Sorry Mario, your profits are in another castle

mario
Sponsored By:

Game Over: Nintendo, EA and Old School Video Gamers Stumble

September marked the 10th consecutive month that retail sales of video games and related video game hardware has declined. This time around it was a wrenching 24% decline in video game sales to just $848 million from over $1.1 billion a year earlier.

What’s more, past reports show video game sales down from $1.2 billion in 2010…  which was a drop from 2009.

In short, Mario keeps busting those bricks but no coins are popping out.

Video game stocks have taken a beating as a result. Year-to-date Electronics Arts (NASDAQ:ERTS), the company behind the blockbuster Madden football games, is down over 36%. And icon Nintendo (PINK:NTDOY) is down 3% despite the launch of its first new video game console in almost six years.

Why the drop off? Well, for the same reason there’s trouble for many media stocks, from the New York Times Co. (NYSE:NYT) to Barnes & Noble (NYSE:BKS) to Yahoo! (NASDAQ:YHOO).

In a word, “mobile.”

Video games have moved away from televisions and computers too as consumers do more with their smartphones and tablets. This is not just disrupting the landscape of the gaming business, but also the profitability since big-ticket hardware like controllers and console boxes aren’t necessary anymore.

The result seems to be a secular decline in profits for the entire video game industry despite strong interest generally in the product, and a struggle to meet the changing landscape of mobile gaming.

It’s a brave new world, where anyone who can create a game that works on the Apple (NASDAQ:AAPL) iPhone or Amazon (NASDAQ:AMZN) Kindle Fire could potentially tap into a best-seller. That’s good for those who know how to write code … but bad for the big guys.

Consider that a tiny company called OMGPOP was able to generate a staggering 20 million downloads in just five weeks for its Draw Something game earlier this year — and that Zynga (NASDAQ:ZNGA) quickly dished out some $200 million for the upstart soon after. Or consider that Rovio, the maker of cult sensation Angry Birds, rejected a plush $2.25 billion offer from Zynga a few months earlier because it thought it was doing just fine on its own.

The irony, of course, is that video game sales are far from dead. Interest is huge not just from the typical youth segment but also from the generation that grew up with Atari, Coleco and Commodore 64 gaming systems 40-some years ago. Demographic research shows that in the U.S., 65% of folks play video games in some form and that the average gamer is 35 years old.

That’s to say nothing of the booming international market for video game sales, particularly in China.

And it’s worth noting that traditional video game makers have big brands and have certainly managed to create new hits in the last few years. About five years ago, Activision Blizzard (NASDAQ:ATVI) tripled from its 2006 lows to its 2008 highs thanks to its Guitar Hero games becoming a pop culture sensation. And Take-Two Interactive (NASDAQ:TTWO), the brains behind ultraviolent smash hit Grand Theft Auto, soared from a low of around $10 a share in 2006 to over $27 by mid-2008.

But media companies across the board, from television to books to music to video games, are learning that it doesn’t take much to knock the old leaders from their perch and replace them with hungry upstarts who have the next big thing.

Investors need to remember this. Because while video gaming is alive and well in 2012, the biggest names next year may be companies you’ve never even heard of today.

And by the way, even if the old guard buys those hip new kids on the block… well, there’s no guarantees that even that is enough. That aforementioned OMGPOP at Zynga has already resulted in a roughly $100 million writedown on the deal.

That’s how fast the video game sales picture changes. Even a megahit from just a few months ago is no guarantee of future success or profitability going forward.

Related Reading

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he owned a position in Apple but no other stocks named here.

Get The Slant delivered to your inbox every day!

Comments