Saturday, January 13, 2007
2007 To Be A Pivotal Year for Electronic Arts - Watch These Titles
It's not always easy being the 800-pound gorilla in an industry, especially if you're Electronic Arts (ERTS) .
The video-game titan is arguably in the toughest strategic position among all of the publicly traded video-game software companies. The console cycle is at a volatile point, favoring smaller publishers that can benefit tremendously from just a few popular titles. Companies can no longer sit back and rely on general industry growth.
As more consumers snatch up next-generation consoles over the next couple of years, the going will get even tougher. Big-name hits are now driving the business, and game-production costs are skyrocketing. Electronic Arts can't afford too many misses.
If December is any indication, the company might be in for a challenge. The industry giant came up short Thursday night, when market-research firm NPD Group released December video-game sales data. According to the report, Electronic Arts' U.S. retail sales suffered an 11% year-over-year drop, with the Need for Speed: Carbon title standing out as a notably weak performer.
A Fresh Crop of Titles
One major concern I've had about Electronic Arts is that some of its franchises may be getting a bit stale. This year, investors need to play close attention to how the next editions of its franchises shape up. As I noted in a previous column, some common-sense, real-world research, such as monitoring sales charts and game reviews, can give you an edge on Wall Street.
So let's take a look at some key Electronic Arts titles to watch. For the record, I am not mentioning the company's sports titles, such as Madden, because they're like little versions of Microsoft (MSFT) Office: They change a little bit here and there but can generally be counted on for reliable sales, with some occasional minor market-share shifts.
First up is Battlefield: Bad Company, due for the Xbox 360 and PlayStation 3 next year. The Battlefield series has been a big winner for Electronic Arts on the PC and, to a lesser extent, on the last-generation PlayStation 2 and Xbox consoles. However, the first-person military shooter genre is quite crowded, and competitors are beginning to emulate the Battlefield formula. It will be interesting to see whether Electronic Arts can successfully extend the life of this franchise.
Second is Medal of Honor: Airborne, the latest update to the World War II-themed shooter series. This game is getting a significant makeover in terms of game-play features, likely as a result of Activision (ATVI) dominating the WW2 genre with the juggernaut Call of Duty series. That said, Activision is taking the Call of Duty series out of WWII, which could be either very good or very bad for Electronic Arts. On one hand, it reduces competition in WWII-themed games, but it could also be a sign that the theme is overdone.
The next important title is the eagerly awaited sci-fi shooter (the word "shooter" is popping up quite a bit here, no?) Crysis, due in the first quarter of 2007 on the PC. The game is being developed by independent German game-software firm Crytek, known for the monster hit Far Cry series, which was considered revolutionary by many gamers and industry pundits.
Another much-buzzed-about PC title is Spore, a strategy game in which players guide a species from origin to civilization.
Another much-buzzed-about PC title is Spore, a strategy game in which players guide a species from origin to civilization.
We'll also see Army of Two for Xbox 360 and PS3, a military action game that may have been inspired by the megahit Gears of War, and Skate, an Xbox 360/PS3 skateboarding game targeted to compete with Activision's Tony Hawk series, which has generated more than $1 billion in sales for Activision since inception.
The Bottom Line
These are just a few of the many titles Electronic Arts will release in 2007, but they will have a big effect on the company's top and bottom lines this year. So keep your eyes on the sales charts at the sites such as Amazon.com (AMZN) and Best Buy (BBY) , and read reviews, because they do have an impact.
In a hit-driven industry, the giant has to have a lot of hits to succeed. Those who own or are interested in Electronic Arts need to monitor whether these games become hits or misses, because they'll ultimately determine the direction of the company's stock price.
Thursday, January 11, 2007
The Cosi Greek Salad
I love the Greek salads at Cosi, even though they aren't real Greek salads (Italian dressing?). However, there is one major problem with them. Every time I get one, the Feta cheese is distributed in the salad as a few giant chunks, which must be broken up with the crappy plastic fork and knife. So if you're reading this Cosi, please get someone on this issue.
Wall Street Slightly Less Deaf to Guitar Hero's Roar
Activision (ATVI) is bouncing up today on a bullish note out of Credit Suisse. Analyst Heath Terry is saying that "We believe Guitar Hero has the potential to become one of strongest franchises in the industry."
