What Are the Deeper Consequences for the Video Game Industry after THQ?

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

THQ (NASDAQOTH: THQIQ) has filed for bankruptcy. As a fan of the company's games, this comes as a disappointment for me, because I was hoping it would be able to turn things around. There were lots of things the company had to do before it became one of those nice turnaround plays, but it looks like it just ran out of time. I was hoping that Metro: Last Light would give the company some much needed profits.

For a while now I have been reading about how the rise of mobile and tablet gaming is changing the face of the video game industry. The suggestion is that only Activision-Blizzard's (NASDAQ: ATVI) Call of Duty games or Take-Two Interactive's (NASDAQ: TTWO) GTA series will be successful. The cause of this is games like Electronic Art's (NASDAQ: EA) fantastic The Simpsons: Tapped Out. I think the focus on mobile gaming ignores the effect of the economic slump for the last few years. Mobile gaming was salt in the wound, but it is a parallel gaming sphere, not a replacement for classic consoles. Eventually an equilibrium point will be reached, and both segments of the market will grow.

I think mobile gaming will disappoint people that think it will be the next big thing. Many mobile games have almost no gameplay, and the social aspect is not enough to carry it. I do not see Angry Birds or Tapped Out replacing Batman: Arkham City. Tapped Out is a great game and is bringing EA plenty of revenue. However, Draw Something showed that what works on the garage level might not work on the corporate one.

Activision-Blizzard is the Best Company in the Industry

Activision-Blizzard is the leader in the industry, with its amazing properties. Very few IPs come as close to Black Ops, WarCraft, or Diablo in recognition or following. ATVI has a few big games in the pipeline. Blizzard titles are the sort that can still deliver years later. Diablo 3 will be making money for years, and while the initial sales were record breaking, the long-term outlook for the game is even better. The same applies to the StarCraft franchise. There are two more games coming out from ATVI soon, and those two games are almost guaranteed successes.

ATVI is not a stock that moves, which can be frustrating. In the last few years it has stayed around the $10 mark and sometimes higher. The fundamentals of the company are fantastic, though. Any company with that much cash and no debt is a star in my book. It issued a dividend just so it could return value to shareholders. The next big success on the Activision side will be Call of Duty: Modern Warfare 4, but it could be a while before this game comes out. ATVI is my favorite company in the industry, and I think it will continue its pattern of success. It just jumped into the mobile space more substantially with its Activate platform, but it is in its nascent stages and it will take some time to see any rewards from this. For now, investors in ATVI will have to content themselves with a slew of the most successful gaming titles ever.

I do worry that the recent problems wracking the industry will make these companies less likely to develop new properties. Eventually Call of Duty might become a tired brand, but I do not see Activision-Blizzard working on something brand new. It might be a secret, but all I see are sequels and meaningless titles on Activision's site that the company is simply publishing as fast as it can. THQ had a lot of interesting and unique games in the works, and it still lost everything; what does that say about a company with no upcoming original titles?

Electronic Arts has Real Potential

EA could prove to be one of the successes as the video game industry recovers. I do not imagine that in the future you will have many public gaming companies, but a few will survive as leaders. EA could be one of them, though there is some interest in taking it private. Before the current economic slump the company acquired BioWare, and let that studio tick off fans of Mass Effect 3 with the ending of a saga. Not sure it was worth paying almost $1 billion for BioWare.

It makes sense for EA to acquire the 2k Sports unit of Take-Two. I know I just mentioned that EA should be careful with acquisitions, but that just means offering a good price. 2k will make a good complement to Madden, and NBA2k can be ported to mobile phones just like Madden. EA should focus more on mobile gaming, but without acquisitions. I would like to see continuing revenue numbers from Tapped Out. The Tapped Out model could be a great one for the industry if it manages to bring in big profits, although I still think quality gameplay is the key to the future.

BioShock: Infinite Upset, but GTA V will Save the Day

For Take-Two, keep an eye out for the next GTA game, because it will be a big seller and the stock should perform well thanks to it. I would also keep an eye on BioShock: Infinite, since it is coming out soon. I feel like the company will try to push the game with a big marketing budget, but after the second game I think the franchise does not have the star power that it is expected to have by the company. I am looking for BioShock: Infinite to do no better than BioShock 2, which would be a massive failure for what the company wants. When the Bioshock: Infinite numbers come out do not be surprised to see the share price drop. Take-Two projected an increase in marketing costs, which will deepen losses if BioShock does not sell. It should provide a nice opening for cheap shares before GTA V comes out.

Final Thoughts

I think the problem with THQ is that while it had numerous critically acclaimed titles, it did not have any titles that really sold. Dawn of War was lauded and won awards, but the critical success did not translate into sales. Generally, being reviewed well is not enough. I see a much-needed culling of the field in the video game industry while mobile gaming is ascendant. There will always be consumers out there that will buy titles which will never become smash hits.


TheArchivist 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!

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