Video Game Industry

1
Video Game Industry

• Analyst Report to Fidelity Magellan Fund Manager
• November 20, 2001

2
Agenda

• Market History Ainsley Quiohilag
• Platform v. Software Bei Wei Li
• Current Market Conditions Henry Steinberg
• Conclusions Recommendation Dana Kelman

3
Market History

• Periods Defined by Two Major Platforms
• Atari v. Colecovision
• Nintendo v. Sega
• Sony v. Nintendo
• X-Box new entry
• Atari, Sega, Colecovision failures

4
Market History

• Software Maker Sustainability
• Electronic Arts
• Activision
• Sega

5
Platform v. Software

• Platforms
• Loss Leaders
• MSFT expects to lose 150 per unit
• Gillette business model analogy
• Profits derived from software
• Platform makers develop software for their
  consoles
• Royalties from third party software developers

6
Platform v. Software

• Software Only Companies
• Ability to make software for all platforms
• No losses to recover
• High profit margins/low marginal cost
• Lower fixed costs than companies that make both
  consoles and software

7
Current Market Conditions

• Major Platform Makers
• Sony Playstation 2 debuted last year
• Microsoft Xbox and Nintendo Gamecube new
  introductions November 2001
• Intense competition
• More platforms more players
• 1 billion marketing blitz for video game
  industry
• Increased size of market (44 million consoles
  today to 70 million by 2003)
• New platform technology facilitates improved game
  quality

8
Conclusion

• Who wins battle of platforms?
• Who cares?
• Value added comes from games
• Examples Movie theaters, Sega Dreamcast
• Real winners are software makers
• Capture whole market regardless of platform

9
Recommendation

• Electronic Arts
• Industry leader
• Use clout to negotiate deals with celebrities
  sports figures
• Hedged against platform standard problem make
  software for all platforms
• Stability
• Survived past industry shakeouts