Potential? Huh? GH has been a blockbuster franchise for quite some time. You know you have a juggernaut when a sequel is released, and sales of the original just keep on chugging along! In hindsight, the company's acquisition of Guitar Hero developer RedOctane for $100 million in June looks like an absolute steal.
I have been telling Breakout Stocks subscribers for months about the monstrous potential of this franchise, which is going to blow up even bigger next year.
GH2 is heading to the Xbox 360 in the Spring, which is big because of the potential for big sales of high-margin downloadable add-ons like song packs. Xbox 360 fans are extremely hungry for hot new titles and there aren't many titles hotter than GH. And then we have GH3 next Christmas on numerous platforms. And since there are no games similar to it, there is basically zero competition!
My current stance on the stock is Neutral for several reasons including the company's options issues, but pay attention to GH. It's not quite a franchise on the level of Halo or Unreal Tournament, but it could get pretty damn close. At the very least, I see the franchise power as somewhere in between Call of Duty and Grand Theft Auto.
I outlined some of my research methods here.
Sunday, January 7, 2007
Playing the Video-Game Group
Originally published on TheStreet.com on December 12:
While some market participants keep close watch on the Fed minutes and assorted economic reports, I find another set of information infinitely more interesting. That's video-game sales data, which were recently reported by market researchers NPD Group.
The Latest Snapshot
For November, software sales rose 15%, while hardware sales rose 36%, both essentially in line with expectations. Software sales were driven by Microsoft (MSFT) Xbox 360 titles like "Gears of War" and "Call of Duty 3," as well as Sony PlayStation 2 titles like "Final Fantasy XII" and "Guitar Hero 2."
Hardware sales were again dominated by Nintendo (NTDOY) , which sold a combined 1.56 million units of its DS and Game Boy handhelds, again taking lunch money from the more technologically advanced Sony PSP, which sold 412,000 units.
Over in the land of next-generation hardware, the Xbox 360 sold 511,000 units, a nice month-over-month gain catalyzed by the aforementioned "Gears of War." However, it was actually outsold by the Sony PlayStation 2, which moved 551,000 units. Both the Sony PlayStation 3 and Nintendo Wii were in short supply, and software sales for both consoles were fairly weak, with the exception of the new "Legend of Zelda: Twilight Princess" Wii game, which likely crowded out a lot of other Wii titles. In addition, the fact that many Wii buyers were purchasing the console just to flip it likely hit software sales.
But as a whole, the industry seems to be producing fewer games. That's because development budgets are rapidly rising, thanks to the sophisticated nature of the Xbox 360 and PlayStation 3. This is creating a big obstacle for larger software publishers, namely Electronic Arts (ERTS) ; with such a huge library of games, the chances of a small number of titles creating a huge financial impact aren't very good.
On the flipside, look at a smaller company like Activision (ATVI) , which had excellent November numbers on the backs of "Guitar Hero 2," "Call of Duty 3" and "Marvel: Ultimate Alliance." (This stock is a holding in the Breakout Stocks newsletter, so I should note that I switched to a neutral stance on it Friday morning for various reasons, including some concerns over its 2007 lineup, particularly the fate of the upcoming "Transformers" game.)
Finding the Hot Spots
So how do you get an edge on what's hot and what's not in the video-game group? Here's a quick roundup of some of the methods I use to determine sales trends.
First, I monitor retail Web sites, particularly Amazon.com (AMZN) and GameStop (GME) (the latter of which is another stock in my newsletter on which I switched to a neutral stance Friday). These sites provide easy access to see which games are selling best on each system, and you also can tell which games are being preordered, an excellent gauge of pent-up demand. However, these sites report rankings and not volumes, so you'll need to assess the information accordingly.
I find it bizarre that analysts only recently seemed to become bullish on "Guitar Hero 2," which was rocketing up the sales charts well ahead of its release. Plus, the original "Guitar Hero" was still selling extremely well and was being played by gamers in just about every Best Buy (BBY) store I visited in recent months. It was pretty obvious to see Activision had a blockbuster with this series.
