Stock Ticker: 2011 In Review
Format holders, publishers, retailers - who won and lost on the global stock markets last year?
It's customary, around the end of one year or the beginning of the next, to write articles declaring the "winners" and "losers" of the year. The games press, in particular, loves this tradition - perhaps it's something to do with the nature of what we're writing about, but it seems that games writers are obsessed with working out who has "won" or "lost" even the most non-combative of situations. Who won E3? Who lost GamesCom? Who walked away with TGS? Who took a beating at EG Expo?
The reasonable response to most of those is probably "who cares?", but there's one game which every company in the industry definitely wants to win - and that's the international high-stakes roulette wheel that is the stock market. In fact, much to the chagrin of consumers and creatives alike, the realities of modern market capitalism mean that the games business (like every other business) picks its top executive staff not for the ability to produce great products, but for their ability to pander to the markets - managing expectations, massaging figures and only concerning themselves with great videogames when that's a vital part of the market strategy (and sadly, it sometimes isn't).
As such, it seems appropriate to look back at 2011 a little more coldly than most retrospectives of the year have done so far, and look at how the industry's top companies performed on their respective stock markets. One word of warning is due; these figures aren't necessarily representative of anything about the firms' actual financial health, the quality of their products or even their growth. Stock markets don't trade on sensible things like that. They're driven by an insatiable desire for growth which deplores stability, as well as by powerful currents of rumour and sentiment. A stock market collapse doesn't necessarily mean you're going bust - but it probably means that you're going to have a radical change of top management very soon.
With that being noted, let's look first to the industry's behemoths - the platform holders. Here's how they stacked up in 2011:
This graph shows some pretty clear water between the Japanese duo of Nintendo and Sony and their American rivals at Microsoft and Apple (whom I've included essentially as a platform holder representative of the wider mobile market - I think we're now long past the point of there being any debate about whether Apple directly competes with gaming platform holders or not). However, it's not exactly a fair graph, for a few reasons.
Firstly, we're only interested in games, and not all of these companies are equally engaged with games. For Nintendo, games are 100 per cent of its business. For Sony, it's a large and vitally important business, but not even half of the whole enterprise in turnover terms. Microsoft's Xbox business is absolutely dwarfed by the scale of Windows and Office. Apple, meanwhile, probably wouldn't even consider itself to be in the business of games most of the time, even though it does increasingly promote its iDevices as gaming platforms, and takes home a healthy 30 per cent share of the increasingly massive iOS gaming market.
Compared to the ongoing struggles with Apple and Google, Microsoft's battle with Sony barely registers with most investors
So essentially, while Nintendo's performance is directly reflective of weakness in its games division, and Sony's also reflects uncertainty about the PlayStation business to a degree, the chances are that Microsoft and Apple's figures don't really bear much relation to their prowess in gaming. If the Xbox business collapsed tomorrow, it would be seen more as a strategic loss than a real financial hit for the company - it's hard to say how the stock market would react, but compared to the ongoing struggles with Apple and Google, I'd wager that Microsoft's battle with Sony barely registers with most investors.
There's a second unfair factor about this graph which we can do something about, and that's the fact that these companies trade on different national stock markets. Financial conditions in Japan and America were rather different this year, as you can see reflected in the relative performance of the Nikkei 225 (Japan's stock market index) and the NASDAQ (America's tech stocks index). Let's plot them on the graph:
Here we can see a slightly sobering reality - although the Nikkei is down for the year, Nintendo and Sony deeply underperformed compared to the wider Japanese economy. In the USA, while Apple outperformed the NASDAQ comfortably (and is still considerably undervalued, going purely off financial indicators from the firm's results, suggesting that either the market is worried about Apple's future or that it's just not caught up to the firm's incredibly rapid growth yet), Microsoft underperformed the index somewhat, having a year best described as "tepid".
Don't take Nintendo and Sony's figures as an indication that Japan as a whole is in trouble, though. I'll come back to those figures later on - there's good news for Japan, albeit arguably even worse news for the platform holders, when we look at a broader set of stocks.
For now, though, let's turn our eyes to the United States, and more specifically at the publishing sector. In terms of US-listed publishers, there are four major players that it's worth looking at - Activision, Electronic Arts, Take-Two and THQ. Here's their graph for 2011.
This graph shows very clearly the separation that's happening in the games business - something that's been an ongoing process for a few years, but which has come to a head in 2011 and will continue to have a major impact in 2012. Publishers that haven't achieved a certain scale just can't compete in the market right now - if you don't want to get completely squeezed out, you either get very big, or you find a niche market where you don't compete with the big boys.
