Video Games: Guess What, the Business Model isn't the Problem
Tyler is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you have followed the video game market for a little while now, it is hard not to notice the talk of many analysts who are ready to applaud or knock down the newcomer in the sector. What seems to be the biggest talking point with so many of these new companies is their business model. It started when Activision Blizzard (NASDAQ: ATVI) revolutionized the business with the subscription-based model for its signature title World of Warcraft. Then came the mobile and app games which applied the internet’s signature freemium model. Again, Wall St. cheered the coming of a new age in the gaming space.
Time and time again, much of the focus on these companies has been on the new business models they are creating and how they were game changers for the industry. Activision rode the wave of World of Warcraft starting in 2004 and in four years they saw a near tripling in their stock value. It was a fleeting moment. The company has yet to recover from its 2008 crash.
Now, it appears it is Zynga’s (NASDAQ: ZNGA) turn to get run through the ringer. With its value dropping over two thirds from its IPO back in December, many people are wondering if a company that depends so greatly on a parent platform like Facebook (NASDAQ: FB) can survive. If this were truly the case, how can game developers be successful when they need to go through a console like Microsoft’s (NASDAQ: MSFT) X-Box or Sony’s (NYSE: SNE) Playstation?
Again and again, investors are looking at the business model of these companies to determine their chances of success. What so many people are overlooking is the most important part of these companies: their products.
Let’s see if the reasoning behind these bearish sentiments can be viewed through a product lens:
- The average shelf life for a video game is six months. Much like new movies and new albums, there is a window of opportunity. Soon enough, gamers will be looking for the next big thing to play. Granted, World of Warcraft (WoW) has done a stunning job of maintaining the level of excitement amongst its players through upgrades, expansion packs, etc. But, eventually people will move onto the next one. We are seeing this right now as WoW subscriptions are dropping off rather quickly as of late. This drop just happens to coincide with the rise in popularity of newer releases such as Diablo III and Star Wars: The Old Republic.
- Zynga was also able to ride a nice long wave of popularity with its Farmville game, raking in money from people paying real cash to upgrade their digital farms. Today, much of the mobile gaming space is being dominated by other games such as Angry Birds (from Finnish developer Rovio) and Temple Run (Imangi Studios). It shouldn’t come as a big surprise, then, that the huge drop in stock also comes at a time when Zynga has not put out a popular title for a while.
Games can be sold in a myriad of ways, and all of these models can be successful depending upon the type of game you are selling. The bottom line for this industry is much simpler than many make it out to be: If you put out an exemplary product, people will buy it.
So, if looking to invest in the gaming space, the most successful companies will be the ones with a strong gaming portfolio and pipeline. Activision is holding a very strong hand with its aforementioned Warcraft and Diablo series, but they are also the backers of the wildly popular Call of Duty and Starcraft series. Electronic Arts (NASDAQ: EA) can count on a solid base of returning customers for its EA Sports games, most notably the Madden series. Also, don’t count out Take Two Interactive Software (NASDAQ: TTWO) with their loyal fans backing the Rockstar label, the creators of the mega hits Grand Theft Auto and Max Payne. These are all very strong brands that have loyal customer bases and can be used to sell the next chapter in the series relatively easily.
This, in my opinion, is the most difficult aspect of the mobile gaming space. Games produced for social media and mobile devices are much easier to develop than the more elaborate productions for consoles and PCs. Thus, the lower entry barrier allows someone to quickly unseat the standing king. One could argue that Zynga does own this space, but it appears they are in a bit of hot water over some of their recent game developments. I would stay away from this area of gaming for a while until the one true king presents himself.
TylerCrowe has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard, Facebook, and Microsoft. Motley Fool newsletter services recommend Activision Blizzard, Facebook, Microsoft, and Take-Two Interactive . 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.