It also makes a lot of sense to speak to sales associates in actual stores, particularly in GameStop, where the employees are cognizant of industry trends and what's selling and what's not in real-time.
Another key research method is to closely monitor reviews of key games. Virtually all top-selling games, outside of some sports titles, are well reviewed. Sites I read include the CNET (CNET) -owned GameSpot.com (not to be confused with GameStop.com) and IGN.com. In addition, for readers who like to see videos of new games, I recommend having a look at GameTrailers.com, which also posts reviews, though you better have a fast Internet connection.
Electronic Arts recently said its "Superman Returns" game was performing well below expectations. This would have been painfully obvious to anyone monitoring the sales charts. I have been looking at these charts every day for months and never saw this game appear once. In addition, GameSpot.com rated the game a 4.5 out of 10, so obviously the critics weren't helping.
So in all, if you want to play the video-game cycle, have a look at the smaller players who can benefit greatly from just a few hit titles. As I've explained, some common-sense, real-world research can help you get an edge on Wall Street.
While some market participants keep close watch on the Fed minutes and assorted economic reports, I find another set of information infinitely more interesting. That's video-game sales data, which were recently reported by market researchers NPD Group.
The Latest Snapshot
For November, software sales rose 15%, while hardware sales rose 36%, both essentially in line with expectations. Software sales were driven by Microsoft (MSFT) Xbox 360 titles like "Gears of War" and "Call of Duty 3," as well as Sony PlayStation 2 titles like "Final Fantasy XII" and "Guitar Hero 2."
Hardware sales were again dominated by Nintendo (NTDOY) , which sold a combined 1.56 million units of its DS and Game Boy handhelds, again taking lunch money from the more technologically advanced Sony PSP, which sold 412,000 units.
Over in the land of next-generation hardware, the Xbox 360 sold 511,000 units, a nice month-over-month gain catalyzed by the aforementioned "Gears of War." However, it was actually outsold by the Sony PlayStation 2, which moved 551,000 units. Both the Sony PlayStation 3 and Nintendo Wii were in short supply, and software sales for both consoles were fairly weak, with the exception of the new "Legend of Zelda: Twilight Princess" Wii game, which likely crowded out a lot of other Wii titles. In addition, the fact that many Wii buyers were purchasing the console just to flip it likely hit software sales.
But as a whole, the industry seems to be producing fewer games. That's because development budgets are rapidly rising, thanks to the sophisticated nature of the Xbox 360 and PlayStation 3. This is creating a big obstacle for larger software publishers, namely Electronic Arts (ERTS) ; with such a huge library of games, the chances of a small number of titles creating a huge financial impact aren't very good.
On the flipside, look at a smaller company like Activision (ATVI) , which had excellent November numbers on the backs of "Guitar Hero 2," "Call of Duty 3" and "Marvel: Ultimate Alliance." (This stock is a holding in the Breakout Stocks newsletter, so I should note that I switched to a neutral stance on it Friday morning for various reasons, including some concerns over its 2007 lineup, particularly the fate of the upcoming "Transformers" game.)
Finding the Hot Spots
So how do you get an edge on what's hot and what's not in the video-game group? Here's a quick roundup of some of the methods I use to determine sales trends.
First, I monitor retail Web sites, particularly Amazon.com (AMZN) and GameStop (GME) (the latter of which is another stock in my newsletter on which I switched to a neutral stance Friday). These sites provide easy access to see which games are selling best on each system, and you also can tell which games are being preordered, an excellent gauge of pent-up demand. However, these sites report rankings and not volumes, so you'll need to assess the information accordingly.
I find it bizarre that analysts only recently seemed to become bullish on "Guitar Hero 2," which was rocketing up the sales charts well ahead of its release. Plus, the original "Guitar Hero" was still selling extremely well and was being played by gamers in just about every Best Buy (BBY) store I visited in recent months. It was pretty obvious to see Activision had a blockbuster with this series.
It also makes a lot of sense to speak to sales associates in actual stores, particularly in GameStop, where the employees are cognizant of industry trends and what's selling and what's not in real-time.
