For this week's edition of "Game On," The Fly spoke with Wedbush Securities analyst Michael Pachter to discuss a number of matters pertaining to the video game sector, including the upcoming earnings period, Take-Two (TTWO) raising the price for the next-generation versions of "NBA 2K21," and more.
QUARTERLY RESULTS: As major publishers report quarterly results soon, Michael Pachter said that all the major gaming companies are going to "kill it" in terms of their results. "On a relative basis, the guys who win the most are the guys who have the most of the revenue that comes from free-to-play games, and they guys who win the least are the guys who have the least amount of revenue from free-to-play games," the analyst said. "And the reason for that is that if you are 100% free-to-play, such as the mobile game guys like Zynga (ZNGA) and Glu Mobile (GLUU), then if people are playing your games longer, that’s just more opportunities to sell them stuff. If you are an almost pure console publisher like Nintendo (NTDOY), where there’s almost nothing to buy in a game… and your revenue actually comes from people buying your games, then the only way you make more money in this current environment is if people buy more of your games. But playing existing games longer doesn’t make you more money.”
“If you’re playing Candy Crush (ATVI), and you play it 20 hours a month, and you spend $5, and then you go from playing 20 hours to playing it 24, then you’re going to spend $6, period," Pachter said, adding, "if you’re playing Animal Crossing, you buy it, whether you play it 20 hours a month or 24, you’re not spending more money.”
The analyst noted that, if he had to rank by upside, he would say that the mobile-focused companies such as Zynga and Glu Mobile, who make nearly all of their revenue from microtransactions, would be the highest, Activision Blizzard would be next, then Take-Two and Electronic Arts (EA), then Ubisoft (UBSFY), and then Nintendo.
WBIE: The Information's Jessica Toonkel reported last week that Microsoft (MSFT) had expressed interest in acquiring Warner Bros. Interactive Entertainment, AT&T's (T) video game business. The news followed an earlier report from CNBC saying that Take-Two (TTWO), Electronic Arts (EA), and Activision Blizzard (ATVI) have all expressed interest in acquiring the business. When asked which suitor is most likely to get a deal done for the unit, Pachter said that the operative questions are “is Warner Bros. selling its development capability and existing IP?” and “is it licensing the rights to use its IP with future games?” "If [AT&T is] licensing its rights to use in future games, Microsoft’s not a good bidder, because Microsoft will not sell those games on PlayStation," he told The Fly. "So why would you sell to Microsoft if the games are only going to be on Xbox and PC? Wouldn’t you rather sell to Activision, or EA, or Take-Two, who will maximize revenue and publish on every platform?”
“If, on the other hand, Warner Bros. is looking to sell the perpetual license to use all the DC characters, Lord of the Rings, and Harry Potter for video game purposes to any of those guys, sure Microsoft can bid up, they just won’t make as much money if they publish it on Xbox only," Pachter added. "But they can bid for it, but to sell it to them for a limited market opportunity if you had an ongoing royalty, would not make sense.”
The analyst said that EA may have the advantage amongst its peers as they have made games with Warner Bros. licenses in the past, including DC superheroes, "Lord of the Rings," and "Harry Potter," though Pachter noted that Take-Two is "determined to participate."
“But I honestly don’t know,” he added. “Warner’s going to sell to the highest bidder, period.”
'NBA 2K21': Earlier this month, 2K announced that its upcoming basketball sim "NBA 2K21" will be available for $59.99 on current-generation platforms while the PlayStation 5 (SNE) and Xbox Series X version of "NBA 2K21" will be available for $69.99. In addition, instead of using the Xbox Series X's upcoming Smart Delivery system for users who want to want to purchase the game on PS4 or Xbox One and upgrade the game later with new consoles, 2K is offering the "NBA 2K21 Mamba Forever Edition," which will be available for $99.99 for both current and next-generation platforms and will include dual-access where purchasing "Mamba Forever Edition" on either current or next-generation platforms provides a copy of the standard edition game on the other generation at no additional cost, within the same console family.
When asked if the move by the Take-Two unit could be a harbinger of a broader increase in software prices, the Wedbush analyst said that he has never seen an individual publisher raise the price of a standard unit before. "I’ve seen them raise the price on their premium version...but I’ve never seen a software publisher do that independently," he said. "It’s always been the console manufacturer that recommends the retail price of the software. And although U.S. law says that the MSRP price is the suggested price, the manufacturer cannot tell them what they will charge.” “Here we go, Take-Two is doing that," he added."
“My call is it’s going to fail miserably, spectacularly, because the manufacturers, Sony and Microsoft, are not recommending this," Pachter continued. "If they don’t recommend it, all the other publishers are going to watch and see what happens.”
The analyst noted that, with the Xbox Series X's Smart Delivery service allowing for free cross-generation upgrades, "NBA 2K" will "back down" if every other game is $60 on Xbox One and free to upgrade to Series X. “My gut is the other publishers will not buck the console manufacturers," he said. "They will not raise prices. My gut is that consumers will say “this sucks, and I’m not getting anything more for $70 than I am with $60.””
AMAZON: Earlier this month, Amazon Game Studios (AMZN) announced that its free-to-play multiplayer game "Crucible" will be moving to closed beta following its release for download on May 20, 2020. When asked if the move casts more doubt on Amazon's ability to become a major game publisher, Pachter said that one failure won't spell the end for Amazon in video games, as they have "plenty of stuff in development now." “One failure isn’t going to cripple Amazon, so I guess the answer is, if we thought they were 99% likely to keep making games, now they’re 98% likely," Pachter told The Fly. "It’s not like they’re going to decide after one failure that they’re not going to try anymore.”
“I think if they fail two times, then maybe they’ll think about getting out," the analyst continued. "If they fail three times, that’s more likely.”
“Making games is hard,” he added. “It takes some magic to make games well, so give them a chance.” The Fly notes that, a day after this interview was recorded, Amazon delayed the release of its upcoming video game "New World" to spring 2021 from August 25.
XBOX EVENT: Microsoft has an upcoming Xbox Series X software event on July 23, during which the company is expected to showcase more first-party titles for the upcoming system roughly one month after Sony's big PlayStation 5 reveal event in June. When asked if the Xbox event could swing momentum their way with a strong showcase, Pachter said it "doesn't really matter" as both consoles will probably be successful anyway. "They’re both going to sell fine," he said. "Ultimately, the difference in sales is going to be more dependent on price point than what happens in June and July.”
"Game On" is The Fly's weekly recap of the stories powering up or beating down video game stocks.
