There are some who say that video games will be just fine during the economic crisis. Of course, you have to consider who's spouting this idea when evaluating it. According to this article, gaming giants Microsoft (NASDAQ: MSFT) and Sony (NYSE: SNE) believe that the upcoming holiday season won't be so tough on their PlayStation 3 and Xbox 360 consoles. They agree with some pundits who think that people will look to drop several hundred dollars on a system as opposed to spending even more on bigger-ticket items such as a vacation. If people cocoon in their homes during this terrible time period to save cash, then they may want to play video games. That's one dimension of the argument.
The other is that consumers may turn to escapist fantasies and casual diversions to take their minds off their problems. In this sense, video games are no different than the movie industry, which is supposed to be resistant to recessions. Again, companies like Disney (NYSE: DIS) and Time Warner (NYSE: TWX) make content that can immerse you in worlds that are different (and more fun) than the one you currently exist in.
Both arguments make sense. Many video games are like movies these days, so comparing them to the film industry is important. And video games definitely are cheaper than a trip to Walt Disney World. However, there are a few things to keep in mind when thinking about these concepts and making an investment decision. First, we are arguably in an environment that we've never seen before. The variables are so different these days. Who's to say how recession-proof movies are going to be, let alone video games? An Xbox 360 can be had for $200. So what if it's less than a trip to Mickey Mouse's castle? Consumers will still be aching. At the very least, if parents don't cut back in terms of buying Johnny a system for Christmas (and they may not, since parents oftentimes refuse to disappoint their kids during the season of Santa), then surely the households who already have one system installed will think twice about installing a second system (yes, many households have multiple systems).
Then there's the price of software. I expect a lot of software deflation this holiday season in the form of aggressive sales and price-cuts as things get wildly competitive. And let's think about the companies themselves. Let's say both Sony and Microsoft sell a lot of hardware and software. Would you buy those two stocks just based on that thesis? I say you wouldn't because both of them are a lot more than just video games. Sure, you get exposure to the industry through them, but you've got to consider their other operating divisions as well.
Right now, I think you have to be careful about buying any stock unless you are an extremely long-term thinker. And if you want to play the video-game idea, you may want to consider going straight to the software publishers since they don't have to produce lower-margin consoles. Activision Blizzard (NASDAQ: ATVI) and Electronic Arts (NASDAQ: ERTS) are two names in the space that carry big brand equities and interesting pipelines. Of course, let me repeat that diving into any equity at the moment is an exercise in daredevil antics. With the Dow crossing the 8000 level today, and with indexes around the world ailing, rational pricing of stocks may not be with us for some time. Don't worry, though. Just slip a copy of Halo 3 into the Xbox 360 or Super Mario Galaxy into the Nintendo (OTC: NTDOY) Wii and let your troubles fade away...
Disclosure: I own Activision Blizzard and Disney; positions can change at any time.
Reader Comments (Page 1 of 1)
10-10-2008 @ 7:08PM
Warren said...
Don't lose sight of the fact that a good video game can offer hundreds of hours of play time to an avid player. That's really good bang for the entertainment buck - much more so than a 2 hour movie you'll never watch again.
10-11-2008 @ 2:19AM
td said...
Also, the XBOX Live network will be partnering with NETFLIX this fall to show movies on demand through the XBOX. A win-win for both companies.