"Modern Warfare 3" Will Mark the End of the Video Game Console Era

By Michael Comeau  SEP 23, 2011 9:15 AM

"Modern Warfare 3" will be one of the last hurrahs for the console-dominated gaming era as the world shifts toward new-school, alternative platforms.

 


Activision’s (ATVI) Call of Duty: Modern Warfare 3 will be the biggest entertainment launch of all time upon its November 8 release.

How do I know this?

Because the last two Call of Duty games earned the very same distinction, so a three-peat is pretty likely.

However, Modern Warfare 3 will be one of the last hurrahs for the console-dominated gaming era as the world shifts toward new-school, alternative platforms.

The current generation of gaming platforms consists of consoles and handhelds from the likes of Nintendo, Microsoft (MSFT), and Sony (SNE).

Unfortunately, all three are being pushed aside by foes we couldn’t have imagined just five years ago -- and this means big things for investors.

Let’s start with mobile gaming before we discuss consoles.

According to a recent research report from Parks Associates, almost two-thirds of smartphone users play games on at least a monthly basis.

And how are smartphone sales doing? Gartner says they were up 74% to 108 million units in the second quarter.

The Nintendo DS, the best-selling handheld-gaming platform of all time, sold 146 million units in its whole lifetime.

Its successor, this year’s 3DS, won’t fare nearly as well. In fact, it was so poorly received at retail that it received a significant price cut in July, just four months after release. From first to worst in one generation? That’s just plain scary.

The appeal of smartphone (and tablet) games is pretty easy to grasp. They’re dirt-cheap or free, you can usually try before you buy, and they don’t require you to buy and carry another gadget around with you.

So that takes care of the handheld world.

Now let’s look at consoles.

A study commissioned by social-gaming company Kabam indicated that there is some overlap between the console and social-gaming populations.

The key finding, courtesy of VentureBeat:

About 82 percent of the hardcore social gamers also play console games. These hardcore social gamers also play for a longer period of time than casual social gamers. As the games get better on Facebook, social games (such as Kabam’s Glory of Rome...) are disrupting play on the traditional consoles.

One figure shows how social gaming growth is resulting in less time and money spent on other game platforms. About 27 percent of social game players who played games on other platforms say that they are spending less time on those platforms. They are also spending about 50 percent less money on console games. Kabam’s own customers report a 55 percent decline in their game play on other platforms.

Normally, I’d roll my eyes at this sort of study because as a social-game producer, Kabam is obviously looking for an outcome that supports its business model.

However, let’s examine some numbers.

The soon-to-be-public social-gaming company Zynga just filed its second-quarter numbers with the SEC.

And what’s going on there? Revenue was up 115% to $279 million in the second quarter of this year. At the very least, Zynga should at least hit the $1 billion revenue mark this year, representing growth of about 70% or higher.

And remember, Zynga is very young. In 2008, its revenue was just $17 million!

For comparison’s sake, how quickly are the console-dependent video-game companies growing?

Wall Street sees Electronic Arts (ERTS) increasing revenues by 7% this year.

THQ
(THQI)? A 17% increase.

GameStop (GME)? A 4% rise.

Take-Two Interactive
(TTWO)? A 9% decline.

Activision? A 14% drop.

Is the money going to companies like Zynga coming straight out of the console-gaming industry?

I’d say that at least some of it is, based upon the fact that literally hundreds of millions of people are playing games on Facebook and other social-gaming outlets. And if that many people are spending more time online playing cheap or free games, then some of them are spending less money on console games.

One could argue that weak sales of consoles and games simply means that we’re late in the cycle, where things normally slow before the next generation comes.

However, that would indicate a pretty weak cycle, considering that life-to-date sales of the Nintendo Wii, Sony PS3, and Microsoft Xbox 360 now stand at 194 million units, or 15% below the combined sales of last generation’s consoles.

How strong could the next cycle possibly be if this one is underperforming?

Let’s talk stocks.

I see the entire traditional gaming industry as a value trap. This would include the aforementioned EA, Activision, THQ, Take-Two, GameStop, Sony, and Nintendo. I would run from all these stocks like the plague.

These companies, particularly EA and GameStop, are increasingly pushing themselves as social/casual gaming powerhouses, but the numbers don’t support the PR. Their efforts, primarily driven by expensive acquisitions, are just not moving the needle.

So who will be flourishing in the new era of gaming?

Apple (AAPL) and Google (GOOG) are the first names that come to mind, because their respective iOS and Android platforms own the smartphone and tablet worlds. That means they own mobile gaming, at Nintendo's and Sony’s expense.

Facebook and Zynga are next on my list, though I suspect both companies will come public too late. They’ve already grown so much that they are dangerously close to maturity.

I know there are still some major video-game industry bulls out there. I hope they have a huge victory party when Modern Warfare 3 sales hit the stratosphere.

Because odds are, there won’t be much to celebrate after that.
Position in AAPL

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