|
|
Get Four
|  | MAY 24, 2004
 TECH KNOWLEDGE By Scott Kessler Hot Players in Online Gaming Revenues are expected to triple by 2007, and companies such as Yahoo, RealNetworks, and CNET are coming on strong Two recent tech-industry gatherings in California prompted me to take a look at online games this week: the huge Electronic Entertainment Exposition (E3) in Los Angeles, which ran from May 11-14, and Yahoo!'s Analyst Day events, held May 12 and 13. From what I understand, E3 is the world's largest gathering of interactive entertainment professionals and enthusiasts. Yahoo (YHOO ) may be best known for its information and communications services, but it has a growing presence in online gaming. Video games are a bigger business than movies, measured by revenues, and online gaming is contributing significantly to overall industry growth. PC-based online games accounted for $450 million in revenues in 2003, estimates tech industry data provider IDC. (Although video-game consoles, like Microsoft's (MSFT ) Xbox and Sony's (SNE ) PlayStation 2 offer access to Internet games, let's focus on the PC-based ones here.) This amount is expected to more than triple by 2007, to $1.5 billion. Online-gaming businesses generate revenues mostly through paid subscriptions, purchased downloadable games, and advertising and sponsorships. We at Standard & Poor's Equity Research believe this anticipated growth reflects global increases in Internet users and usage, online connection speeds, and computing power. Online games are also becoming more sophisticated, particularly as they capitalize on the power of the Net for greater levels of interactivity. Moreover, online users are growing more comfortable with paying for games and related content. We view Electronic Arts (ERTS ), a member of S&P's home-entertainment software subindustry group, as a leader in the category, through its formidable video-game franchises, as well as online offerings such as Ultima Online, The Sims Online, and the Club Pogo subscription service. However, we'll focus on a few of the companies within our Internet software and services coverage group that are also forces in online gaming. Yahoo: With the country's second-most popular online-gaming Web site (according to Nielsen//NetRatings) following Electronic Arts' EA.com, Yahoo is a significant player in Internet games. Yahoo Games' freebies include card games, arcade games, board games, and word games. Its fantasy sports services are available for free or on a premium basis (includes enhancements such as real-time statistics). Yahoo's subscription service, called All-Star, gives access to special games, tournaments, and leagues. Yahoo also offers free downloadable games, as well as Games on Demand subscription packages. Although Yahoo Games generates sizable game-related and ad activity, it's only a small contributor to a company that generated $1.6 billion in revenues in 2003. We believe Yahoo will increasingly focus on the online-gaming category as the company uncovers the segment's growth and profitability potential. In particular, we believe Yahoo could make a purchase in the segment as soon as this year, perhaps of a developer of downloadable games. We think that SportsLine.com (SPLN ), which essentially signaled it is putting itself up for sale in May, 2004, would also be a logical acquisition target, given its notable presence in fantasy sports. RealNetworks: This outfit's real.com garnered more consumer content revenue in 2003 and 2002 than any Web site other than Yahoo. In 2003, RealNetwork's (RNWK ; 3 STARS; $6) games segment accounted for more than $12 million in revenues, including sales related to its GamePass subscription service, downloadable games, and game-associated advertising. Following the acquisition in January of GameHouse, we estimate RealNetworks will reap roughly $32 million in online gaming revenues in 2004. GameHouse is a developer, publisher, and distributor of online games. RealNetworks offers more than 200 free puzzle, word, and action games through its RealArcade service. GamePass for RealArcade is the company's subscription service. With the acquisition of GameHouse, we believe RealNetworks became the first major Internet media company to purchase an online-game developer. This is a major deal, because it's reminiscent of cable companies buying content providers. Think Warner Communications acquiring Time Inc. (TWX ) -- or Comcast (CMCSA ) looking to buy Disney (DIS ). Historically, once they achieve significant capabilities, distribution companies have often looked to sell content to their subscribers. Owning content can serve to differentiate distributors from their competitors and potentially boost profits. We would not be surprised if RealNetworks next sets its sights on a developer of wireless games, given its focus on wireless opportunities around the world. U.S. wireless game revenues are expected to rocket from $160 million in 2003 to $1.7 billion in 2008, according to IDC. CNET Networks: CNET (CNET ; 3 STARS; $9) takes a multibrand approach to the online-gaming category. It claims that its GameSpot is the Internet's most highly trafficked gaming Web site. Visitors and registered users can find free game-related content from GameSpot. Its GameSpot Complete, a paid-subscription service, offers video previews and reviews, unlimited downloads, strategy guides, coverage of live game-related events, exclusive video features (such as developer interviews and behind-the-scenes reports), and game information and updates via e-mail. CNET's GameFAQs and GameRankings.com Web sites provide users with access to additional content related to games and gaming. We expect CNET to continue consolidating smaller game-oriented companies, particularly ones that have more of a focus on media. In April, 2004, it acquired WGR Media, the publisher of the Wireless Gaming Review Web site. In January, 2004, CNET acquired the rights to distribute and circulate TV Game magazine in China. In sum, we view the online-gaming area as quite exciting, and we believe Yahoo, RealNetworks, and CNET are all likely to continue to pay closer attention to it. We expect these companies to increasingly invest in online gaming, both internally and through acquisitions. Moreover, S&P believes the segment will contribute an even healthier amount of revenues and profits to these companies in the years ahead. Note: Scott Kessler has no stock ownership or financial interest in any of the companies in his coverage area. He's a registered representative of Standard & Poor's Securities, Inc. Affiliates of SPSI received non-investment banking compensation from Yahoo and Electronic Arts during the past 12 months. Price charts and required disclosures for all STARS-ranked companies can be found at www.spsecurities.com  Analyst Kessler follows stocks of Internet software & services companies for Standard & Poor's Equity Research All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
BW MALL
SPONSORED LINKS
Get BusinessWeek directly on your desktop with our RSS feeds.
Buy a link now! Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
 Copyright 2004, by The McGraw-Hill Companies Inc. All rights reserved.Terms of Use | Privacy Notice |
Printer-Friendly Version
