Traditional Gaming Companies in Trouble

You want to know why Take Two Entertainment (TTWO) and Electronic Arts (ERTS) are going to have a harder time making money? Because smaller, more nimble companies like Zynga are moving on their turf. Here's an old TechCrunch post of Zynga--note that Bing Gordon, EA's former CEO, is involved in Zynga: Zynga Profile

Zynga is the creator of the new hit, YoVille, which is attracting fans not only worldwide, but also from more diverse groups, like college-age women. With its YoVille game attracting over 2.5 million active users on Facebook, Zynga is perfectly positioned to capture the growth in gaming, which is shifting away from major franchise hits to social networking and games that are able to get to the market faster, like Ultizen-style games: Interview with Ultizen CEO Lan Haiwen

Unfortunately, EA's and TTWO's problem lies within their business model. More specifically, their revenue projections rely on having hit franchises, like Madden NFL--meaning that revenue is dependent on very few sources--or on franchises that require large licensing fees. When you factor in the licensing fees a company like EA has to pay Hollywood studios (e.g. for EA's Harry Potter and Batman games), the NFL, and the NBA, you begin to see that EA is almost working to make money for other companies, while bearing most of the risk and the costs of failure.

I realize my assessment may be overly pessimistic; after all, most companies would kill to have exclusive rights to the only official Batman game, which will be a guaranteed hit. At the same time, relying on one-time hits has its own problems. For instance, EA/TTWO's business model must assume a major dropoff in sales after an initial release, because almost no game creates a major source of consistent revenue three years after its release. History has shown that a new franchise, like Spore, will do very well in an initial release, but sales will dramatically decrease afterwards, absent unusual circumstances. Thus, the larger gaming companies, despite creating blockbuster gaming hits once every few years, know they cannot rely on those hits for very long. Of course, certain games, like Grand Theft Auto, may be exceptions to this rule, but there is no guarantee of consistent success, and like most retailers, Take Two probably isn't looking forward to the 2008 X-Mas season.

Now, compare gaming software with Microsoft's Office software, which most analysts assume will attract new users and have old users upgrading for another ten years or more (despite arguably better products on the market, like Corel's Wordperfect Suite). A skeptic might look at the difficulty in creating gaming software that will attract users five to ten years from an initial release and say that even if a gaming company establishes a major hit, "So what?" The competition and costs in continuing to establish blockbuster hits will continue to be fierce and never-ending, while also being based in part on luck and consumer fickleness. It's now more apparent why the X-Box, even with Microsoft's money behind it and an in-house gaming development team, has had such difficulty making a net profit. Indeed, Microsoft recently lowered the price of its console to take market share from rivals--showing that it recognizes consumers have become more cost-conscious, exposing the gaming market's reliance on discretionary consumer income: X-Box Price Cut

If social networking games and mobile gaming are the future, then smaller, more nimble companies will be more competitive because of their smaller size, which leads to lower overhead, and their focus on bringing less complex games to market, which allows games to be introduced to the public faster and with less potentially devastating financial consequences. In contrast, if EA spends two years perfecting its new Batman game, and sales are flat, it will lose millions of dollars.

When I began analyzing the gaming market in light of the aforementioned issues, I came to the conclusion that the best way for EA and TTWO to continue growing would be to use their substantial cash reserves to acquire smaller companies; in other words, to choose the route Larry Ellison took Oracle (ORCL): Oracle's Acquisitions. Despite Oracle's proven software business model of smaller acquisitions and generating (not paying) licensing fees, most large gaming companies are trying to merge or buy out other major companies, which reveals a much different business strategy--one that may be completely out of touch with the future of gaming.

John Edgar Wideman

Most people who know me know I love basketball. In honor of the recent NBA regular season tip-off, I wanted to introduce readers to John Edgar Wideman. Mr. Wideman, a controversial writer, has some interesting pieces on basketball and was a former All-Ivy League forward for U of Penn. His daughter, Jamila Wideman, played in the WNBA (thanks to former Stanford star Heather Owen for giving me the heads-up on this familial connection). Here is one paragraph from an interview with Mr. Wideman, where he weaves basketball within the larger context of life:

[B]asketball and other contact sports are all about testing, pushing, within arbitrary frameworks. They are all about physicality. So it was very natural to me. I trust the body. I trust pleasure. I trust pain. You can muck around with those a little, but after a while they win. They tell you they're the boss.

http://findarticles.com/p/articles/mi_m2838/is_2_34/ai_64397591/pg_1

Here is my favorite paragraph from Wideman:

Well, if something terrible happens, you've got to do something about it. Your choice is either to be crushed by it or to carry on. That's a choice all the time. At this point today, and in my work so far, I have tried to suggest that it is worth carrying on. That's in fact what I am doing. I think the best thing and the worst thing about life is that you don't know what is going to happen. The best thing and the worst.

http://www.salon.com/nov96/interview2961111.html

Wideman's most popular basketball book is Hoop Roots: Basketball, Race, and Love. I have not read it but hope to start it one day--right now, I am still working through Pat Conroy's delightful book, My Losing Season.

