Kids These Days
Tiger Woods gets $50mm to advertise for Nike, or whoever it was. Howard Stern gets $500mm (OK, not all cash) to take his show over to Sirius satellite radio (which, by the way, also agreed to pay $200mm to carry broadcasts of NFL games). By now, we're used to seeing big numbers in sports and entertainment. So yesterday's news that the NBA signed 5-6 yr licensing deals for a reported $400mm sounds pretty ho hum. Wait a minute, though: the deals were with Electronic Arts and four other video game companies. Video games!
Electronic Arts, the world's largest video game company, already has a $500mm 5-yr exclusive deal with the NFL, and Take Two is reported to have signed a $300mm exclusive long-term deal with the baseball guys. By my reckoning, that's about $200mm a year for virtual basketball, football and baseball. Bear in mind, here, that these three are all pretty much North American sports, so we're really not talking about worldwide markets. To the videogame makers, sports games are worth, apparently, about $1.2 billion a year in revenues.
Here's a funny sidelight: part of the revenues are from advertising within the games. They can actually stick ads into the virtual game just like they do in the real ones.
I took a quick look at Electronic Arts's financials (ticker ERTS). They do about $3.2 billion a year in sales and bring $500mm - $600mm to the bottom line. They have a market cap of around $17 billion, no debt and $2.6 billion in cash at 12/31/2004. The stock is trading at about 30x last twelve months' earnings ($55 stock, $1.86 EPS) and, despite all the cash, doesn't pay a dividend. About half their sales are from overseas, mostly Europe.
One of the other companies participating in the (obviously non-exclusive) deal, by the way, is Atari. There was a time when Atari seemed the invincible king of the videogame business, back in the early 1980s when games like PacMan and Space Invaders were the very latest thing. Turned out kids suddenly got bored with videogames and Atari was caught with enormous inventories of unwanted cartridges.
Atari these days (if it's even the same company - ticker ATAR) has a market cap of about $400mm, a tiny fraction of Electronic Arts (which didn't even exist back then) and revenues of around $410mm. There's also Take-Two Interactive Software (TTWO, maker of the very successful and highly criminal Grand Theft Auto series), with a $1.9bn market cap and $1.25bn in revenues, and Midway Games (MWY) with a $900mm market cap and $160mm in revenues. The fifth player is Sony, obviously not a pure play. Other players not in this sports deal are Activision (ATVI) $2.4bn market cap, $1.4bn in sales, and THQ (THQI) $1.1bn market cap, $700mm in sales.
I used to own one called Acclaim Entertainment, which was a fairly decent name in that business in the 1990s. I see they filed bankruptcy back in September. The stock is in the pink sheets at .39 cents a share.
Electronic Arts stock took a pummelling on Monday after it lowered its expectations for sales and earnings for 2005 ($1.62 - $1.64 expected in EPS). Granted it has a very strong balance sheet and can stand, no doubt, several tough years. But, especially give the history of the videogame industry (see above), does it really deserve a forward P/E of over 30x? Not that I really know a lot about this business, but I can't see where the growth is supposed to come from.
For a quick look at the retailing of electronic games, and some light on the hardware side, see this story on GameStop (GME):
http://yahoo.smartmoney.com/onedaywonder/index.cfm?story=20050323&afl=yahoo
This Texas-based (uh oh! red flag!) company has over 1,800 stores around the country and plans to open another 370 - 400 this year, expanding its base by over 20%. Among their competitors are WalMart, Best Buy and, presumably at some point, web-based downloading.
It's a world of bread and circuses. Just seems to me the circus/bread ratio is at an all-time high. If your average joe doesn't have enough bread to pay for a circus ticket, how long can this go on?
Electronic Arts, the world's largest video game company, already has a $500mm 5-yr exclusive deal with the NFL, and Take Two is reported to have signed a $300mm exclusive long-term deal with the baseball guys. By my reckoning, that's about $200mm a year for virtual basketball, football and baseball. Bear in mind, here, that these three are all pretty much North American sports, so we're really not talking about worldwide markets. To the videogame makers, sports games are worth, apparently, about $1.2 billion a year in revenues.