Another key research method is to closely monitor reviews of key games. Virtually all top-selling games, outside of some sports titles, are well reviewed. Sites I read include the CNET (CNET) -owned GameSpot.com (not to be confused with GameStop.com) and IGN.com. In addition, for readers who like to see videos of new games, I recommend having a look at GameTrailers.com, which also posts reviews, though you better have a fast Internet connection.
Electronic Arts recently said its "Superman Returns" game was performing well below expectations. This would have been painfully obvious to anyone monitoring the sales charts. I have been looking at these charts every day for months and never saw this game appear once. In addition, GameSpot.com rated the game a 4.5 out of 10, so obviously the critics weren't helping.
So in all, if you want to play the video-game cycle, have a look at the smaller players who can benefit greatly from just a few hit titles. As I've explained, some common-sense, real-world research can help you get an edge on Wall Street.
Thursday, January 4, 2007
Bloodsport - BEST MONTAGE OF THE 20TH CENTURY
While my favorite martial arts film star is easily Tony Jaa, Jean-Claude Van Damme will always have a place in my heart for his work in the Channel-9 classic Bloodsport. So I thought I'd post a clip from the movie which includes an awesome fight montage, and some killer songs, including the Stan Bush classic "Fight to Survive." Ok it's not really a classic, and I don't know who Stan Bus is but its really funny when the singer yells "I FIGHT TO SURVIIIIIIIIIIIIIIIIIIIIIIIIIIIIVE."
Wednesday, January 3, 2007
Video Game Stuff - Grand Theft Auto IV, Lost Planet, Tekken
Some interesting things going on:
Numerous media outlets are reporting that Florida attorney Jack Thompson sent a letter to Bill Gates indicating he plans to "undertake various means" to prevent minors from purchasing the upcoming Grand Theft Auto IV. Now whether or not you think violent games should me sold to kids, Thompson will give the game great marketing this year. In the past, laws crafted by Thompson have been branded unconstitutional.
Looking back in time, the P.M.R.C.'s 1980's attack on so-called objectionable lyrics inluded a list of songs called the Filthy Fifteen, which no doubt contributed to the huge success of albums like Prince's Purple Rain and AC/DC's Back in Black. In a recent VH1 documentary, Motley Crue's Nikki Sixx said he was thrilled about the Parental Advisory labels pushed by the P.M.R.C. because they were likely to boost sales.
Elsewhere, a couple weeks ago, Capcom announced that Xbox live downloads of demos for the upcoming "Lost Planet" title surpassed 1 million, indicating that Xbox 360 gamers are still extremely hungry for new content.
Also, there is a rumor going around that a next-generation version of the classic PlayStation series Tekken will appear on the Xbox 360, marking the latest in large number of defections of Sony exclusives.
And finally, a whole bunch of people on Joystiq debated my recent article on Sony.
Numerous media outlets are reporting that Florida attorney Jack Thompson sent a letter to Bill Gates indicating he plans to "undertake various means" to prevent minors from purchasing the upcoming Grand Theft Auto IV. Now whether or not you think violent games should me sold to kids, Thompson will give the game great marketing this year. In the past, laws crafted by Thompson have been branded unconstitutional.
Looking back in time, the P.M.R.C.'s 1980's attack on so-called objectionable lyrics inluded a list of songs called the Filthy Fifteen, which no doubt contributed to the huge success of albums like Prince's Purple Rain and AC/DC's Back in Black. In a recent VH1 documentary, Motley Crue's Nikki Sixx said he was thrilled about the Parental Advisory labels pushed by the P.M.R.C. because they were likely to boost sales.
Elsewhere, a couple weeks ago, Capcom announced that Xbox live downloads of demos for the upcoming "Lost Planet" title surpassed 1 million, indicating that Xbox 360 gamers are still extremely hungry for new content.
Also, there is a rumor going around that a next-generation version of the classic PlayStation series Tekken will appear on the Xbox 360, marking the latest in large number of defections of Sony exclusives.
And finally, a whole bunch of people on Joystiq debated my recent article on Sony.
Monday, January 1, 2007
Interactive Brokers IPO Could Be a Grand Slam
Leading online broker and market maker Interactive Brokers recently filed an S-1 with the Securities and Exchange Commission, and investors should keep this name on their radar screens.
