NEW YORK, NY – If there’s a cheat code for magically pumping up stock value, the video game industry may want to enter it now.The New York Times reports that since May 1st, four major publicly-traded game publishers have lost a collective $6 billion in market capitalization, a drop of approximately 25-percent in matter of weeks.
The decline in game software stocks outpaced the fall-off in the general market, with Nasdaq falling by 8.3-percent and the S&P 500 dropping 4.2-percent over the same interval.
Industry analysts blame a range of factors, from delayed releases of next-generation gaming consoles and the increasing popularity of online play to negative publicity and legislative measures targeting the game software industry in the wake of events like the Grand Theft Auto/”Hot Coffee” incident.
The current performance of stocks like Electronic Arts (ticker symbol: ERTS) and Activision Inc (ATVI) reflects uncertainty in the market’s future. Analysts wonder, with the price tag for Sony’s PS3 set at $499 – the highest ever charged for a gaming console – will consumers rush in or hold off?
Traditionally, the video gaming industry has seen lulls that correspond with the introduction of new consoles, as consumers are frequently slow to buy into the next generation, particularly if games for the new console are scant at the time of its release. Gaming software creators are looking for history to repeat itself.
“More people are playing games than ever before,” Bobby Kotick, head of Activision told The Times. “People who were in their teens in the ‘80s are now playing games with their kids. When I look at the next 10 years as compared to the past 10 years, I just see better prospects.”
What could distinguish this dip in the market from previous cold spells is the rising cost of developing a top-shelf title for modern gaming consoles, with production costs running from $10 million to $15 million per title for next-gen games.
Such a price tag cuts deep into the profit margins for the game-makers and mitigates one of the advantages the gaming software industry had during previous slowdowns – a relatively low cost product in a high-yield market.
For a title that costs $15 million to produce to turn a significant profit, it must sell several million copies, Kotick told The Times. The need to produce “blockbusters” may cause companies to focus on producing fewer games that sell better, according to Kotick, reducing the overall number of games available for new consoles.
The growing popularity of online play is one reason for optimism among the gaming companies and both the Xbox 360 and PlayStation 3 are built with online distribution in mind. If downloading games directly to the hard drives on the new consoles becomes a common practice, this could drastically reduce the media costs that attend disc-based games.
For practical reasons, however, Kotick says investors shouldn’t hold their breath expecting big numbers from game downloads.
“The idea of full downloadable games is so far in the future that it’s almost incomprehensible as an opportunity,” Kotick told The Times<./i> Instead, he suggested that supplemental downloads, such as new weapons or new missions to augment a disc-based game, could present a more realistic revenue stream.
