MARKET COMMENT
Games Developers Are A Bad Investment

By David Kuo (TMFDragon)
July 29, 2003

Computer games have come an awful long way since "Tennis for Two". This was the very primitive electronic game based on the simple oscilloscope developed by the scientist Willy Higinbotham in 1958. Without Higinbotham we may not have had an electronic games industry at all.

The electronic games market has grown into an industry that is estimated to be worth over £4b annually. In 2002, software sales grew 8% and that growth, driven by the steady increase in the number of installed games consoles, is expected to continue.

In the UK, we have a number of companies involved in developing games. The biggest is Eidos (LSE: EID), which has a market capitalisation of £175m. A long way behind, in second place, comes SCI Entertainment (LSE: SEG), which is valued at  £20m.

Other notable players include Warthog (LSE: WHOG), which is worth £10m and Argonaut Games (LSE: AGT), valued at £7m. The smallest of the bunch is Empire Interactive (LSE: EMP), which is worth just £5m.

Interestingly, despite the enticing size of the electronic games market, none of these quoted software developers is especially profitable. Eidos has posted a loss in the last three years, though this year the company should make a small pre-tax profit of £5m on sales of £154m. This is largely due to the successful launch of Lara Croft on the Sony Playstation 2 platform in the US.

Elsewhere, SCI Entertainment has only managed to be profitable in three of the last five years. Argonaut Games' track record of profitability is even worse. The company has only been in the black once in five years and is expected to post a loss both this year and next. Empire Interactive has been in the red for the last three years, though it could break into profit should sales of its Starsky & Hutch game take off.

Warthog, though small, has been perhaps the steadiest performer. Turnover has improved progressively and today Warthog reported a 29% improvement in annual turnover to £11m. However, Warthog blemished its unbroken record of profitability by posting a pre-tax loss of £0.8m compared to a profit of £0.4m last time.

The computer games industry has undergone significant change over the years, and well it should. However, as Warthog pointed out today, the days of the specialist games developers are likely to be numbered because the already sophisticated technology is getting even more complex.

This could spell the end for the smaller games developers as scarce resources are channelled into bigger outfits. I would not be surprised if some of the less profitable names bite the dust. And let's not forget that even a product that was endorsed by David Beckham could not save Rage from the clutches of the receivers.