Gaming The Video Game Industry

Adam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I’m a recovering video game junkie. I used to play Super Mario Brothers all the time, and when I wasn’t playing I was watching my older brother playing. When I slept, I dreamt of Sonic the Hedgehog and his trusty sidekick Tails. My friends’ and my idea of a “sleep-over” was staying up all night playing whatever we could get our hands on after a trip to Blockbuster.

My enthusiasm for gaming has waned with age. As video game technology advances, my tastes stay the same. I would much rather play an 8-bit side-scroller than an immersive action packed first person shooter. I fear I’m not alone in my lack of enthusiasm for hardcore gaming.

Last month, video game sales fell 25% year-over-year. While this month may be an improvement with the release of Halo 4 and the newest Call of Duty, I believe this is a trend that will continue to plague the video game industry.

Where Have All The Gamers Gone?

You probably already know the answer to this question. If you own a smartphone or tablet, you probably have at least one game installed on it. It might have been a free download, or maybe you paid a couple bucks for it; either way it was far less expensive than a new console and a $60 video game.

Mobile devices are snatching up casual gamers at an alarming rate. As the fastest growing segment of the computer industry, more and more people are finding entertaining games on their smartphone and bypassing expensive game consoles. In fact, in the second quarter this year, digital game revenue outpaced physical games by 47%.

What Does This Mean For The Big Game Developers?

As the market shifts from one platform to another, game makers like Activision (NASDAQ: ATVI) and Electronic Arts (NASDAQ: EA) must split their focus. Console games on systems like Microsoft’s (NASDAQ: MSFT) Xbox 360 and Sony’s (NYSE: SNE) PlayStation 3 are generally very big, graphic intense, multi-faceted games. However, with the limited processing power and screen real-estate of a smartphone or tablet, mobile games are drastically different.

EA has successfully started porting games and creating new ones for smartphones and tablets in the past year. Game downloads increased 46% for the company year-over-year last quarter, and now make up nearly half of the company’s revenue stream. The Simpsons: Tapped Out has been one of mobile’s highest grossing games, attracting nearly 3 million active daily users.

Activision, on the other hand, is just beginning its foray into mobile gaming. The company remains very much focused on its successful franchises such as Call of Duty, and continuing to create great games for the newest generation of game consoles. Despite a positive earnings report for this most recent quarter, and a raise in guidance, the long-term outlook will require a shift in focus.

The mobile game market doesn’t provide these two big developers with the barrier to entry they have in console gaming. Development kits are inexpensive, and practically anyone can submit their games to the Apple or Android app stores. Additionally, programming smaller, less graphic intense games is easier and takes far less time. Quality still wins out in the end, but creating a quality mobile game is inherently different from a quality console game.

What’s Next?

Nintendo (NASDAQOTH: NTDOY) is set to release what its calling the first next-gen console this month: the Wii U. The console is aimed toward casual gamers, and sports a touch-screen tablet like remote control that doubles as a second screen for one vs many gameplay. Pre-orders are sold out, and Nintendo seems to have another innovative console on its hands.

Nintendo may have jump-started the shift toward more casual gamers with its Wii release in 2006, and the newest console looks to capitalize on that shift further. Activision and EA need to adapt quickly, because Microsoft and Sony’s next-gen console release dates are still far off.

If either company can find a fun casual party game that effectively utilizes Nintendo’s innovation, they could have a big winner on their hands. That game could easily port to the tablet interface of Android and iOS devices as well. It just requires the company’s great teams of game developers to shift their focus.

Microsoft is rumored to release an Xbox-branded Surface device in the near future. The idea is to attract next-gen console-hungry gamers with a new Windows 8-based gaming tablet. Microsoft may be able to sell the tablet near cost and make up for it with high margins on game downloads. This could attract consumers looking for the best value in tablet computing, and create the market size developers need to see before they enter. Nonetheless, gamers will expect something between Angry Birds and Halo 4 in terms of gameplay on this rumored tablet. This is yet another challenge for these big game developers to tackle.

So…?

EA and Activision have quite a few challenges at hand. While EA is embracing the change, Activision remains laser focused on its quality game franchises. I believe EA is taking the smart approach by expanding its focus with mobile and computer game downloads. These games produce higher margins for the company, and diversifies its portfolio amongst several platforms. Meanwhile, Activision is the big fish in a shrinking pond. While its most recent quarter saw good results, it’s only a matter of time before the pond dries up.


adamlevy has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard and Microsoft and is short Sony (ADR) and has the following options: long JAN 2013 $22.00 calls on Sony (ADR). Motley Fool newsletter services recommend Activision Blizzard, Electronic Arts, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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