The video games industry is one of the fastest growing industries in the world. Its the creation of a new form of interactive entertainment. The industry is growing rapidly and will soon be bigger than the movie industry.

The “King of games”.
For years Nintendo was the king of video games, every competitor that challenged it was summarily demolished. The NES and SNES (Famicom in Japan) made Nintendo a synonym for video games. Their high quality in-house games and memorable characters like Mario, Zelda, StarFox, DonkeyKong started franchises that still sell games by the millions. Nintendo also introduced quality control of third party developers to made sure that customers had great games to play. As the video games industry took off competitors introduced competing consoles like Sega MegaDrive/Genesis, 3DO, Atari Jaguar, Sega Saturn, but they all failed because they didn’t have the games to back up the hardware.

The new kid on the block.
It was not until the PlayStation launch in 1994 by Sony that Nintendo faced its first true competition. The PlayStation was first to market. Sony introduced the CD format which had 10 times the capacity of a Nintendo cartridge which gave game developers creative freedom they never had on 32MB cartridges. The PlayStation was much easier to program than the N64 which helped Sony attract a lot of third party developers to PlayStation. When Nintendo released it Nintendo 64(N64), Sony already had a stranglehold on the market. What Sony saw was the creation of a new form of entertainment. The PSX has gone on to sell 100 Million units over 11 years and the PS2 surpassed that number in 7 years.

Two is company, three is a crowd.
Microsoft got its taste of the video game industry when it developed the operating system and development tools for the Sega Dreamcast. The growing video games market seemed to threaten the PC market which generated most of Microsoft’s revenue. The XBox was also a chance for for Microsoft to diversify it’s revenue stream, it joined the console wars in 2001.

What next?
The Next-gen Console wars are upon us. The competitors are Microsoft, Sony, Nintendo. The victor will receive control over a hundered million households.

Console Manufacturers
The money is made not in the hardware sales, usually consoles are sold at a loss. The profits flow in from licensing deals with software developers who want to publish games for the console. The more games that get developed and sold the higher the profit for the console manufacturer. The number of games developed and sold is directly proportional to the number of units sold.

Sony PS3 (SNE): The PS3 is a difficult release for Sony. Game developers like consoles to be positioned exclusively for gaming and not as media units. Selling a console as a media unit means game developers have no idea how many units were purchased for the purpose of gaming. Another risk factor for Sony is the price point, usually consoles sell for around $299-$399 at launch. At launch the PS3 will sell for $599-$699, agreed that it has a Blu-Ray player but the price is twice the XBox360. Sony lost the VHS v/s Betamax wars and is trying to win the HD-DVD v/s Blu-Ray wars. I’m afraid Sony may win the Hi-Def wars but lose the console wars.

 Microsoft XBOX 360 (MSFT): First out of the block its projected to have 10 million units shipped before PS3 or Nintendo Wii make it to market. Improved production lines mean it will be able to cut prices when the new consoles launch, further improving unit sales.

Nintendo Wii (NTDOY): The new unique controller with motion detectors will provide a unique gaming experience. The Nintendo image of high quality kids friendly games will sell units to pre-teen audiences. Nintendo’s gaming franchises will also help sell a lot of consoles, especially in Japan. It wont win the console wars but it will be extremely profitable. Unlike Microsoft and Sony, Nintendo doesn’t depend on third party developers. It has the best game development unit in the world. The company can release a Mario, Zelda or Pokemon game and sell 5-7 million consoles.

Microsoft and Sony will sell more consoles but the video game revenues are a small part for both companies. As a pure play on video games Nintendo wins. Even without the console market Nintendo would do fine because its Game-Boy dominates the handheld market. The PSP isn’t even worth mentioning

Game Developers
 As consoles improve independent game developers are closing down. Better hardware mean the customer expects better looking games. They want games that look as good as movies. The production costs of games are skyrocketing, with some games costing as much to develop as blockbuster movies. This has led to significant consolidation in the industry. The only companies that will survive are the big publishers.

Electronic Arts (ERTS): EA has excellent sports franchises which lets them publish sports games with minor tweaks every year that sell millions. It also controls franchises like The Sims, Battlefield, Medal of Honor etcetra that are million unit sellers. The best part about EA’s business is that it develops all games for all consoles, so it doesn’t matter which hardware manufacturer wins EA get its software sales.



Konami (KNM): The company that created the Dance Dance Revolution craze (I’m sure you’ve seen kids dancing on the floor-mats) has a lot of franchises like Metal Gear, Bomberman and Silent Hill, each of which will be made into multiple games for various consoles. The company posses a brand recognition in Japan that ensures its games will be blockbusters.

I like the consistency in earnings of Konami over EA. The majority of Konami’s revenue comes from console games but Konami also has some Arcade, Toy, Mobile and Casino gaming exposure that helps it weather the downturns in the industry at the end of each console generation.



Others: I do not like any of the other game manufacturers like Activision(ATVI), THQ(THQI), Atari (ATAR) and Taketwo(TTWO). They dont have the size, financial strength or game library/franchises that EA and Konami have. The one company i would love to own is Blizzard (Vivendi), too bad its not an individual company

Services
The only ones i know of are Shanda(SNDA), Netease(NTES) and The9 (NCTY). The companies provide services for On-line gaming and on-line communities. They’re just too risky.

Retail
 Wal-mart and Best-Buy sell a lot of consoles and video games but there is only one company that is exclusively a video game retailer.

GameStop(GME): is the world’s largest video game retailer. The company operates 4,500+ retail stores throughout the United States, Austria, Australia, Canada, Denmark, Finland, Germany, Italy, Ireland, New Zealand, Norway, Puerto Rico, Spain, Sweden, Switzerland and the United Kingdom. To GameStop it doesn’t matter who wins the console wars and it doesn’t matter which game developer get the next blockbuster franchise. If the industry grows GameStop will mint money.

Best way to invest in video games : GameStop(GME)
Alternative : Nintendo (NTDOY)