While unknown to most of the public, Interactive Brokers is among the 20 largest securities firms in the country, and it is very popular with highly active traders due to its cheap commission rates and robust trading platform.
To my delight and to many bankers' disgust, Interactive Brokers, which proposes to trade on the Nasdaq under the symbol IBKR, will be going public via the Dutch auction method, with W.R. Hambrecht running the deal. In addition, the company will retain a very complex ownership structure designed to leave voting control in the hands of Chairman and CEO Thomas Peterffy.
In the first nine months of this year, Interactive Brokers reported net revenue of $969 million, up 43% year over year, with pretax income up 47% to $600 million. This growth is simply enormous relative to traditional online brokers like E*Trade (ET) and TD Ameritrade (AMTD), and I plan on doing a lot of homework on this deal.
Between the Dutch auction and the company's complexity, Interactive Brokers could end up being an incredibly cheap stock. Sell-side firms will want to see a large deal like this fail because they won't be collecting big, fat banking fees on it. Given Peterffy's control over the company, the media will probably trash this deal as being shareholder-unfriendly.
Google's (GOOG) auction was frowned upon by many. And we've seen many companies with convoluted ownership structures, like Lazard (LAZ), get heavily criticized by the media. In spite of that, they ended up turning into stock market home runs
While unknown to most of the public, Interactive Brokers is among the 20 largest securities firms in the country, and it is very popular with highly active traders due to its cheap commission rates and robust trading platform.
To my delight and to many bankers' disgust, Interactive Brokers, which proposes to trade on the Nasdaq under the symbol IBKR, will be going public via the Dutch auction method, with W.R. Hambrecht running the deal. In addition, the company will retain a very complex ownership structure designed to leave voting control in the hands of Chairman and CEO Thomas Peterffy.
In the first nine months of this year, Interactive Brokers reported net revenue of $969 million, up 43% year over year, with pretax income up 47% to $600 million. This growth is simply enormous relative to traditional online brokers like E*Trade (ET) and TD Ameritrade (AMTD), and I plan on doing a lot of homework on this deal.
Between the Dutch auction and the company's complexity, Interactive Brokers could end up being an incredibly cheap stock. Sell-side firms will want to see a large deal like this fail because they won't be collecting big, fat banking fees on it. Given Peterffy's control over the company, the media will probably trash this deal as being shareholder-unfriendly.
Google's (GOOG) auction was frowned upon by many. And we've seen many companies with convoluted ownership structures, like Lazard (LAZ), get heavily criticized by the media. In spite of that, they ended up turning into stock market home runs
Chin-up Challenge
I was never a great athlete, nor particularly strong. This was especially true in 7th grade.
As part of a set of physical fitness tests in gym class, we were required to do chin-ups. Unfortunately, I was one of the weaklings, not able to do a single one. I felt so embarrassed that I bought a chin-up bar to practice at home, because I was NOT going to repeat this performance in 8th grade.
I started practicing chin-ups every day. At first, I was basically just holding myself up as long as possible, but before I knew it, I could crank out a dozen at a time without breaking a sweat. When it came time for that stupid test again in 8th grade, I ranked pretty high in a gym class of well over 100 kids.
So now I want that feeling back. I've let myself get out of shape the last couple years, and I'm only now started to work my way back to being fit. So as part of this new initiative, I'm aiming to be able to do 20 chin-ups in a row by June 1. So feel free to cheer me on!
As part of a set of physical fitness tests in gym class, we were required to do chin-ups. Unfortunately, I was one of the weaklings, not able to do a single one. I felt so embarrassed that I bought a chin-up bar to practice at home, because I was NOT going to repeat this performance in 8th grade.
I started practicing chin-ups every day. At first, I was basically just holding myself up as long as possible, but before I knew it, I could crank out a dozen at a time without breaking a sweat. When it came time for that stupid test again in 8th grade, I ranked pretty high in a gym class of well over 100 kids.
So now I want that feeling back. I've let myself get out of shape the last couple years, and I'm only now started to work my way back to being fit. So as part of this new initiative, I'm aiming to be able to do 20 chin-ups in a row by June 1. So feel free to cheer me on!
