The annual video gaming extravaganza Electronic Entertainment
Expo (E3) is set to kick off at the Los Angeles Convention Center
(LACC) on June 5, 2012. Over the next 2 days (the event concludes
on June 7) the world's biggest gaming trade fair promises to be an
extraordinary affair for game developers, critics and players.
The year's most anticipated gaming event is expected to showcase
a number of new games from the likes of
Electronic Arts (
Activision Blizzard (
), Microsoft (
. However, hardware makers and their new offerings are expected to
remain in primary focus, considering the ongoing softness in
With the increasing usage of smartphones and tablets for playing
games, the three console makers Nintendo, Sony and Microsoft are
not only having a hard time luring new gamers but their existing
customer base is also shrinking. This has resulted in a sharp drop
in unit sales and revenue. According to market research firm The
NPD Group, hardware revenues declined 11.0% year over year to $5.6
billion in calendar year 2011.
Hardware continued its slump in the first four months of
calendar year 2012, with revenues declining 38.0%, 18.0%, 35.0% and
32.0% in January, February, March and April, respectively. We
believe that the aging consoles of Microsoft (Xbox launched in
year running) and Sony (PlayStation launched in 2006, 6
year running) are failing to attract gamers, which resulted in this
Although all the three console makers continue to suffer loses,
Nintendo has faced much of the brunt lately, primarily due to the
weaker-than-expected performance of its 3DS handheld device, which
was launched in 2011. The Japanese company is expected to launch
its latest version of Wii (Wii U in November) during the show.
According to market research firm EEDAR, Nintendo will also focus
on launching new versions of its popular titles such as Super Mario
on the new console to attract gamers.
As new updates of both Xbox and PlayStation are expected in late
2013, we believe that the new console will provide Nintendo a
competitive edge over Microsoft and Sony going forward. However, we
believe that consoles will continue to face significant competition
from handheld devices (PlayStation Portable, Vita, 3DS), mobiles
(both smartphones and feature phones) and tablets going
On the software side, a lot of prequels and sequels from popular
franchises such as Battlefield (EA), Medal of Honor (EA), Crysis
(EA), Call of Duty (Activision), Halo (Microsoft), God of War
(Sony) are expected during the show. However, lack of new
games/franchises can be a dampener in our view.
We believe that this year's E3 will see a significant deviation
in the industry's business model, as free-to-play micro-transaction
based social games are expected to hog the limelight. Recently, EA
announced its intentions to launch free versions of some of its
popular franchises such as FIFA and Battlefield, to attract more
gamers. The company expects to earn significant revenue from
additional features and through micro-transactions by selling
in-game based items.
According to market research firm Gartner, consumer spending on
global online gaming (subscriptions and micro-transactions) will
grow at a compound annual growth rate of 27% through 2015. EA's
arch rival Activision has also been expanding its social presence
for some time. According to a recent news feed from Bloomberg,
Activision is building a new social site called Skylanders Spyro's
Universe where players can chat, play games alongside friends and
customize their lands.
We don't expect any major update from either the software or the
hardware side in this year's expo that could significantly affect
the video game industry's growth trajectory in the near term.
However, we believe that the ongoing transition from the physical
to the digital platform will ultimately benefit the video game
industry over the long term. This is particularly due to the low
cost of development and the absence of packaging costs, which will
help publishers keep a popular franchise running profitably over a
longer period of time.
According to Gartner, video game-related spending is expected to
reach $112.0 billion by 2015, with 50.4% of spending on software
($56.5 billion). Over the next five years, the share of gaming
hardware as a percentage of total spending on gaming will remain
constant, with spending on the fast-growing online gaming segment
outpacing software spending.
With rising consumer spending on digital gaming (social, mobile,
casual), we remain optimistic on the video game industry's growth
trends over the long term. We believe that publishing companies
with a focus on the digital segment will stand out even amid
sluggish market conditions. We believe that companies like EA,
Zynga Inc. (
and Activision are well positioned to benefit from this trend going
However, the highly fragmented video game market continues to
witness increased competitive pressures, which are hurting its
overall profitability. This compels us to remain Neutral on these
stocks over the long term.
Currently, Microsoft, Sony, EA, Activision and Zynga have a
Zacks #3 Rank, which implies a Hold rating in the near term.
ACTIVISION BLZD (ATVI): Free Stock Analysis
ELECTR ARTS INC (EA): Free Stock Analysis
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