Shares of video game companies swing on reviews

NEW YORK Fri Sep 16, 2011 2:50pm EDT

Eighteen gamers demonstrate Electronic Arts' soon to be released Medal of Honor's online multiplayer feature during their press briefing ahead of the Electronic Entertainment Expo (E3) at the Orpheum Theater in Los Angeles, California June 14, 2010. REUTERS/Gus Ruelas

Eighteen gamers demonstrate Electronic Arts' soon to be released Medal of Honor's online multiplayer feature during their press briefing ahead of the Electronic Entertainment Expo (E3) at the Orpheum Theater in Los Angeles, California June 14, 2010.

Credit: Reuters/Gus Ruelas

NEW YORK (Reuters) - Want to know why video game stocks pop or drop? Check the reviews.

For years, investors have turned to video game reviews to help make buy or sell decisions, moving the share prices of some video game companies higher or lower.

They consult the website Metacritic, which tracks a large amount of reviews and comes up with an average score, as well as reviews from top video game outlets such as News Corp's IGN.com and GameStop Corp's Game Informer.

And with the holiday shopping season approaching, when companies in the $64 billion video game industry generate the bulk of their sales and earnings, investors will be scouring reviews more closely than usual.

"The review scores are a first indicator of how a game will perform commercially," said Jesse Divnich, a consultant and analyst for EEDAR, a research firm focused on the video game industry. "Investors will keep a close eye on them to measure potential success of a game."

Shares of Electronic Arts fell 6 percent last October after review scores for "Medal of Honor," a military game in which EA had invested millions of dollars, came in below rival shooter games such as Microsoft's "Halo" and Activision Blizzard's, "Call of Duty."

In March, "Homefront," a first-person shooter game from THQ Inc received weaker-than-expected reviews and scored 75 out of a possible 100 on the website Metacritic. Analysts called the scores disastrous, sending THQ shares down 20 percent that day.

Just as negative reviews can harm video game stocks, positive reviews can boost them. Shares of Take-Two Interactive surged 10 percent over three sessions and reached a 52-week high in May after its crime solving game, "L.A. Noire," received glowing reviews and achieved a high score on Metacritic.

One of the reasons why video game reviews carry so much weight with investors is because avid gamers tend to rely on them to help make purchasing decisions.

Case in point: Eric Choi, a 23-year-old Chicago resident who buys between 10 and 15 games a year. After having fond memories of playing the action shooter title "Duke Nukem" growing up, he was happy to spend $60 on the latest edition of the game, which Take-Two released in June. That was until the reviews changed his mind.

"When the reviews came in about how it was apparently a terrible game, it influenced my opinion and my decision not to buy," Choi said.

Investors also took note. Take-Two shares fell as much as 5 percent on June 14 after the game scored in the low 50s out of 100 on Metacritic.

Reviews have become so influential on sales, Divnich said, that his firm has been hired by major video game companies to write mock ones so that they can anticipate what real reviews might say.

Divnich, who said he consults for about 90 percent of video game companies, brought in a former video game critic from a top website to both play the game and write the review, which is designed to look like a review coming from a large video game publication. The reviews are then sent to video game makers and never appear in print.

"We'll type up a review as if it would be in a magazine," he said. "It's critical for them to know how well their game is going to be received before they launch a title."

While Frank Gibeau, president of EA Labels, agrees that game critics and reviews play an important role in consumers' buying decisions, he also said that they are not always indicative of a game's success.

"There is a correlation between the critical index and sales of any given game, but there are exceptions to the rule - games that don't score high marks in reviews but sell well and others that critics love but gamers ignore," Gibeau said.

For example, THQ has said "Homefront," which received poor reviews, may end up selling 3 million copies, which would make it a commercial success.

THQ and Take-Two declined to comment on this story.

A poor review of a highly anticipated game may not be enough to convince an investor to sell off shares of a company entirely either, said Ted Pollak, portfolio manager of the San Francisco-based Electronic Entertainment Fund, which focuses on video game investments.

Besides reviews, Pollak does other research to figure out if a game might sell well, including beta testing or monitoring early versions of games. He also considers the development teams behind the game and even looks at what type of technology was used in its creation.

