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Baby, I Can See Your 'Halo 4,' but Are You My Saving Grace?


Media hype is starting to surround Microsoft's upcoming 'Halo 4' video game. Could it ignite a comeback for a struggling industry?

Microsoft (MSFT) just took the wraps off its upcoming Xbox 360 game Halo 4 -- the latest update to the franchise that catapulted Redmond into contention with Sony (SNE) and Nintendo in the quest for video-game industry dominance.

Yesterday, Microsoft's 343 Studios, which is taking the Halo reins from the famed Bungie, released a behind-the-scenes look at Halo 4, which has gamers whipping up a frenzy thanks to the snazzy graphics and hints at a deeper backstory:

For those who aren't familiar with Halo, it is a series of top-selling and generally critically acclaimed sci-fi action games developed by Microsoft for its Xbox and Xbox 360 gaming platforms, in addition to PCs and Macs.

If it weren't for the first Halo game released in November 2001, odds are that the original Xbox would have been a total bomb, leaving Sony and Nintendo to divide the video-game world between them.

The Halo series, responsible for many billions of dollars worth of software and console sales, has also extended into other media formats like comics, books, and even anime.

Though Halo 4, due for release later this year, might logically seem like the fourth game in the series, it's actually the seventh, as Microsoft has actually released three other Halo games since 2007's blockbuster Halo 3.

Note: I'm not counting 2011's Halo: Combat Evolved Anniversary, which was a remix of the original Halo game.

Those three "in-between" games were sort of offshoots to the main Halo storyline, and so coming back to the straight-numbered Halo 4 indicates that this game is a very, very big deal for Xbox 360 owners.

But is the same true for investors?

To answer that question, let's take a brief trip in the time machine to explore recent video-game industry trends.

Let's rewind to the last time the industry saw a numbered Halo game, 2007, a blockbuster year for the video-game business if there ever was one, primarily due to the insanely strong release scheduled during the back half of the year, which included, but was not limited to, the following:
  • August: Take-Two Interactive's (TTWO) BioShock
  • September: Microsoft's Halo 3
  • October: Activision's (ATVI) Guitar Hero 3
  • November: Activision's Call of Duty 4: Modern Warfare, Nintendo's Super Mario Galaxy, Ubisoft's (UBSFY.PK) Assassin's Creed, Sony's Uncharted: Drake's Fortune, and Electronic Arts' (EA) Rock Band.

That year, US video-game industry sales rose in incredible 43%, thanks in part to that shockingly strong lineup of games, led by Halo 3, which above all others moved serious volumes of Xbox 360 hardware.

In 2007, shares of leading video-game retailer GameStop (GME) rose 125%, while Activision was up 73%. Heck, THQ (THQI), now trading at $0.53, finished that year at $28.19!

2008 was a slower year for the industry with 19% growth, while 2009, 2010, and 2011 all saw declines.

Now, there were five factors involved in the video-game industry slowdown:

1. Economic weakness

2. Maturation of the console cycle

3. The demise of the Guitar Hero/ Rock Band music-game fad.

4. The emergence of new social gaming platforms like Facebook and Zynga (ZNGA), which represented new competition in casual gaming.

5. The shocking growth of powerful mobile gadgets powered by Apple (AAPL) iOS and Google (GOOG) Android, which have sported ever more impressive graphical capabilities.

So the question is, can the 1,000%-certain blockbuster status of Halo 4 offset all five of these factors and lead the industry back to 2007-style glory?

Now if you've read my work on the video-game industry, I'm sure you can guess that my answer is most certainly no.

Here's how I see it.

If a single title could catapult the industry back to success, it would have been 2011's Call of Duty: Modern Warfare 3.

But it didn't -- 2011 was a lousy year for any video-game company, and every stock is well off its respective highs.

Halo is big, very big. But unlike MW3, it will only be on one console -- Microsoft's Xbox 360. And secondly, by the time Halo 4 hits this holiday season, the Xbox 360 will be 7 years old, meaning that the number of potential new console buyers drawn in by the Halo phenomena is likely to be extremely limited simply because any such folks will likely already have been draw into the fold.

In turn, that limits the game's potential Halo effect (pun intended) on the industry.

Furthermore, the traditional video-game industry should be very, very frightened of Apple.

We've already seen massive disruption in the traditional mobile-gaming business by smartphones like the iconic iPhone (see Nintendo Joins the Long List of Apple Victims).

But look forward.

An Apple television set is on the way (see Four Reasons iTV Will Be the Easiest Money Apple's Ever Made), and I'd say it's a near-certainty that it will have built-in gaming capabilities. There is zero chance that it will match the capabilities of a dedicated console, but as we've learned with smartphones, convenience and low price go a long, long way with a substantial chunk of casual gamers.

Furthermore, given advancements in mobile-graphics processors, I see no reason why future iPads, and other tablets for that matter, couldn't function as gaming consoles -- just add a video output and a controller. (See With Apple iPad 3 Coming, Android Tablet Market Should Be Shaking in Its Boots.)

Now as far as picking video-game stocks go, we are in quite a tricky spot, simply because it's so difficult to figure out price levels at which investor expectations will bottom out ahead of the next cycle.

Compounding the difficulty is the fact that in the last cycle, there was no broad industry lift -- the stocks really were all over the place.

GameStop was a momentum favorite through early 2008, before crashing spectacularly. Activision was also a real monster for quite a while, but it's never quiten gotten over the death of Guitar Hero. EA actually peaked in early 2005, before the cycle started. THQ boomed in 2005 and 2006, but was hit by heavy competition in 2007 and never recovered. Take-Two was a rollercoaster due to a takeover bid from EA that was later abandoned, as well as wild ups and downs in its own product cycles.

So looking from here -- it seems best to avoid these names until the industry figures out ways to offset the secular challenges presented by social gaming and the newest generations of multifunction mobile devices.

Twitter: @MichaelComeau

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