E3 IN REVIEW: The bad, the great, and the boring!

E3 IN REVIEW: The bad, the great, and the boring!
We attended the E3 Media & Business Summit last week in Los Angeles, CA, and met with over a dozen companies presenting products at the show, including Sony, Nintendo, Microsoft, Activision Blizzard, Atari, Electronic Arts, Midway, Sega, Take-Two Interactive, THQ, and Ubisoft.

Non-traditional game software again was the popular theme of the show, with many companies working on new games based upon music themes, targeted at female audiences, or focused on a casual market in order to expand the video game demographic beyond young men.

The big news of E3 happened right before on Sunday when Microsoft (sort of) cut the price of its Xbox 360 Pro (20Gb) to $299 from $349 in order to clear existing inventory. Sony followed by (sort of) cutting the price of the PS3 (80Gb) to $399 from $499, replacing the 40Gb model (which is being discontinued).

Microsoft had the most impactful presentation of the three console manufacturers, in our view, with an expanded offering of interactive games (e.g., 1 vs. 100) and the announcement of a partnership with Netflix.

We think that Sony had the least impactful presentation, trying to address too many topics for the time allotted. Nintendo’s presentation was “just right”, but hardcore gamers were disappointed at the lack of a major Mario or Zelda game announcement.

There were few surprises on the software front, with most of the publishers showcasing games that had previously been announced. Electronic Arts had the most impressive presentation of the publishers, in our view, showing highly polished content and having developers make many of the presentations.

We were impressed by Activision’s Rock Band rip-off, Guitar Hero World Tour, and expect the battle of the bands to heat up this fall as MTV Games/Harmonix appears to be up to the challenge with Rock Band 2. We were similarly impressed with Ubisoft’s showing, focused on a mix of hardcore and casual games.

The show was small in scope, and the spectacle of E3 is dead. The Los Angeles Convention Center concourse was as quiet as a college library during summer, with little to attract media attention.

The main game display area was similar in size to a school cafeteria (as compared to filling the entire convention center), and the “fireworks effect” of past shows was reserved for the evening parties. The best of these was MTV/Harmonix’s extraordinary “party” with mood music provided by The Who.

In our view, E3 is headed for extinction, unless the publishers and console manufacturers wake up to the fact that nobody cares about the show anymore. We believe that show is ill-timed, coming after most major holiday announcements are out, and landing during “quiet period” for most of the companies (making meetings with investors near-impossible). The lack of a spectacle will likely keep media away in the future, the lack of surprises will keep retailers away, and the lack of interaction with management will likely keep investors away.

Without these three constituencies, the show will likely lose its relevance. We strongly believe that E3 should be held no later than early June (when companies can meet with investors and when some “secrets” have yet to be revealed), and believe that the spectacle should be restored by increasing the size of the show space.

We expect modest share price appreciation for the major video game publishers to come out of E3, given that most in attendance were favorably impressed with the publishers’ showing. We recommend that investors opportunistically add to positions in Activision, Electronic Arts, Nintendo, THQ, and Ubisoft.

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