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Will Online Gaming Spell the End for Video Game Makers? (ERTS, TTWO, GME, ATVI)


Yesterday’s quarterly report from game shop Electronic Arts (ERTS) has already cost the company about 9% of its share price. EA reported that it lost $82 million (EPS -$0.25) on revenue of $1.24 billion. Analysts had expected EPS of $0.31 on $1.35 billion in revenue.

That may have been the good news. For the current quarter, EA expects non-GAAP revenue of $800-$850 million, which is less than the $851 million that analysts had predicted. Earnings are expected in the range of $0.02-$0.06, again below estimates of $0.13.

EA’s CEO said that demand is expected to be strong for video games this year, but that the company has “chosen not” to be optimistic. That’s a real vote of confidence in your people and your products. EA’s board is probably looking for a new CEO already.

What is causing the pessimism? EA’s lineup of games scheduled for release this quarter is very strong, with the already-released Mass Effect 2 having sold over 2 million copies in its first two weeks. EA has also accomplished a great deal in its restructuring efforts, having reduced total operating expenses from 62% to 56% of total revenue compared with the year-ago period.

EA expects shipments of all game industry packaged goods to fall by 3% in 2010. The competition for game players is coming from online games that don’t require an expensive console or any physical media.

The impact on game makers like EA and Take Two (TTWO) could be substantial. So could the impact on brick-and-mortar video game stores like Gamestop (GME), which today was downgraded to “Neutral” by an analyst from Credit Suisse. Gamestop not only has to compete with aggressive pricing from Amazon (AMZN) and Wal-Mart (WMT), but with online multi-player games.

The growing popularity of online, multi-player games like Activision Blizzard’s (ATVI) World of Warcraft may be even more important in dampening sales of packaged games. For less than the cost of a single packaged game, a gamer only needs a high-speed Internet connection to play endlessly. And there is a whole community of players who interact socially as well. The online game phenomenon, with its relatively low cost and built-in social network, is steadily eroding sales of packaged games.

What’s happening is much like what happened in the music business, where CD sales have fallen dramatically as online sales have increased. Consumers of music have voted with their feet, and gamers are starting to do the same thing.

Tell us what you think here.

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