Recent news in the video game world has prompted me to ask whether or not there is money to be made here.
There are new consoles coming from Sony Corporation (ADR) (NYSE:SNE) and Microsoft Corporation (NASDAQ:MSFT) later on in the year, and there are bound to be countless numbers of games from publishers Activision Blizzard, Inc. (NASDAQ:ATVI) and Electronic Arts Inc. (NASDAQ:EA).
In the news
Activision Blizzard, Inc. (NASDAQ:ATVI) and EA have been in the press as of late–one for the good, and one for the bad. We’ll get the bad news out of the way first.
Activision had a great first quarter but their big money maker, “World of Warcraft,” actually lost a whole lot of players. In 2010, the game had approximately 12 million active subscribers, and that has since dropped to 8.3 million. With players paying around $14 per month to play the title, it can be assumed that revenues have dropped by some $50 million per month on the game.
Now on to the great news for Electronic Arts Inc. (NASDAQ:EA)! They will actually be teaming up with Disney on all future Star Wars games. Obviously it is not known exactly what games will be coming, or whether they will be viewed positively by fans, but having such a name on the roster is definitely positive for Electronic Arts Inc. (NASDAQ:EA).
The consoles
Later this year store shelves shall see a refreshed set of consoles. Sony Corporation (ADR) (NYSE:SNE) has already showed off the controller for their next generation system, and Microsoft will be unveiling their console later today.
The initial reactions from that unveiling will weigh heavily on Microsoft Corporation (NASDAQ:MSFT)’s entertainment division, particularly after the dismal news of late on Windows 8.
One particular feature that hardcore gamers are hoping doesn’t make an appearance could in fact be a make or break on this next Xbox: always-on DRM. Always-on DRM would mean that gamers have to ensure their console is connected to the internet in order to complete basic tasks, even playing games.
The always-on DRM issue led to the “resignation” of Microsoft Corporation (NASDAQ:MSFT)’s Creative Director Adam Orth earlier on in the year after some very questionable Twitter exchanges.
While the DRM fiasco may only have been a hoax or a misunderstanding, it will leave a lot of hardcore gamers waiting and wondering what will become of the Xbox.
Would it mean anything?
Microsoft Corporation (NASDAQ:MSFT) may seem like a company that would have more interest in trying to sell copies of Word rather than Xbox’s, but they’re not. The company actually estimated that their Xbox 360 sales generated some $56 billion at retail.
The console business at Microsoft Corporation (NASDAQ:MSFT) has made up 7%-10% of revenues at the company over the past 5 years. While that is only a small chunk of a large business, I don’t think the company nor its shareholders be willing to give it up. While always-on DRM won’t remove this market from under Microsoft, it would certainly alienate a large portion of the customer base.
Back to Games
With the new consoles already on their way, Activision Blizzard, Inc. (NASDAQ:ATVI) is making sure to get their juggernaut console game to the market. “Call of Duty: Ghosts” has been announced for a November release–that means we will be seeing this title on the next-gen consoles.
The lifetime revenues for Call of Duty come in at $6 billion, so obviously Activision Blizzard, Inc. (NASDAQ:ATVI) won’t just let this go.
The Numbers
So, we have a handful of companies that are all in-line to make a whole lot of cash when the end of the year rolls around. Would it be better to hold the game companies? Or perhaps jump on in with Microsoft? Each has their pros and cons, let’s take a deeper look at the numbers.
We’ll start with Microsoft Corporation (NASDAQ:MSFT); the company has a solid 21.5% net profit margin, well above the S&P 500. Of course, console margins are usually slim, if not negative when consoles first hit the market. Consoles tend to make their money over time, and the initial release to market is quite a risky one for investors, at least in my opinion.
Activision Blizzard, Inc. (NASDAQ:ATVI) is showing a slightly higher net profit margin than Microsoft over the last year at 24.38%. The company’s five-year average is a much lower at 12.4%. You shouldn’t let that bother you though; Activision Blizzard, Inc. (NASDAQ:ATVI) comes with a nice big zero in the debt-equity column.
Electronic Arts Inc. (NASDAQ:EA) has the lowest profit margin of the bunch with a 2.58%. That’s scarily low for some people, and well below the market as a whole. Despite that, EA happens to be my favorite of the group because of their growth potential going forward. With all of their brands, the new consoles, and the potential of casual games, I feel that Electronic Arts Inc. (NASDAQ:EA) is well positioned going forward.
Investor Takeaway
This year will likely be big for the console manufacturers as a refresh is long overdue, but we won’t know for sure until after today as to whether the consumer is leaning towards the PS4 or Xbox Infinity.
Microsoft will still see consoles fly off the shelf either way, and they’ll generate quite a bit of additional revenue from the new product.
When it comes to an actual investment, though, Electronic Arts Inc. (NASDAQ:EA) may be the one. The addition of the Star Wars franchise of games, and the analysts’ very positive outlook on the company, may be all we need to make some money from the market.
The article A Market for Video Games originally appeared on Fool.com is written by Ash Anderson.
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