PS3 = Big Stinker?
Originally posted on TheStreet.com:
After more than a decade at the top of the video game heap, during which it sold more than 200 million consoles, Sony (SNE) is set to be knocked off its firm position as King of the Hill because of its flawed PlayStation 3 strategy. This is only one of many reasons to avoid shares of the consumer-electronics conglomerate, but it's certainly the most important.
Zapped by Blu-Ray
Among the most glaring errors Sony has made with the PS3 has been the inclusion of a next-generation Blu-ray DVD drive in the console. Having seen Blu-ray in action up close, I can say it certainly is impressive.
But it has also had the effect of driving up the cost of the two versions of the PS3 to $500 (20 GB hard drive) and $600 (60 GB hard drive) respectively, much more expensive than the competing Microsoft (MSFT) Xbox 360 and Nintendo Wii, with no discernible improvement in game quality. Shortages of certain Blu-ray components have resulted in extremely short supplies of the PS3, giving Microsoft and Nintendo some running room to build market share.
In addition, the competition between the two next-generation DVD technologies, Blu-ray and HD-DVD, is causing an enormous amount of confusion among consumers and hindering adoption of both. This is a critical issue; slow consumer adoption of Blu-ray will make it more difficult to build economies of scale, which normally result in lower manufacturing costs.
Look at the relatively unsuccessful audio formats DVD-Audio and Super Audio CD for a historical parallel. And in a world where digital distribution of media is becoming more prevalent by the day, it makes little sense for Sony to have made such a bold bet on a physical format.
Sure, we're years away from high-definition video downloads being both quick and economical, but download services such as Apple's (AAPL) iTunes as well as numerous file-sharing programs clearly are shrinking the size of the market for physical media such as DVDs and CDs. Of course, the HD-DVD camp will suffer along with Blu-ray. But Sony is disproportionately tied to Blu-ray, given its strong dependence on its video-game division for profit.
Former Title Titan
Plus, Sony is losing exclusivity on many PS3 video-game titles. Software publishers such as Koei, publisher of the Dynasty Warriors series, are moving titles over to the Xbox 360 in increasing number. There are even rumors that Konami (KNM) will put out a Metal Gear title on the Xbox 360, which would be a huge blow to Sony, given how popular that series is.
Then there's Take-Two Interactive's (TTWO) blockbuster Grand Theft Auto series; a next-generation version of the game will appear simultaneously for Xbox 360 and PS3 consoles late in 2007. Sony previously had an exclusive deal with Take-Two for GTA games during the PS2 cycle, though those titles later appeared on the original Xbox. In addition, 2007 will see Xbox 360 players enjoying both monster PS2 hit Guitar Hero 2 and Sega's Virtual Fighter 5, formerly a PS3 exclusive.
This bet-hedging by all these software companies is making the lower-priced Xbox 360 much more attractive to consumers by drastically improving the breadth of software available for it. I also expect Microsoft to cut prices on the Xbox 360 in the near future. The console has sold about 10 million units to date, though I have recently noticed retailers getting a bit aggressive in giving away freebies with the console. That implies that near-term demand may be a bit sluggish.
While brand loyalty is an issue with console gamers, the lower-priced Xbox 360 has captured plenty of ground in attracting former Sony exclusives. That's likely to cut into Sony's fan base.
Wah-Wah Wii
As for the Nintendo Wii, the most important thing to note is that its low manufacturing cost and relative technological simplicity are giving Nintendo a huge boost in the important Japan market. The Wii is making its way into gamers' hands a lot faster than the PS3, giving Nintendo a chance to gain a foothold with consumers ahead of mass production of the PS3.
Sony's video-game business is easily its crown jewel. At its best, it has provided more than 60% of Sony's operating profit despite hovering around 10% of overall Sony revenue. Given that Sony is almost certainly going to lose market share, the company's profitability will be dragged down dramatically.
This state of affairs means Sony's historically lucrative video-game unit is very likely to lose its luster over the next few years as Microsoft and Nintendo gain market share in this segment. Plus, one must consider the generally tough state of the consumer electronics business, given how competitive businesses such as high-definition televisions have become. With that in mind, it is nearly impossible for me to come up with a bullish case for Sony.