"If I was in a situation where I needed to trim a position, reviews could have an influence. But I wouldn't completely dump a company because one game didn't score well," he said.

HOLIDAY SPOTLIGHT ON REVIEWS

When publishers release their biggest games of the year -- the games that are expected to have a major impact on a company's bottom line -- the importance of reviews is heightened.

"If 'Call of Duty,' which is half of Activision's earnings, gets a poor review this year, it will be bad," said Wedbush Securities analyst Michael Pachter, referring to the possible impact on Activision's stock.

Activision will release the latest version of the game, its biggest video game franchise on consoles, in November. Last year, the game set a new record by selling 5.6 million copies, or $360 million worth, on its first day.

Pachter says he considers review scores on websites Metacritic and Gamerankings.com, which are both owned by CBS Corp, for his investment recommendations.

EA is mounting a challenge to Activision with its own first-person shooter game, "Battlefield 3," which comes out in October.

Divnich, from EEDAR, expects Activision's game to sell twice as many copies as EA's game. But, he added, "if EA can gain higher review scores, it shifts the momentum in EA's favor."

(Reporting by Liana B. Baker; Editing by Peter Lauria, Dave Zimmerman)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
FoxxDrake wrote:
Well as an avid gamer who follows these stories please let me share the following: this is setting up to be a titanic battle with interesting repercussions for the industry and game-ers at large.

Activision’s Call of Duty Modern Warfare 3 is, perhaps, trying to gouge consumers. It’s attempting to do this by offering a “subscription” service in addition to the game.

For the most part when the consumer purchases a game (usually for $60) the costs are over and play is unlimited. Enter Download-able Content (DLC) – which is the industry’s way of extracting more profit out of a successful title by offering more game content (more missions, extra features, you know – stuff to do with or in the game) at added cost later on.

The consumer is free to buy this bonus content or not. It’s optional, some get it, some don’t.

Activision is attempting to add a service on top of the $60 game cost for $49.99 a year that is sort of a pre-buy of the DLC. It works like this, buy the game for $60 then subscribe to the service for another $49.99 and when the DLC arrives you get it for free.

Now I like money and I like Call of Duty (it’s perhaps the best first person shooter – military squad combat simulator) on the market today.

However, there are some issues with this approach. Where as an MMORPG (massive multi-player online role playing game) such as WoW (World of Warcraft) has material (such as stories) that lend themselves to a subscription based service – think a novella or magazine subscription – with Call of Duty – which is pretty much shooting people online, probably doesn’t.

Moreover, there’s a Great Recession on (Great Depression 2.0). Couple that with there are a plethora of great and established titles hitting the market at the same time – there’s going to be increased competition for a shrinking dollar.

Here’s just some of the competition:
Skyrim
Battlefield 3
Rage
Gears of War 3
Mass Effect 3
Starwars: The Old Republic (which is a MMORPG – and this designed for generating recurring costs)
Bioshock Infinate
Assassins Creed Revolutions
Batman: Arkham City
Dark Souls
and many more smaller title…

With Gears of War 3 leading the order of battle first by coming out on September 20, 2011 and the rest coming out in October-November-December 2011 holiday season.

The question is what will consumers with limited (or smaller budgets) choose?

Which leads to Battlefield 3 – the Pepsi to Activision’s CoD Coke, arguably it’s getting GREAT reviews which have many gamer-s considering a switch.

As a huge CoD fan who recently bought and played Battlefield 2, I can say while CoD is better – it’s only by a hair. If Battlefield 3 has improved as much as the reviews have suggested, it’s going to be hard to ignore as it’s fundamentally the same game as CoD.

If I had to place bets this holiday season, it would be on the following…

1) Skyrim
2) Battlefield 3
3) Mass Effect 3

I still think Gears 3 and Modern Warfare 3 will be huge sellers, just not what they might be otherwise – absent a better economy and less competition.

Finally, I’ll end with the fact that there’s also a “stale factor.” A lot of these game are sequels – which while having a built in audience – also risks going to the well once to often.

Outside bet on Rage as a potential “Cinderella” and Assassins Creed falling flat.

Sep 17, 2011 5:02pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.