(TTWO) Court Ruling Boosts Gaming Industry

The gaming industry heaved a sigh of relief after the U.S Supreme Court turned down a California law that prevented minors (below 18 years of age) from buying violent videogames, referring to the ban as an unconstitutional infringement on speech rights.

Publishers were relieved as this favorable verdict bolsters their position at a time when the gaming industry is already reeling under sales pressure, which is evident from the monthly industry sales reviews.

According to the NPD data, US retail sales in May shrank 14% year over to $743.1 million, a new low since October 2006. The decline was attributable to a lower number of new game releases coupled with weaker sales of portable games.

Major video game publishers, such as Take Two Interactive Software Inc. (TTWO), Activision Blizzard Inc. (ATVI) and Electronic Arts Inc. (ERTS), were relieved by the verdict going in their favor, as a negative ruling would have been a precedent for other states to adopt a similar policy, which would perhaps have dented the already sluggish revenue growth going forward.

The game publishers feared that a negative verdict would have increased further scrutiny and government regulations over their products, thereby increasing distribution time lag. Moreover, rejections would have resulted in huge loss of money and time, as game development is a capital and labor intensive process.

Further, a fresh round of controversy and negative review of a new release could have crippled sales going forward, as evident from the controversy surrounding the franchise Medal of Honor, released by Electronic Arts in 2010, which was severely criticized for its content.

The favorable ruling added cheer to the videogame publishers whose games are realistic and at times violent. Nonetheless, hardcore gamers tend to favor these games as there has been a clear indication of the most violent games turning out to be the most successful ones.

For example,Take Two Interactive’s matured rated “Grand Theft Auto” has been the most successful franchise along with “Red Dead Redemption”. The company has recently launched “L.A. Noire”, which is quite realistic as well as violent.

The same can be said about Activision’s revenue churner “Call of Duty: Modern Warfare” franchise which has a mature rating. Its closest rival, Electronic Arts’ yet-to-be released “Battlefield 3” also has a mature rating.

Our Take

The gaming industry is undergoing a transition towards digital and online gaming. The rapid adoption of online games is expected to drive the top-line growth of most of the video game companies, particularly with a diversified portfolio, such as Electronic Arts and Activision Blizzard.

In the recently concluded Electronic Entertainment Expo (E3), every major video game publisher recognized the need to digitize their products and have been shifting the business model to the digitized format where the popular and new titles would be available in their digital versions. This would generate a revenue stream that is likely to benefit the video game publishing companies in the long run.

Moreover, quality of product, higher level of visual graphics, enhanced gameplay, online availability, and solid marketing strategies are the prerequisites for a game to succeed, irrespective of being violent or of non-violent nature, in our view.

We also believe that the tremendous success of online social gaming will further change the dynamics of the video game industry going forward. We believe that the social gaming market is well positioned for continued growth, primarily attributable to its casual, social and interactive environment compared to the more conventional platforms.

We remain Neutral on Electronic Arts and Activision, but have an Underperform rating on Take Two Interactive over the long term (6-12) months.

Currently, Activision has a Zacks Rank #2, implying a Buy rating over the short-term. Electronic Arts has a Zacks Rank #3, implying a Hold rating over the short term. Take Two Interactive has a Zacks Rank #5, implying a Strong Sell rating in the short-term.

ACTIVISION BLZD (ATVI): Free Stock Analysis Report

ELECTR ARTS INC (ERTS): Free Stock Analysis Report

TAKE-TWO INTER (TTWO): Free Stock Analysis Report

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