Video games in a rut as E3 show kicks off

Aging console cycle, cloudy outlook makes stocks 'absurdly cheap.'

By MSN Money Partner Jun 4, 2012 11:29AM

By Dan Gallagher


MarketWatchAs the video game industry kicks off its annual E3 conference this week, investors have taken a particularly dim view of the sector, as the aging console cycle and slumping retail sales have hit the stocks hard.


It is unclear whether this year's show will do much to boost enthusiasm for the group, as it has in years past. Only Nintendo is expected to showcase new gaming hardware -- the Wii-U console that was previewed last year and is expected to launch this fall. No new Xbox or PlayStation hardware is expected at the event, and most of the big game releases expected to be on display will be sequels to long-established franchises such as "Call of Duty," "Halo" and "Madden NFL."


"What's happening is that everyone expects this year's E3 to be a dud, so why buy the stocks ahead of the show?" said Doug Creutz of Cowen & Co. in an interview.


He noted that investors are already looking ahead to the next console cycle. Both the Xbox and PlayStation platforms are aging, but new updates to those consoles are not expected to begin until late 2013 at the earliest.


"It's certainly not more than a year away," Creutz said of the next console cycle. "The question for investors then becomes: 'Do I need to own the group?' "


All of the major pure-play videogame stocks are in the red for the year to date, underperforming the S&P 500. Electronic Arts (EA) and Sony (SNE) are down 35% and 30% for the year, respectively. Nintendo (NTDOY), Take-Two Interactive (TTWO) and GameStop (GME) are also trading on strong doube-digit declines, while Activision Blizzard (ATVI) has seen a more modest drop of about 5% for the year to date.


Valuations are low as well, what Creutz describes as "absurdly cheap." The three major third-party game publishers -- EA, Activision and Take-Two -- are trading at 55% below their average forward price-to-earnings ratios for the last five years, according to data from FactSet Research.


Part of the reason for the negative sentiment -- on top of what has been a rough few month for the broader market -- is the fact that the current console cycle is getting long in the tooth. The Xbox 360 is in its seventh year, with the PlayStation 3 and Wii on the six year mark. That -- along with fresh competition from cheaper mobile and social games -- has hurt the retail sales results for the sector in the last year.


January through April saw strong double-digit declines in sales of game hardware and software in traditional retail outlets, according to data from the NPD Group. That figure does not track growing sales in digital-only channels, such as Xbox Live and the PlayStation Network.


This has led to game publishers vastly shrinking the number of titles they launch in a given year -- focusing instead on blockbuster franchises that sell not only game disks but also downloadable expansion content. And those are the types of games expected to feature big at this year's E3 show.


"Every single game you hear about is going to be a sequel to an old franchise," predicted Michael Pachter of Wedbush Securities.


The main draws of this year's show from the action-shooter category are expected to include "Halo 4" from Microsoft (MSFT), developed exclusively for the Xbox 360, while Activision will show off "Call of Duty: Black Ops 2," and EA will preview "Medal of Honor: Warfighter" — all slated for fall release. (Microsoft owns and publishes TechBiz, an MSN Money site.)


EA will also showcase the next installments of its popular sports franchises such as "Madden NFL" and "FIFA," as well as the next big sequel to its "Need For Speed" racing series.


But downloadable content will play a bigger role this year than in year's past. EA in particular will show off up-coming expansion content for its "Battlefield 3" and "Star Wars: The Old Repubic" games. Activision may share more developments of its online "Call of Duty" platform called "Elite."


According to Jesse Divnich, vice president and lead analyst for the market research firm Electronic Entertainment Design and Research, or EEDAR, the main goal for game-makers this year is to maintain interest among key consumers until the full launch of the next console cycle.


"The primary goal is to keep consumers excited until we see the new hardware," Divnich said. "It's true that the market is softening. Consumers are looking for different forms of entertainment. The industry has to keep them excited enough to maintain momentum."


Wild cards this year may be include "Grand Theft Auto V," the next installment of the wildly popular urban action franchise from Rockstar Games. Take-Two, the publisher of the series, has not put out any release date for the series, though analysts widely expect the game to hit before the end of the company's fiscal year — with most expecting a March release.


Activision may also give a preview of the game franchise being developed by Bungie, the original developer of the "Halo" franchise, which is building an as-yet-unnamed title for Activision. Documents released though a recently settled lawsuit between Activision and another developer suggest the first Bungie game is expected for late 2013. Analysts are mixed on whether the company will choose to preview the title this year.


Epic Games may also preview its next "Gears of War" installment for the Xbox 360. And LucasArts — the videogame studio owned by George Lucas — announced plans to showcase "Star Wars 1313," a "mature-themed action title, during the show. No expected release date for the game has been given.


The E3 conference will begin in Los Angeles on Monday morning, with a press conference by Microsoft for its Xbox platform in the morning, followed by events for EA, Ubisoft and Sony later in the day.


Nintendo will host its own press event on Tuesday morning, where it is expected to showcase its high-definition Wii-U console, due for launch later this year. Investors will be looking for more details on the specific launch date and price of the console, as the company's shares have fallen hard of late as sales of its Wii console and handheld devices have fallen sharply.


More from MarketWatch

Jun 4, 2012 4:13PM

The reason video games are down so much (other than the economic slump) is that there are no original games anymore; like the article said every major release is a sequal - essentially a rehash of the same game with new maps and maybe some minor upgrades to the previous installment. I guess I can see where they are coming from - its far easier and much, much more profitable to churn out a dozen sequals to a game in a few years instead of coming up with original ideas. Sequals themselves aren't bad, but the game should at least try to feign an attempt at telling a good story.


Game makers are getting lazy, they have shifted the focus of video games from playability, fun factor and depth to dumping everything into graphics while simultaniously shortening game play time to sell off more sequals and DLC, and don't get me started on how easy 99.99% of games are.


All in all the overall quality of video games as a whole has taken a nose dive ever since around the time when the Playstation 2 was released, the best console games of today pale in comparison to the heavyweights of the Super Nintendo/Sega Genesis era. Even computer games are severely diminished - the only games that have any sort of quality to them are the monthly pay to play MMO games - and even those lack anything resembling true quality. They replaced challenges and puzzles with timesinking, endless grinding and random chance.


Games of Chrono Trigger calibur are but a memory to game makers today.

Jun 4, 2012 3:39PM
I love when people who know nothing about games talk about them.  It's always awkwardly-written and hilarious.
Jun 4, 2012 3:48PM
Maybe these developers should try writing a few more PC games instead of all this console crap.  You can't even get Halo 3 and many games are poorly ported onto the PC with no quicksave and weak graphics.
Jun 4, 2012 3:31PM
Of course video games are in a rut.  Parents now have Facebook, a much more popular option as a babysitter for their children.
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