Out with the old and in with the new. Video game developers of all sizes are surely hoping 2010 brings more joy than 2009 did. If not, we could see the movie studios stepping in to take control of the video game industry. In order to avoid this fate, several developments from this past year need to change course.
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Higher Revenues a Must
How bad were video game sales in 2009? Some suggest they'll have dropped by double-digits year-over-year, once holiday sales have been tallied. November provided some hope for developers Activision Blizzard (Nasdaq:ATVI) and Nintendo, whose respective releases of Call of Duty: Modern Warfare 2 and New Super Mario Brothers generated unit sales in the millions. Unfortunately, with the exception of the top-15 titles, only serious gamers were buying.

Price War Hurts
In early December, Wal-Mart (NYSE:WMT) dropped the prices of its 25 most popular video game titles by 20%. The question on everyone's mind seems to be whether Bentonville intends to make this permanent, or is simply looking at the move as a seasonal pricing policy. Amazon.com (Nasdaq:AMZN) seem more than willing to go down this road as well. If both of these retail behemoths were to carry this into 2010, second-tier developers like Sony (NYSE:SNE) and Microsoft (Nasdaq:MSFT) as well as video game retailers like GameStop (NYSE:GME) would be seriously affected. As a loss leader, Wal-Mart and Amazon won't feel a thing.

Profits Please
Activision sold four million units of Modern Warfare 2 its first day, generating $310 million in revenue. Unfortunately, the development and marketing costs are so high in the video game industry that even home runs like this one produce very little on the bottom line. Take-Two Interactive Software (Nasdaq:TTWO) announced in early December that its losses for all of 2009 and the first quarter of 2010 would be larger than originally projected, erasing most of the stock's gains for the year. Until the industry learns how to make money consistently, smart investors will stay away. That's probably why the film business is sniffing around. Movies are similar to video games in that they posses a flawed business model. Produce a huge amount of stinkers - along with a few blockbusters - and hope you make money. I guess misery loves company.

The Bottom Line
Three out of four of the biggest video game developers - Konami, Take-Two and Electronic Arts - have seen their stock prices drop substantially over the past five years. Only Activision has seen an increase. While there is some optimism that the worst is behind the video game business, it can't afford another year like the one just passed. (For more, see Power Up Your Portfolio With Video Game Stocks?.)

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Tickers in this Article: ATVI, WMT, AMZN, SNE, MSFT, GME, TTWO

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