SwiftPageEmail Subject: DFC Intelligence Game Industry Brief

SwiftPageEmail Subject: DFC Intelligence Game Industry Brief.


Are Revenue Gains in the Game Industry Coming at the Expense of Profits?

January 27, 2009

It is no secret that the stock market had an almost universally awful performance in 2008. Therefore it is no surprise that almost all the game companies saw their market value decline. However, it has also the general convention that the game industry is “recession proof.” Looking at the sales numbers it is clear that the industry showed significant growth and most public game companies have been reporting strong revenue increases. Of course, with market conditions as they are, this growth has not translated into increased investor value.

In the latest issue of the DFC Dossier, we presented a report comparing the 2008 performance of 14 leading public game companies. We divided those companies into three categories: 1) Western Game Publishers; 2) Japanese Game Publishers and 3) Asian Game Publishers. The results proved interesting because they highlighted how the market is shifting from a pure physical product business to a hybrid product/service business. While Western publishers showed the strongest revenue growth, it came with a decline in profits. Meanwhile, the Asian companies that focus on online PC games are showing very strong profits as their service-oriented products generate revenue for years, long after development costs have been amortized.

Overall in 2008 the seven major Western game publishers we selected have shown a 50% increase in revenue from the equivalent period in 2007 (in most cases the six months from 3/31 to 9/30). Only THQ showed a revenue decline. However, at the same time, these seven publishers reported an aggregate net loss in both 2007 and 2008. Furthermore, this net loss increased 42% in 2008. Only Activision Blizzard, Take-Two Interactive and Ubisoft showed positive net income in the first reporting periods of 2008/fiscal 2009. Take-Two Interactive was the only company that showed an increase in income (or decrease in loss).

The traditional Japanese retail game market has struggled for several years. Meanwhile, an online game market is just starting to emerge in Japan. As a result, Japanese publishers have for sometime been forced to expand beyond their domestic market and look at emerging online business models. In 2008, it started to appear that some of the Japanese publishers may be better positioned to weather market conditions than their Western counterparts.

The large Japanese game publishers did not experience the revenue growth of the Western publishers. Overall in 2008 the four major western game publishers included had a 17% annual increase in total revenue for the comparable six month period from 3/31 to 9/30 (for the Western publishers it was 50%). However, unlike the Western publishers the Japanese publishers showed a 272% increase in income. As a result, the stocks of Japanese game publishers were not as hard hit.

Of course, the big success story in 2008 was the Asian PC online game companies. The three Asian online game companies used for this report had a stellar performance in 2008. The market value of these company’s stocks not only held steady but for NCsoft (Korea) and Netease (China) showed an increase. Aggregate revenue for these three companies was up a total of 26%, while net income showed a more modest 6% increase. However, these companies are not only showing growth they continue to be very profitable. The Asian online game companies have already mastered making money from games as more of an ongoing service as opposed to a ship and forget product.

It is becoming clear that the profit margins for successful online games far exceed that of traditional retail products. Companies like Shanda and NCsoft are still earning money from games released years ago. Furthermore, consumers are showing a willingness to pay money for a service. Unlike a pure digital product, it is hard for a pirate to steal a good game service. This is very good news for the overall industry, but bad news for the large boxed publishers that have not been able to figure out the service-oriented online business.

Online game play and digital distribution are just starting to change the business models and power structure of the industry. More than that, they are also changing the game playing and buying habits of consumers. DFC Intelligence is launching a series of new research products that will help track the growing base of online consumers worldwide, including their actual demographics and usage behavior. We feel that not only understanding the change in business model, but also having a solid grasp of emerging consumer behaviors is essential.

Of course, the casual game industry has seen enormous growth from the rapidly increasing number of online game consumers. DFC Intelligence is proud to be a media sponsor for Casual Connect being held in Hamburg, Germany February 10-12. For more information go to http://europe.casualconnect.org/. Make sure to look for us at the show. If you would like a copy of the full report comparing individual company performance contact Ozzie Monge at omonge@dfcint.com.

A sample of reports on the video game and PC game market include:

DFC Dossier The DFC Dossier is published ten times a year and provides subscribers with regular updates and analysis of the latest market trends. If you would like to see a copy of the latest DFC Dossier contact Ozzie Monge at omonge@dfcint.com.

The Online Game Market This 800 page report contains a comprehensive analysis of the online gaming market. Includes current sales trends, market forecast, and in-depth company profiles.

The Market for Portable Video Games This 185 contains complete five-year forecasts by platform, a look at portable game software, portable game online trends, and business models and revenue expectations for game publishers.

Worldwide Market Forecasts for the Video Game and Interactive Entertainment Industry Complete five-year forecasts for all individual console and portable game platforms by region (Asia, Europe, North America, rest of world)) through 2012. Also included are PC game forecasts and historical sales figures. The report has several scenarios for future market growth including an analysis and forecasts for new systems from Sony, Microsoft and Nintendo, as well as portable game systems.

The Business of Computer and Video Games This report includes an historical analysis, overview of individual hardware system, top-selling games, game genres, consumer demographics, business models, retailer profiles, marketing elements and case studies, industry trends.

Market Leaders in the Video Game and Interactive Entertainment Industry This 750+ page report profiles major companies in the interactive entertainment industry. Each individual company report is about 25-50 pages and has an historical background, financial overview, product analysis and a frank assessment of the outlook for that company.

Overview of the Video Game and Interactive Entertainment Industry This report is designed to provide an overview of some of the key trends in the video game and interactive entertainment. The focus is on highlights from the forecasts and analysis of trends, game genres and business issues found in DFC reports.

The Game Market in China This 350 page report contains a complete look at the rapidly growing Chinese game market, including forecasts to 2010, government regulations, market entry strategies, business models, distribution options, game genres and numerous company profiles and case studies.

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