THQ is a perfect example of a mid-range publisher that has failed to take either of those paths, and this year it was brutally punished by the stock market for that failure. THQ still thinks it's a big publisher. It still wants to play the AAA game, and to its credit, it does know how to turn out solid AAA console titles - but it hasn't got the scale or the resources of its larger rivals, and as costs and risks in the console space spiral, I'd argue that the window of opportunity for a company like THQ to grow up to heavyweight size has closed. That, more than any transient event, is why they're down nearly 90 per cent in valuation over 2011.
For all the talk about Bobby Kotick's abrasive attitudes being a play to the stock market, the reality is that the market isn't exactly impressed with the direction in which he's taking Activision
But look at the top of that graph. It's extremely telling that, of the big three US publishers, Activision Blizzard, the largest, is the only one to undershoot the NASDAQ. Take-Two showed moderate growth, while EA did really rather well. I've talked about this before, but this drives it home - for all the talk about Bobby Kotick's abrasive attitudes being a play to the stock market rather than to gamers, the reality is that the market isn't exactly impressed with the direction in which he's taking Activision either. It's not that the company is doing badly, but World of Warcraft is stagnant and Call of Duty, although still huge, isn't about to hit a growth spurt either. The markets want growth, and right now, nobody (least of all Kotick, I suspect) can see where Activision's growth is going to come from. Does anyone really see them creating a compelling original IP in the coming year or two?
By contrast, Take-Two has done a solid job of convincing people that it's still got the chops to create very valuable new IP, and to exploit it in a careful way that doesn't lose or alienate consumers. EA has done an even better job, and convinced people that it has an intelligent mobile, social and online strategy into the bag - although shareholders will be very anxious to see what happens to Star Wars: The Old Republic now that it's finally on the market. If it turns out to be a solid revenue generator, expect EA to soar in 2012 - if it hits the rocks and has to be rethought as a freemium game sooner rather than later, the markets will start to question the strategy that John Riccitiello has spent the past half-decade implementing for EA's revival.
Speaking of revivals, though, it's worth having a look at one last stock before we leave the US publishers. EA may be the best performing of the big publishers, but who's this plucky smaller firm soaring above the giants?
That's right - if you wanted to make serious money on a videogame stock last year, your chips should have been on Majesco, which ended 2011 more than 200per cent up on its opening price for the year. It's a small capital stock, so it's prone to much more aggressive movements than the large, expensive stocks - compare its rollercoaster ride to the placid movements of EA's stock in the above graph - but that's still impressive growth. Why? Well, investors seem to quite like the fact that the company has combined a low cost base with a keen eye for niche titles that can become breakout hits, like the Cooking Mama series. It will be interesting to follow the company's trajectory in 2012 and see how much room to expand there is in that formula.
We'll turn away from publishers in just a second, but first, let's look across the Atlantic at Europe's sole remaining global publisher of note. With Eidos now swallowed up by Square Enix, only Ubisoft's stock on the Paris exchange is really worth analysis. Unfortunately, it isn't useful to compare Ubisoft with any of the US publishers, because the Paris exchange itself has been buffeted by uncertain financial winds in the past year. Instead, I've stacked Ubisoft up against the CAC-40 index of French shares, which has unsurprisingly had a torrid year in the face of Eurozone doom and gloom.
Ubisoft, too, has had a weak year. I'll take a closer look at Ubisoft at some point in the near future, but for now it's worth noting that the company has underperformed the CAC-40, but not in any particularly unsurprising way. For the most part, Ubi's decline is the same pattern as the CAC, just steeper, and I'd suggest that's more reflective of deeply worried French investors pulling out of uncertain, risky tech stocks in favour of 'safer', more traditional investments than it is of a fundamental weakness at Ubisoft.
Speaking of fundamental weakness, though, there is one other stock on this side of the Atlantic worth a look - the UK's GAME Group, which we discussed in a Stock Ticker piece relatively recently. Let's turn to retailers, then, and have a brief look at how GAME and its US rival GameStop ended out 2011.
The division here is as clear as it was in the US publisher graph we were looking at a moment ago, and the message is the same. GameStop faces much the same challenges in the marketplace that GAME does, but investors are confident that GameStop has the scale necessary to overcome those challenges. GAME, on the other hand, is simply too small and too unambitious for any outcome other than being completely steamrollered by market changes.
GAME is simply too small and too unambitious for any outcome other than being completely steamrollered by market changes
Is the confidence in GameStop well-placed? Probably not. The company continues to hold a powerful position in US specialist retail, and it's doing a lot better than GAME in that it's demonstrating a willingness to engage with digital distribution channels and trying to integrate them with its business. Nothing GameStop has done so far has really looked like an escape route for a bricks-and-mortar business faced with a steady decline in physical product sales - and ideas like the mooted GameStop-backed, Android-powered gaming tablet device are flatly ridiculous, revealing the extent to which GameStop is thrashing around looking for a lifeline. I give it another couple of years before its graph starts to look a lot more like GAME's did in 2011.