After more than a decade at the top of the video game heap, during which it sold more than 200 million consoles, Sony (SNE) is set to be knocked off its firm position as King of the Hill because of its flawed PlayStation 3 strategy. This is only one of many reasons to avoid shares of the consumer-electronics conglomerate, but it's certainly the most important.
Zapped by Blu-Ray
Among the most glaring errors Sony has made with the PS3 has been the inclusion of a next-generation Blu-ray DVD drive in the console. Having seen Blu-ray in action up close, I can say it certainly is impressive.
But it has also had the effect of driving up the cost of the two versions of the PS3 to $500 (20 GB hard drive) and $600 (60 GB hard drive) respectively, much more expensive than the competing Microsoft (MSFT) Xbox 360 and Nintendo Wii, with no discernible improvement in game quality. Shortages of certain Blu-ray components have resulted in extremely short supplies of the PS3, giving Microsoft and Nintendo some running room to build market share.
In addition, the competition between the two next-generation DVD technologies, Blu-ray and HD-DVD, is causing an enormous amount of confusion among consumers and hindering adoption of both. This is a critical issue; slow consumer adoption of Blu-ray will make it more difficult to build economies of scale, which normally result in lower manufacturing costs.
Look at the relatively unsuccessful audio formats DVD-Audio and Super Audio CD for a historical parallel. And in a world where digital distribution of media is becoming more prevalent by the day, it makes little sense for Sony to have made such a bold bet on a physical format.
Sure, we're years away from high-definition video downloads being both quick and economical, but download services such as Apple's (AAPL) iTunes as well as numerous file-sharing programs clearly are shrinking the size of the market for physical media such as DVDs and CDs. Of course, the HD-DVD camp will suffer along with Blu-ray. But Sony is disproportionately tied to Blu-ray, given its strong dependence on its video-game division for profit.
Former Title Titan
Plus, Sony is losing exclusivity on many PS3 video-game titles. Software publishers such as Koei, publisher of the Dynasty Warriors series, are moving titles over to the Xbox 360 in increasing number. There are even rumors that Konami (KNM) will put out a Metal Gear title on the Xbox 360, which would be a huge blow to Sony, given how popular that series is.
Then there's Take-Two Interactive's (TTWO) blockbuster Grand Theft Auto series; a next-generation version of the game will appear simultaneously for Xbox 360 and PS3 consoles late in 2007. Sony previously had an exclusive deal with Take-Two for GTA games during the PS2 cycle, though those titles later appeared on the original Xbox. In addition, 2007 will see Xbox 360 players enjoying both monster PS2 hit Guitar Hero 2 and Sega's Virtual Fighter 5, formerly a PS3 exclusive.
This bet-hedging by all these software companies is making the lower-priced Xbox 360 much more attractive to consumers by drastically improving the breadth of software available for it. I also expect Microsoft to cut prices on the Xbox 360 in the near future. The console has sold about 10 million units to date, though I have recently noticed retailers getting a bit aggressive in giving away freebies with the console. That implies that near-term demand may be a bit sluggish.
While brand loyalty is an issue with console gamers, the lower-priced Xbox 360 has captured plenty of ground in attracting former Sony exclusives. That's likely to cut into Sony's fan base.
Wah-Wah Wii
As for the Nintendo Wii, the most important thing to note is that its low manufacturing cost and relative technological simplicity are giving Nintendo a huge boost in the important Japan market. The Wii is making its way into gamers' hands a lot faster than the PS3, giving Nintendo a chance to gain a foothold with consumers ahead of mass production of the PS3.
Sony's video-game business is easily its crown jewel. At its best, it has provided more than 60% of Sony's operating profit despite hovering around 10% of overall Sony revenue. Given that Sony is almost certainly going to lose market share, the company's profitability will be dragged down dramatically.
This state of affairs means Sony's historically lucrative video-game unit is very likely to lose its luster over the next few years as Microsoft and Nintendo gain market share in this segment. Plus, one must consider the generally tough state of the consumer electronics business, given how competitive businesses such as high-definition televisions have become. With that in mind, it is nearly impossible for me to come up with a bullish case for Sony.
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