Game industry in flux, investors watch and wait

SAN FRANCISCO Fri Dec 3, 2010 11:34am EST

Bobby Kotick, Chief Executive Officer of Activision Blizzard, speaks at the Reuters Global Media Summit in New York November 30, 2010. REUTERS/Brendan McDermid

Bobby Kotick, Chief Executive Officer of Activision Blizzard, speaks at the Reuters Global Media Summit in New York November 30, 2010.

Credit: Reuters/Brendan McDermid

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SAN FRANCISCO (Reuters) - Video game publishers say they have positioned themselves to capitalize on the future of digital entertainment. Investors will need more convincing.

The heads of the major U.S. game makers, speaking this week at the Reuters Global Media Summit, explained why the battering from investors was unwarranted.

Some argued that investors are not grasping the opportunity at hand as the industry shifts toward digital, which boosts margins. New technologies such as gesture, or the ability to play games with a wave of the hand, and 3D could help broaden the traditional market of consumers.

Still, investors have remained skeptical so far over the industry's ability to profit from emerging gaming trends. Shares of U.S. video game publishers have vastly underperformed broader market indexes since the start of the financial crisis in September 2008.

The $60 billion global video game industry has historically been buffeted by volatile trading, driven by blockbuster franchises like Activision Blizzard's "Call of Duty" and Take-Two Interactive's "Grand Theft Auto." But new opportunities have helped publishers manage the unpredictable nature of the hits-driven business.

Activision CEO Bobby Kotick argued that investors don't quite understand the model that drives his company, with recurring revenue and the bulk of profits coming from online games rather than packaged titles.

"I think that will take a little bit of time before investors really appreciate the differences between a company like ours and some of the other companies that historically they have compared us with," Kotick said.

But he was cool to the young but fast-growing markets in mobile and social games, which are free to play.

That stood in sharp contrast to Electronic Arts, which is investing heavily in those areas.

EA CEO John Riccitiello said digital games, which includes online, mobile and downloads, will provide most of the industry's growth in the coming year and make up a staggering 50 percent sales.

Anyone who fails to recognize that shift will be left behind, he argued. "You are either on the right side of a technology transformation or the wrong side," Riccitiello said.

Although Take-Two Chairman Strauss Zelnick was generally optimistic about the future of the game industry, he said the sector's once frothy multiples had finally come back to earth.

"It's pointless to argue with the market ... if you deliver good results on a consistent basis then you'll be rewarded," he said.

CHANGE AFOOT

Even as the game market shifts, the current generation of home consoles made by Microsoft Corp, Sony Corp, and Nintendo Co Ltd are starting to show their age.

According to industry tracker NPD, retail sales of traditional video game hardware and software are down 8 percent this year in the United States, the largest market. But that does not account for digital or mobile sales.

Those new markets are seeing a surge in users and hours spent playing games. But making money off them presents a new set of challenges.

Mobile gaming has soared in popularity since the launch of Apple's App Store in mid-2008. But the app marketplace has grown cluttered with thousands of offerings for smartphones, and it is difficult to generate significant revenue from titles that are often priced from 99 cents to $10.

At the same time, hundreds of millions of people are playing free games on social networks like Facebook. Although hot startup Zynga is growing fast in social games, it is unclear how big the market can ultimately be.

Publishers are betting that gesture and 3D technology will broaden the appeal of games, and provide a new opportunity for the traditional publishers.

Microsoft's Kinect gesture-based gaming accessory has been well-received, selling more than 2.5 million units in less than four weeks on the market. Sony's motion-sensing platform has shipped 4.1 million units since its launch in September.

Activision's Kotick said physical interfaces are already expanding the market. And he said 3D technology is especially powerful in video games.

"3D was invented for gaming not for movies ... there is no better media for 3D than video games," he said.

(Reporting by Gabriel Madway; Editing by Derek Caney)

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