Here's a funny sidelight: part of the revenues are from advertising within the games. They can actually stick ads into the virtual game just like they do in the real ones.
I took a quick look at Electronic Arts's financials (ticker ERTS). They do about $3.2 billion a year in sales and bring $500mm - $600mm to the bottom line. They have a market cap of around $17 billion, no debt and $2.6 billion in cash at 12/31/2004. The stock is trading at about 30x last twelve months' earnings ($55 stock, $1.86 EPS) and, despite all the cash, doesn't pay a dividend. About half their sales are from overseas, mostly Europe.
One of the other companies participating in the (obviously non-exclusive) deal, by the way, is Atari. There was a time when Atari seemed the invincible king of the videogame business, back in the early 1980s when games like PacMan and Space Invaders were the very latest thing. Turned out kids suddenly got bored with videogames and Atari was caught with enormous inventories of unwanted cartridges.
Atari these days (if it's even the same company - ticker ATAR) has a market cap of about $400mm, a tiny fraction of Electronic Arts (which didn't even exist back then) and revenues of around $410mm. There's also Take-Two Interactive Software (TTWO, maker of the very successful and highly criminal Grand Theft Auto series), with a $1.9bn market cap and $1.25bn in revenues, and Midway Games (MWY) with a $900mm market cap and $160mm in revenues. The fifth player is Sony, obviously not a pure play. Other players not in this sports deal are Activision (ATVI) $2.4bn market cap, $1.4bn in sales, and THQ (THQI) $1.1bn market cap, $700mm in sales.
I used to own one called Acclaim Entertainment, which was a fairly decent name in that business in the 1990s. I see they filed bankruptcy back in September. The stock is in the pink sheets at .39 cents a share.
Electronic Arts stock took a pummelling on Monday after it lowered its expectations for sales and earnings for 2005 ($1.62 - $1.64 expected in EPS). Granted it has a very strong balance sheet and can stand, no doubt, several tough years. But, especially give the history of the videogame industry (see above), does it really deserve a forward P/E of over 30x? Not that I really know a lot about this business, but I can't see where the growth is supposed to come from.
For a quick look at the retailing of electronic games, and some light on the hardware side, see this story on GameStop (GME):
http://yahoo.smartmoney.com/onedaywonder/index.cfm?story=20050323&afl=yahoo
This Texas-based (uh oh! red flag!) company has over 1,800 stores around the country and plans to open another 370 - 400 this year, expanding its base by over 20%. Among their competitors are WalMart, Best Buy and, presumably at some point, web-based downloading.
It's a world of bread and circuses. Just seems to me the circus/bread ratio is at an all-time high. If your average joe doesn't have enough bread to pay for a circus ticket, how long can this go on?
posted by econoclast at 3:56 PM
2 Comments:
I have to say, I quite enjoyed everything you just put down. I commend your research and thought this was an excellent informative tool.
On topic however, I'm not terribly shocked at the use of video games as advertising tools, especially in the U.S. If you think about it, the market for these games is aimed at the age range of 12 to 24, roughly speaking. For the younger memebers of the bracket, the sight of those advertisements every time they turn on their game, which is rather frequent according to recent surveys, ensures that when the time comes, this group of budding adults will be well aware of the companies on their games and what they sell. Personally I call that particular aspect of the practice good marketing.
As to the success of Game Stop, I am not particuarly surprised that bit of information either. Locally the Game Stop here has become rather popular in the last year or so. So much so in fact, that they redesigned their store logo and remodeled the store.
At any rate, I rather enjoyed reading all of this. Props.
Thanks for the comments. I just wonder whether the growth prospects justify the price of these stocks. Back in the early 1980s, kids just got tired of videogames. Maybe that's because the games were too primitive to hold their attention. On the other hand, fashions do change. Remember Magic Cards? (I wonder if, for example, poker isn't stealing quite a few players away from videogames?)
Interesting that Game Stop is so popular in your neighborhood. But what happens to them if suddenly videogames go out of fashion?
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