Tags: Media, Video Games

Traditional Media Looks to Cash In On Fast Growing Video Game Industry

By , Money Morning •

By Jennifer Yousfi
Managing Editor

French media giant Vivendi's (BIT:VIV or PINK:VIVEF) recent deal to buy a major position in U.S.-based Activision, Inc. (NASDAQ:ATVI) has turned the market's eye to other video game tech stocks.  Activision's stock rose on 24% Monday after the deal was announced, but other gaming stocks also showed gains as investors bet on potential take-over targets.

  • Take-Two Interactive Software (NASDAQ:TTWO), makers of "Grand Theft Auto," rose 8.7% to close at $16.28.
  • THQ Inc. (NASDAQ:THQI) rose 1.8% immediately following the announcement.
  • And France-based Ubisoft Entertainment SA (EPA:UBI) rose 5.3%.

Two companies that did not benefit from the announcement were Electronic Arts Inc. (NASDAQ:ERTS) and China-based The9 Ltd. (NASDAQ:NCTY), of which EA currently holds a minority stake.  Both stocks lost in trading on Monday.

The9 Ltd. has a licensing agreement in place with Vivendi to distribute "World of Warcraft," one of the most popular online role-playing games, in the China market.  Investors fear Vivendi's new deal with Activision, a top EA competitor, will threaten this profitable agreement.

Video games are a multibillion-dollar industry and media conglomerates are looking for ways to capitalize on this fast growing entertainment sector at a time when traditional media like movies and music are struggling worldwide.

Revenues from console and online games are expected to outpace film and music revenues this year.  The video game market is expected to grow 9% annually over the next several years to become worth $48.9 billion by 2011 as reported by the Economist.com. 

"I do believe that consolidation ultimately is inevitable. Video-game development is not getting any cheaper. It's a capital-intensive business, and I don't see that going away. That will drive some of the smaller competitors out," Take-Two Interactive Software Chief Executive Ben Feder told a UBS investment conference on Monday.

Traditional media firms have incentive to buy an established video game company rather than invest the start-up time and capital needed to build their own in-house division.

BMO Capital Markets analyst Edward Williams told Reuters that Chinese and Korean game companies make appealing prospects to traditional media firms due to their ties with fast-growing Asian markets and familiarity with profitable online subscription business models. 

"You can't ignore players in Asia," Williams said.

Companies to watch include: China-based Shanda Interactive Entertainment Ltd. (NASDAQ:SNDA) and Giant Interactive Group Inc. (NYSE:GA) and South Korea-based NCsoft Corp. (SEO:036570).

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