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I Never Made a Single Dollar Off of Video Games

But that doesn't mean my opinion doesn't matter. - Or does it? I don't know. I will ask someone with experience in these matters.

Well, You know, I thought I would write a blog post. I figured I'd make it about something that I have formal education in.

I have no real working experience in game design, creation, marketing or really anything specifically game related. So if you think it is impossible for me to have any insight into games because of this please stop reading now.

Regardless of what you think though, my general understanding of market forces and investment can be applied to the game industry just like any other industry - believe it or not.

A little history about the video game industry - from a market standpoint:

The video game industry is highly competative from a market standpoint. There are many suppliers(studios) and they all work to be the most profitable. However, just like with almost every industry in recent history, there has been decreased competition due to the oligopolization and monopolization of many companies in the world economy. Currently, there are two huge companies that are ultimately responsible for the creation of many of the video games we play. Activision-Blizzard and Electronic Arts. These are really the biggest(besides Nintendo which is in a different class) video game corporations an average joe like you can invest in without being a partner or a venture capitalist. Some other ones are THQ, Take Two, Sony, Nintendo etc etc.

 

To Continue:

Activision-Blizzard is made up of a bunch of different companies that have merged since the early 90's. The biggest obviously being Activision and Blizzard. Activision Blizzard is currently owned by a French conglomerate called Vivendi. (So, if you were for the change from french fries to "freedom" fries after 9/11 then you are an idiot and should not be allowed to play WOW).

ATVI is the stock market symbol for the company Actvision Blizzard. If you invested in ATVI on June 9th 2003 (before the succes of WOW) and held that stock until 2008 you could have increased your investment(taking into account stock splits) by about 700%. In other words you could have turned 1 dollar into 7 dollars or 5,000 dollars into 35,000 dollars.

That being said, ATVI was NOT a great investment in the past few years. ATVI's stock price has hovered at about 12 dollars for the last 3 years and paid only a couple dividends of 15 cents per share in that time. That means you could have turned 1 dollar into about one dollar in that time period(yay, now I can un-invest that dollar and make a bracelet out of it).

Moving On:

Now, let's take a look at the other big player in the video game industry, Electronic Arts (stock symbol ERTS). It is actually not the result of a huge merger. It has been gobbling up smaller studios since the 90's. Some of the biggest being Bioware(mass effect) and Maxis(the sims, simcity).

If you invested in ERTS in June of 2003 and held the stock until the end of 2008 you would have about doubled your money(I'll spare you the dollar example). Needless to say, ERTS has not performed that well since 2008 either, so I won't even go into that.

Currently ERTS has a market value of 7.58 billion(fancy people like to call it market capitalization, but it is really just the value of a single stock times the number of issued stock shares. in our case 23.01 * 329.94 million = 7.59 billion). ATVI on the other hand has a Market Capitalization of 13.87 billion. So clearly, Activision Blizzard is the higher valued company right now, but Electronic Arts has the claim to being bigger one time . None of this information is really reflected in the number of emloyees each company currently employs: ATVI - 5000 , ERTS - 8000. Nor is it reflected in the total assets that each company owns - ATVI - 13.4 billion , ERTS - 4.7 billion.

None of this information actually even matters that much to a current stock owner either I just htought it was interesting. It is only useful for predictive purposes.

 

The Crux of the Situation(note to self: look up defenition of crux):

A current investor usually has one concern - THE BOTTOM LINE (or profit, or net income, or what's left etc. etc. - nobody really knows the origen of the word- scholars believe its original meaning to be a type of Hungarian pastry) How much money is going to be left for the owners or investors of a company - that is what investors and market movers in the end care about for stock they already own.

Let's Compare Those:

ATVI Total Annual Net Income 2007 to 2010 - 646 Million Dollars.

ERTS Total Annual Net Income 2008 to 2011 - -2,495 Million. (THAT'S RIGHT, look again, it's NEGATIVE).

That means Electronic Arts is suffering pretty badly right now. The makers of Mass Effect, Dead Space, Dragon Age, Battlefield Bad Company, The Sims. All the games I myself truly like are made by a company that can't seem to make a profit. This lack of profit is obviously reflected in the lack of growth in their stock price over the last ten years.

To Conclude:

Now before I quit for the day, I wanted to pass on to you one more nugget of financial analysis advice. It is called the P/E ratio(Price/Earnings). This is the ratio of a company's earnings per share to its stock value per share. I don't even need to look up the Electronic Arts P/E ratio to see that it is going to be negative.(I just did, they actually just list it as zero which is misleading in my opinion). Healthy price earnings ratios are around 10 to 20 dollars. That means a healthy company should be making about 5% to 10% per year on the money that is invested in it.

The higher the price earnings ratio, the more you are "paying" for each dollar of earnings. Consider this: Why would someone pay money for negative earnings? Answer: if you think future earnings will go up.

So the P/E can be a good way to see if a company is undervalued or overvalued(don't get carried away there are defenitely many other important things to consider too).

And Your Assignement:

Your assignment for tonight(or next year if you find this patronizing) is to look at how well General Electric's (GE) stock has performed since 2008 compared to ATVI, ERTS, Take Two, Sony's game subsidiary and Nintendo. From this you should be able to determine whether the video game industry has underperformed or overperformed the market in the last 3 years. GE is considered an indicator of the entire U.S. economy (HINT: you will have to take into account dividends) If you want, you can report back to me and I will tell you if you are right or wrong. But I would probably think you are a huge dorksandwich for actually being that nerdy. But hey, nerdin' ain't easy.

In any case my next post will include a graph/table displaying this information for your enjoyement.

I truly believe that if we as market consumers, cannot recognize value when it is obviously in front of us, we don't deserve the awesome products that a weakened but creative giant creates for us. In other words, we only have ourselves to blame for the stagnation of an awesome company.

If you want more analysis of video game companies, let me know, I will try to build up the willpower to provide it. But I make no guarantees. Honestly I'd rather this article get's passed over somewhat anonymously as I just wanted to get an idea of how many people can understand what I am saying. For many of you with investment experience this will probably be pretty basic knowledge for you.

Gerald Belman is a stupid middle age turdburger - he went to Martha Dyke university in the 60's and has no problem (for some annoying reason) walking into a public bathroom barefoot. You can reach him at [email protected] - That's right . . . compuserve.

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