Games: Takeaways From Meetings In India
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  • 1. July 23, 2010 Industry Report Think Entertainment: Gaming Reason for Report: Games: Takeaways From Meetings In India Industry Update Atul Bagga THINK SUMMARY: 415-249-6362, abagga@thinkequity.com Over the last few days, we met with Zapak, the largest games company in India (according to the company's CEO), a couple games start ups and VCs in the media space, and spoke to a few games retailers in India. We are encouraged with an apparent strong video games culture amongst the youth and youngsters in India and believe that India could emerge as another games powerhouse (similar to China) over the next few years with a potential $1.5-2.0 billion market opportunity. We believe that the inflection point could come over the next 12-18 months, with expected strong growth in broadband penetration on the back of a recent award of wireless broadband spectrum by the government to the private sector. Similarly, with about 600 million subscribers and upcoming rollout of 3G, mobile games could emerge as another meaningful potential opportunity. We believe that Activision and Electronic Arts may have play in the Indian markets given the popularity of their franchises in India and their aggressive plans for online. KEY POINTS: • With a population of 1.2 billion (roughly 250 million middle-class population according to the World Bank), we believe India is an attractive market for consumer products. Games culture seems to have grown significantly over the last few years with a considerable media expansion that led to an increased exposure to the Western culture. In our conversations with the retailers and some of the users, it seems that the children and youth are very familiar with the top franchises (such as Call of Duty, Need for Speed, FIFA, Grand Theft Auto, Smackdown vs. Raw) and latest titles. Using China as a benchmark, we estimate that India has the potential to emerge as a $1.5-2.0 billion market for video games. • Penetration of consoles seems miniscule, given the high price point of consoles ($350-400 for an Xbox 360 Arcade or Wii versus $150-199 in the U.S.) and the video games ($55-66 for video games) that may be out of reach for a large majority of the population (average per-capita income in India is at $1,030, per IMF). Pirated games for PC (selling at $1-4 per title) seem extremely popular, according to our conversation with retailers, gaming companies, and VCs, which makes us believe that, like China, the online and free-to-play model could be the credible way to monetize the users in India. Our conversation with Zapak (the largest games company in India, according to the company's CEO), suggests that users are willing to spend for the virtual goods, and ARPPU at $20 seems in the range of that of international markets. • With only 81 million Internet users (per Internet World Stats) and roughly five million broadband users (according to International Telecommunication Union), the market for online games could be limited. However, in June 2010, the Indian government auctioned the licenses for wireless broadband spectrum, and with some aggressive private investment planned (from groups such as Reliance Industries, QUALCOMM, Bharti, and Aircel), we would expect to see meaningful growth in broadband penetration over the next 12-18 months, which we believe could be an inflection point for online games in India. Please see analyst certification (Reg. AC) and other important disclosures on pages 3-5 of this report.
  • 2. July 23, 2010 Industry Report • Similarly, mobile could be another significant opportunity with over 600 million mobile users (according to Telecom Regulatory Authority of India) and with the recent auctioning of 3G licenses and planned investment by the private sector in 3G. • While it may be too early to comment on the potential beneficiaries, we believe that companies with an aggressive plan for the online, free-to-play might have an interesting play in the Indian markets. Furthermore, India might be an easier market than China in terms of regulatory stand point and could have more direct upside for the global publishers. With awareness of top franchises (Call of Duty, Need for Speed, FIFA) and aggressive plans for the online, ATVI (planning online version of Call of Duty for emerging markets, Starcraft 2 and popularity of World Of Warcraft), and ERTS (Online version of Need for Speed, Tiger Woods, Battlefield Heroes) could have some play in the India markets, in our opinion. INVESTMENT RISKS: Gaming continues to be a hit-or-miss-driven business, and predicting successful titles versus unsuccessful titles is extremely difficult. The risk is especially high for the new and unproven IPs, and a company's reliance on the new IPs and the titles in the established franchises to reach the revenue target opens it to risk of a revenue miss. Macro headwinds and popularity of the used games and free-to-play online games. Given the current macro headwinds, used games and free-to-play online games create higher substitute competition for video games. The industry is dependent on the console cycle; unexpected start of the new console cycle will likely constrain the revenue growth and affect profitability of gaming vendors. Foreign currency exchange risk. These companies generate revenue from international operations, which exposes the companies to foreign currency exchange risks. Page 2
  • 3. July 23, 2010 Industry Report COMPANIES MENTIONED IN THIS REPORT: Company Exchange Symbol Price Rating Activision Blizzard, Inc. NASDAQ ATVI $11.62 Buy Electronic Arts Inc. NASDAQ ERTS $15.59 Buy QUALCOMM Inc. NASDAQ QCOM $39.11 Hold Important Research Disclosures Analyst Certification I, Atul Bagga, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report. The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firm's total revenues, a portion of which is generated by investment banking activities. ThinkEquity LLC makes a market in QUALCOMM Inc., Electronic Arts Inc., and Activision Blizzard, Inc. securities; and/or associated persons may sell to or buy from customers on a principal basis. Rating History for: QUALCOMM Inc. (QCOM) as of 07-22-2010 01/28/10 H 56 48 40 32 24 16 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 2008 2009 2010 Created by BlueMatrix Page 3
  • 4. July 23, 2010 Industry Report Rating History for: Electronic Arts Inc. (ERTS) as of 07-22-2010 05/27/09 07/09/09 I:H B 75 60 45 30 15 0 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 2008 2009 2010 Created by BlueMatrix Rating History for: Activision Blizzard, Inc. (ATVI) as of 07-22-2010 06/15/09 I:B 21 18 15 12 9 6 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 2008 2009 2010 Created by BlueMatrix Rating Definitions Effective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tier Buy/Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, including previously published reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Buy: ThinkEquity expects the stock to generate positive risk-adjusted returns of more than 10% over the next 12 months. ThinkEquity recommends initiating or increasing exposure to the stock. Page 4
  • 5. July 23, 2010 Industry Report Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stock is fairly valued. Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquity recommends decreasing exposure to the stock. Distribution of Ratings, Firmwide ThinkEquity LLC IB Serv./Past 12 Mos. Rating Count Percent Count Percent BUY [B] 150 69.10 17 11.33 HOLD [H] 66 30.40 2 3.03 SELL [S] 1 0.50 0 0.00 This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. The opinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state. This research report was originally prepared and distributed to institutional clients of ThinkEquity LLC. Recipients who are not market professionals or institutional clients of ThinkEquity LLC should seek the advice of their personal financial advisors before making any investment decisions based on this report. Additional information on the securities referenced is available upon request. In the event that this is a compendium report (covers more than six ThinkEquity LLC-covered subject companies), ThinkEquity LLC may choose to provide specific disclosures for the subject companies by reference. To request more information regarding these disclosures, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600 Montgomery Street, San Francisco, California, 94111. Stocks mentioned in this report are not covered by ThinkEquity LLC unless otherwise mentioned. Member of FINRA and SIPC. Copyright 2010 ThinkEquity LLC, A Panmure Gordon Company Page 5