticipates game releases linked to Spiderman 3, Shrek 3 and Transformers. These are three of the most highly-anticipated movies of the season. Moreover, during fiscal 2006, the company continued to enhance its internal product development capabilities with the acquisition of two game developers, Toys for Bob, Inc. and Beenox, Inc.

    THQ Inc. (THQI) is a leading global developer and publisher of interactive entertainment software, whose diverse product portfolio caters to every segment of the expanding gaming audience. The company develops its products for all popular console and handheld game systems as well as games for personal computers and wireless devices. As of Mar 31, 2006, THQI had 14 internal development studios located in the United States, Australia, the United Kingdom and Canada.

    THQI's portfolio of licensed franchises includes some of the biggest brands in entertainment. The company produces games based on its long-term, multi-property publishing agreements with DisneyPixar, Nickelodeon and World Wrestling Entertainment. In January, THQI added the long-term rights to publish games based on The Ultimate Fighting Championship. The company stated that it now owns six well-established franchises, each with one million plus unit sales that it plans to sequel and extend well into the future. While THQI recently missed analysts’ third-quarter earnings expectations, it topped expectations in the previous nine quarters. The company has also benefited from recent acquisitions. In July 2006, THQI completed the acquisition of Paradigm Entertainment. In February 2007, it acquired Mass Media, Inc.

    ERTS, ATVI, GME THQI 1-yr chart:

    Source: Profiting From the Love of Gaming