Video Game Reviews Matter: To Gamers and Investors
Andrew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
All gamers have done it at some time or another: fallen victim to a barrage of marketing hype, rushed to the store, and spent a wad of cash on the "it" game, ran home to play, and experienced ... grave disappointment. $50 for this?
Order ... In a disorderly market
Fortunately, gamers are a resourceful bunch, and some have taken to the internet to write reviews critiquing the newest games. These editorials work much like something you'd see in the newspapers or on rottentomatoes.com for movies -- a few paragraphs about the quality and nature of content, followed by some sort of standard rating metric or score. In the video game industry, IGN.com, gamespot.com, and metacritic.com are the leading sources of reviews.
For illustrative purposes, I'll refer to IGN's rating scale: scores range from 0 to 10, where 0 is a "Disaster," 3 is "Awful," and 5 is "Mediocre;" 8, 9, and 10 are "Great," "Amazing," and "Masterpiece," respectively. A game rated 8.2 plays "Great," but isn't as "Great" as a title that scores an 8.8. Gamers love reviews because with so many different titles available, nobody wants to have a "Mediocre" summer vacation by playing a 5.
Along these lines, and I will tell you that I'm a game nut familiar with the review sites, highly-rated games generate a positive buzz and usually post impressive sales numbers. For those of you who own or are considering electronic entertainment stocks, please understand that most gamers consult the reviews before making purchase decisions. Put another way: if it matters to the customer, then it should matter to the investor.
So, if reviews are important to sales, and if we accept that sales trends influence corporate strategy, then we can logically say that reviews have some bearing on strategy as well. Here are some examples that investors can appreciate.
Game reviews meet business strategy
The Battlefield series, an Electronic Arts (NASDAQ: EA) product, famously does battle with Activision Blizzard's (NASDAQ: ATVI) Call of Duty line. These franchises currently dominate the "shooter" game category and sell exceedingly well; both have received glowing reviews from IGN in the 8.5 to 9.5 range. An important distinction, however, centers around sales totals: Call of Duty has sold over 120 million units in its series run while Battlefield comes in at only about 24 million.
The reason for this disparity lies with the fact that Activision has released a new Call of Duty annually for the last nine years, while Electronic Arts has published four Battlefield entries in the same time period. From a business perspective, I'd say that the consistent string of highly-rated Call of Duty games has created a pretty imposing barrier to entry between the shooter category and Electronic Arts.
Essentially, Activision has set the quality standard so high that Electronic Arts has required years to formulate a competitive product, and Activision racks up the sales in meantime. So if I were researching the industry, I'd certainly like to see some consistently good reviews in a particular company's major game franchises because that kind of track record can create a great competitive edge.
Electronic Arts' NBA Live used to be a best-seller, but after declines in quality starting in 2007 or so, lukewarm rating scores followed. By 2010, Electronic Arts dropped the series entirely after dismal sales results. Take-Two Interactive (NASDAQ: TTWO) seized the opportunity and released the landmark NBA 2K11 featuring Michael Jordan on the front cover; the game certainly did Jordan justice, as IGN editors scored it a 9.5.
The NBA 2K series has continued in successful fashion and sales have grown significantly. Electronic Arts remains out of the basketball market, resulting in a painful cessation of market share to Take-Two. Similarly, Electronic Arts may decide to discontinue its Tiger Woods PGA Tour franchise, a golf game that once sold incredibly well but has recently fallen off a cliff in popularity.
You're right if you guessed that this decline coincides with a lower average review score for the series -- I know that Tiger has had his personal issues, but game critics attribute the low scores to uninspired gameplay and a lack of significant improvements.
At the same time, other Electronic Arts sports titles such as FIFA and NHL have sold well and garnered consecutive years of great scores in the 8.5 to 9.5 range, with competitors opting to concede to Electronic Arts in these markets. Despite the recent divergence in reception between Tiger Woods PGA Tour and NHL, the reviews still give consistent attention to addressing the accolades, shortcomings, quality of programming, and special features of each game.
Because different development units within a particular company create different game franchises, reviews can help reveal which of these units are pulling their weight and which are struggling. For savvy investors, this information can provide a future view of where management may focus its strategic adjustments.
The Foolish conclusion
In such a fast-paced and competitive industry, reliable insight into the true nature of the product can be hard to find; game ratings and reviews solve this problem by sniffing out all the rotten eggs. Investors can use this information to gauge quality and sales potential, and assess what these aspects say about the future of the company.
From a top-down view, management's response to critical reception in the gaming community completes the feedback loop: does the company close a production studio, shake up the C-suite, or make an acquisition? Conversely, sometimes developers produce games that score in the 9.5 to 10 range; these numbers are reserved for truly exceptional work, and such an accomplishment should resonate with investors.
As a recommendation, if you own or are considering Electronic Arts, Activision Blizzard, or Take-Two Interactive, be sure to check check the review sites. I have seen too many uninformed gamers buy heavily-marketed junk, and as an investor, you don't want to make the same mistake.
While Activision and Microsoft have been taking the headlines when it comes to console gaming, Fools following the gaming sector would do well to also keep tabs on Electronic Arts. The Motley Fool's new special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.
Andrew Gill has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard and Take-Two Interactive . The Motley Fool owns shares of Activision Blizzard. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!