What Will Happen to Gaming in the Current Turmoil?

Includes: ATVI, EA, UBI
by: Bruce Everiss

Due to a mixture of government incompetence, financial market greed and consumer stupidity (in that order) we are now suffering a global financial correction. These happen periodically as part of a well established economic cycle but this time it is going to be worse because there was a big bubble in asset values. Current government action seems to be trying to use taxpayers money to prevent the inevitable, thus delaying the necessary correction. They would be far better off letting the weak fall by the wayside thus getting the whole thing over more quickly so we can sooner resume the virtuous side of the cycle.

The value of stocks and shares is supposed to reflect their ability to earn profit with an element for risk factored in. This is rubbish. In the real world stock and share value is determined by only one thing, and that is sentiment. It is sentiment that makes people buy and sell and so force the prices up and down.

And this we can clearly see in the current turmoil. The prices of stocks and shares are taking a beating. In some cases this may well be deserved. But in many cases the underlying value of the business and its ability to generate profits is unaffected by current turmoil, yet it is still taking a beating purely on sentiment.

Which brings us to the video game industry, most of which is publicly owned and so has its capital in stocks and shares that are traded in the world’s stock markets. This industry is massively profitable and is growing very strongly and consistently. It is in the middle of a transition from being entertainment for a niche to being the entertainment of choice for the mass market. It is inevitable that gaming will make this transition because it has the massive advantages of interactivity, connectivity and non linearity. Other entertainment media just cannot compete.

And what will happen to gaming during the current turmoil? It will boom. Just as Hollywood boomed during the great depression. People want and need their escape, their entertainment. And gaming is the best entertainment there is. So gaming stocks and shares should be unaffected and ride out the turmoil.

But something is going wrong. Due to sentiment game shares are taking a beating. Electronics Arts (ERTS) shares were already very cheap due to the cost of recent restructuring and investment, yet the company lost 9% (or $1.1 billion) in one day. Don’t these stock exchange people look at the sales charts? Electronic Arts is reaping the fruit of its labours and is making massive amounts of money just now, with a lineup through the holiday season that will see them banking a fortune.The silly price the company's stock is at now it makes it a very juicy potential victim for a big predator media company wanting a stake in the games industry. News International, for instance.

And it isn’t just Electronics Arts. Activision Blizzard (NASDAQ:ATVI) lost 13.8% ($3 billion) in value in one day and Ubisoft (UBI) lost 14.4%. This is just sheer stupidity, there is no way this has anything to do with the real values of these companies.

If anything, this turmoil should speed up the rate of industry consolidation as companies rush to seek safety in size. Electronic Arts may look like a potential target but it can make buy up some of the competition, making it too big for takeover. Take Two (NASDAQ:TTWO), for instance, could now be bought for far less than Electronic Arts’ previous bid. And it will be far more willing to accept it. We are headed for exciting times.

Disclosure: None