I promised earlier on that I'd return to the question of Sony and Nintendo, and how they look in the context of the Japanese market as a whole. The Japanese stock market is interesting from a gaming perspective because there are a lot more large games companies listed there than there are on western markets. Here's how that sector fared in 2011:
The black line there, once again, is the NI225 index of the top 225 Japanese stocks, so as you can see, it hasn't been a bad year at all to be a Japanese publisher. Not all of these stocks are born equal, of course - it's worth noting that Sega Sammy is a much, much larger company than top-performer Capcom, which is the smallest of the firms listed here. Sega Sammy also has widespread interests outside the games business - specifically, it's heavily invested in the pachinko business in Japan, a business that involves a lot of property ownership in high-value town centre areas as well as being fundamentally linked to the economic fortunes of Japanese households to a much greater extent than the console software business. The take-away is that Sega Sammy is arguably far more exposed to the downside of events like last year's tragic earthquake and tsunami, which goes some way to explaining its near-flat performance last year.
After recovering from the earthquake's financial impact, every Japanese third-party publisher outperformed the Nikkei
Square Enix is a rather different case, and its weak performance relative to the rest of the sector is a consequence of multiple factors. Investors aren't entirely confident in the company's strategy, and concerns over its ability to effectively manage the scale of modern game development have been compounded by immense delays to key console titles. More important this year, however, was the exchange rate; especially since the acquisition of Eidos, Square Enix is arguably the Japanese publisher with the heaviest overseas presence and investment, and the ludicrously strong Yen has steadily devalued those investments on the firm's balance sheet over the past 24 months. This factor impacted every Japanese company to a certain extent last year, but Square Enix more than most.
The point remains, however, that the Japanese industry did pretty well in 2011. No company displayed any serious decline in its stock price, and after recovering from the earthquake's financial impact, every Japanese third-party publisher outperformed the Nikkei. The next time you hear about the Japanese games industry being in crisis, that's worth bearing in mind.
Of course, there were companies that underperformed the Nikkei - because that graph isn't complete until we add in the platform holders. Sony's status as a publisher is somewhat mid-range - it does publish some big games in Japan but its market share of software isn't all that large. Nintendo, on the other hand, is by far the biggest publisher of game software in Japan, and would be the largest company in that industry even if you stripped away its hardware business.
All of which makes it a bit worrying, at first glance, that Nintendo's performance is so awful compared to the rest of the Japanese industry, but there are two factors to consider here. The first is that Nintendo's actual software performance was as good as ever in 2011, and that these figures also don't really take into account the remarkable turnaround in the fortunes of the 3DS towards the end of the year. It will be interesting to return to Nintendo in a few months and see how the stock market has assimilated that data point.
The second factor is that Nintendo's stock is still on a decline from the ridiculous highs of 2007, when it was the most valuable company on the Japanese stock market for a short time. The Wii was a fantastic product that sold amazingly well, and the DS did even better, but neither of those things justified the investor excitement that drove Nintendo's stock to be valued at a level comparable to the world's largest car manufacturer, Toyota. It's worth noting that Nintendo is still the most valuable games company on the Japanese market, and that includes Sony. The stock price has declined, but it would be wrong to see this as a crash or a total loss of faith in Nintendo - it's a correction to a more reasonable price level. A dramatic correction, but a correction nonetheless.
Finally, let's take a brief look at Japan's emerging mobile gaming giants, DeNA and Gree. I wrote about these companies only a few weeks ago, but something I didn't do at that point was put them in the context of the rest of the Japanese games business. The very first graph in this article showed Apple in contrast to the more traditionally rooted games platform holders, so I'm effectively circling back to the same argument by showing how the burgeoning mobile sector has been valued compared to the conventional software sector in Japan over the same period.
There isn't a whole lot to say about this, but it's a striking graph. GREE was by far the top performer in the gaming sector in Japan in 2011, growing its valuation by over 150per cent. DeNA, for its part, declined heavily in the last few months of the year - I've discussed the reasons for that before, but the basic message is that investors are worried that the company's growth has flatlined and isn't convinced by its overseas expansion strategy. GREE, on the other hand, is approaching the overseas market aggressively. 2012 looks like being the year in which it really breaks out in the west.
That's it for our round-up of 2011's stock movements. Stick with us through 2012 as we'll be looking in more depth at some of the stocks discussed in this feature, as well as looking at the early performance of some of 2011's headline IPOs, such as Zynga.