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EIEF: Williams Talks Gaming The Investor's Way

BMO Capital’s Edward Williams, speaking on the first day of the Edinburgh Interactive Games Festival, commented on game firms as investment opportunities - and why Activision, Take Two, THQ and Ubisoft would have to merge to compete with EA's might.
BMO Capital’s Edward Williams, speaking on the first day of the Edinburgh Interactive Games Festival, commented on the notable growth opportunities for investors willing to risk buying game stock. When it comes to the relationship between the stock market and games companies, according to Bank of Montreal Capital analyst Williams, the basis of love is easy to spot. "The things we like are profitability, performance, predictability and the liquidity which means we can easily buy and sell large amounts of stock," he said. Signs of love on the rocks were missing earnings, opaque finances, and weak balance sheets. Welcome to investing 101. But with 12 years experience in the games sector, Williams had some more interesting information to impart, before dashing off to his Copenhagen-bound flight. (Delays thanks to our false fire alarm didn't allow him to complete the full text of his speech.) For despite the industry's current transitional situation and general downturn of game stocks, Williams saw plenty of hope for the future. One clear issue will be the upturn in traditional packaged goods. Next-gen games, such as those for Xbox 360, command a 20 percent hike in retail prices, and that has to be good news for games companies and investors, as PlayStation 3 comes onstream. Williams reckoned this is only the start, though. New revenue streams such as in-game ads, micro-payments and the mobile games business will enable the industry to expand rapidly, with an especially strong uplift in profitability expected compared to the traditional retail-based packaged goods business. Building on David Gardner's keynote, Williams also said he expected legislative pressure against the industry to lessen as it becomes a larger and more established part of mainstream entertainment. Perhaps more interesting, however, were his views on which companies would win in future. As an investor, he reckoned those companies with their own brands would certainly have more power. Linked to this was the advantage of owning a lot of internal development resources. "Value will be found in development skills, not publishing skills," he predicted, later going on to say that the ability to have 50 percent of development inhouse was the magic number for profits in terms of reduced royalty payments more than covering the overhead of internal teams. Linked to this, he claimed, will be the continued drive to low tax locations such as China and Montreal, which publishers such as Ubisoft and EA have employed in recent years. Other factors required for future success, according to Williams, will be the ability to sell games globally, have a strong balance sheet and the willingness to make multiple strategic gambles. One example was the failure of EA.com, which despite costing the publisher around $500 million was absorbed in its general positive finances. Other strategic moves from EA, such as the acquisition of mobile publisher Jamdat, and casual online site Pogo.com, seem likely to prove more lucrative, but the ability to be able to fail will be vital for future success. Perhaps Williams' most controversial statement resulted from a question from the floor however. When asked about the likelihood of big media companies such as News International or Viacom entering the games space, he said he didn't think it was likely in the short term. He did, however, raise the possibility of some publishers such as Activision, Take Two, THQ and Ubisoft to attempt a merger in order to try and compete with EA's scale. "It would be a big investment opportunity for the market," he said of the likely reaction of fund managers any potential deals, although he didn't further explain how such a deal would clear any regulatory issues, let alone EA's minority stake in Ubisoft. [Gamasutra has multiple staff at both the Edinburgh and Leipzig game development events this week, and will cover the most important sessions from both in detail.]

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