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GameStop Starts Funding Indie Developers, While Zynga Shows Life

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Does hope for the troubled video game industry rest in mobile?

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While a beleaguered sector suggests GameStop (NYSE:GME) is going the way of the video arcade, this week the world's largest game retailer has revealed its potential future role in the industry: as a mobile developer platform. GameStop will commit $10 million to fund the Kongregate Mobile Developers program, run by Kongregate, the Web-based distributor of free-to-play video games acquired by GameStop in 2010. The new program is being run by former Zynga (NASDAQ:ZNGA) executive Panayoti Haritatos, and will offer selecte game developers financial support, consultancy services, PR and marketing assistance, guidance on in-game monetization practices, and promotion on all of Kongregate's channels, including mobile apps on Apple (NASDAQ:AAPL) iOS and Google (NASDAQ:GOOG) Android.

Like a trepidatious swimmer dipping her toe into an unfamiliar ocean, it appears GameStop is testing the waters of a space it has -- until now -- serviced only as a distributor.

The transition resembles that of Netflix (NASDAQ:NFLX), once champion of the now-declining DVD-delivery industry, now a player in original content creation with its new, critically lauded series House of Cards. In an effort to steal eyes from online viewing services like NBCUniversal's (NASDAQ:CMCSA) Hulu and Amazon's (NASDAQ:AMZN) Instant Video -- and compete with TV providers like Cablevision (NYSE:CVC) and DISH Network (NASDAQ:DISH) -- Netflix has turned to original programming in a space where brand loyalty is trumped by high quality.

[Read more about the struggles facing traditional TV providers, and the tactics companies like Google are employing here.]

At the moment, the video game industry is licking its wounds, following a rough two-month patch. December 2012 saw a 26% drop in game sales according to CNBC, as gamers are tending to spend on mobile and social games instead of traditional platform titles. December also saw one of this country's 'Big Four' gaming companies, THQ (PINK:THQIQ), file for bankruptcy protection, only to have its request denied and its assets broken up and sold at auction to a number of competing game makers. Last month, developer Gas Powered Games laid off 40 employees after turning to crowd-funding site Kickstarter to fund its next project, while Majesco Entertainment (NASDAQ:COOL) -- maker of titles like Zumba Fitness Core for Microsoft's (NASDAQ:MSFT) Xbox Kinect -- saw its stock price drop below $1 after an unfavorable earnings report. Finally, last week Disney (NYSE:DIS) closed its video game development studio Junction Point following less-than-epic sales of its feature title Epic Mickey.

Amidst this bleeding, Zynga released its Q4 earnings yesterday afternoon, surprising those who have criticized the company for its many problems: an inability to innovate, poor audience retention with new titles, and a lack of a competitive edge in the online gambling space.

[Read much more on Zynga's perceived shortcomings here.]

While Q4 revenue remained flat at $311 million, Zynga reported full-year revenue of $1.28 billion, a 12% increase from the year prior. A net loss of $48.6 million for the fourth quarter was down 89% year-over-year. The company grew daily active users 3% in the fourth quarter, while monthly active users were up 24% when compared to December 2012. A quarterly profit of $0.01 per share beat the Street's expectation of a 3-cent loss per a share.

Life, it seems, may indeed exist in the mobile space. As consumer market research firm NPD reported last year, while the overall number of gamers in the US declined by 5% in 2012, mobile gamers are growing at incredible rates. Take the popular mobile game Angry Birds, which saw playership grow by 22% in 2012.

For GameStop, this is the sector seemingly driving growth. Its holiday sales for 2012 fell 5% year-over-year, and, before this, its 3Q earnings showed a net loss of $624.3 million versus net earnings of $53.9 million the year prior. Sales shrunk overall by $180 million. However, the company saw a significant 31.1% growth in its "other" category, which includes mobile game sales, expected to reach the company's sales forecast of $150 to $200 million for 2012.

GameStop might have its head in the right place by taking a shot at the mobile space. Even if President Tony Bartel has refuted reports that the company plans to shutter 500 to 600 storefronts in 2013, the demand in that market is waning. What GameStop needs now is a hit title -- its own Angry Birds -- to drive consumer loyalty.

Twitter: @brokawbrokaw
No positions in stocks mentioned.
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