Warren Buffett on Geeks

Today's WSJ had another gem from Warren Buffett (front page). Regarding the computer programs that financial firms relied upon to evaluate so-called safe investments and derivatives, Warren delivered another classic line:

All I can say is, beware of geeks...bearing formulas.

Oh, the obviousness, especially post-LTCM.

Genetic Ancestry

National Geographic is building an ancestry database. It's called the Genographic Project, and it's cheaper but much less specific than the 23andme/ genetic test:

https://www3.nationalgeographic.com/genographic/

For $99.95, you will get a kit in the mail where you provide some DNA for analysis. This is accomplished by scraping the inside of your cheek and then placing the samples in a watery solution to ship to National Geographic. My first sample didn't work, probably because I ate food too close to the scraping, but my second sample had enough DNA for analysis. It turns out I am a member of the Haplogroup J and J2. Wikipedia has a good entry on this haplogroup:

http://en.wikipedia.org/wiki/Haplogroup_J2_(Y-DNA)

Apparently, my particular haplogroup is shared by everyone from Greeks to Italians to Iranians to Sephardic Jews. Here is the particular breakdown of shared ancestry, from Wikipedia and National Geographic:

Iraqis 29.7%, Lebanese 29.5%, Syrians 29%, Sephardic Jews 29%, Kurds 28.4% , Turks 27.9%, Georgians 26.7%, Iranians 23.3%, Ashkenazi Jews 23.2%, Greeks 22.8%, Italians 19.3%, Tajiks 18.4%, and southern Spaniards 10%.

Wikipedia had a more expansive list than the National Geographic results, so after you receive your haplogroup results, you should view the relevant Wikipedia entry for more information.

I'm not sure what these results really show. Much of it is probably based on the program's original ancestry database. For example, if not enough Persians are in the original database, then fewer samples will be classified as Iranian. I'd be very interested in seeing how National Geographic set up its original ancestry database before it cross-compared new DNA samples.

My sister also did the test and her haplogroup is found disproportionately among the Finnish in Finland. So it appears she and I are a combination of Mediterranean and Scandinavian ancestry. What does it all mean? Who knows? My Mediterranean side prefers warmer weather, so maybe I will stay put in California. On the other hand, perhaps this will convince me to go to Finland one day and visit. I've always liked Matt Damon's character in Good Will Hunting, and Damon is Finnish-American. On the other hand, apparently Aileen Carol Wuornos (a serial killer) is Finnish-American, too. It just goes to show you there's not much you can glean from genetic data.

Even so, if some government official from Finland sees this post and wants to offer me a free trip to the Motherland, I'd happily accept--I mean, there's nothing wrong with a country taking care of one of their long-lost emigrants, right? I'll go brush up on my Finnish--especially these two phrases: Minä en ymmärrä suomea, and Puhutteko englantia?

Election Won't Have Long Term Impact

From AP writer Madlen Read:

[I]nvestors shouldn't get too caught up in the market's short-term reaction after the election results. The Dow surged, for example, after President Hoover was elected in 1928 — and the next year the it crashed, ushering in the Great Depression.

If the next two unemployment reports show increased layoffs, they will overshadow any election results. If you are a pessimist who believes the market has already priced in an Obama election and is due for another technical bounce, one short-term strategy might be to buy now and then sell in mid-January 2009. Personally, I am overweight tech stocks.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

Harvard Law Grad Burns Diploma

A Harvard Law grad has burned his diploma and has quit the daily grind:

ABA Journal Article

http://adventuresinvoluntarysimplicity.blogspot.com/2008/10/follow-your-dreams.html

His blog is here:

http://adventuresinvoluntarysimplicity.blogspot.com/

I've also learned that there is something seriously wrong with law firm life. I've been blogging for five months now, and I am still surprised by the sheer number of e-mails I receive from other lawyers who are dealing with some of the very same issues I struggle with. I think there is a yearning out there for a way to reconcile the demands of a legal career with other life goals. Many lawyers feel that they have rejected important aspects of themselves in exchange for a life they no longer feel they want to live. They feel trapped because they have to pay a mortgage, student loans, private school tuition, etc. ... but have no idea how to get out.

I think it is important to emphasize that not every lawyer working at a law firm is unhappy. Some of my very best friends have thrived in that environment and are genuinely happy. If you derive genuine, meaningful pleasure from the profession and can overcome all the obstacles that this lifestyle places on your personal life, then you have it made.

Like most things in life, law practice is what you make of it, but there are definitely more workaholics in the legal profession. For me, it's not the practice of law that is problematic, but the 24-7 nature of the job. I feel discombobulated when I am not working because I am afraid I might miss important messages and phone calls; also, being a solo practitioner, it's almost impossible to take two week vacations. I've gone five years now without a two week vacation (and I'm not sure if I've taken any one week vacations, either, except one time when I was best man). I hope to take a two week vacation next year. A friend suggested San Luis Obispo, so I might go there for a simple, relaxing vacation.

Recession Hits Law Firms

Two major SF law firms have shut down:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/10/31/MNA113S07P.DTL

You know the economy's bad when lawyers can't find work. On the other hand, like most professions, certain subgroups do well even when an overall industry doesn't. For example, bankruptcy lawyers, especially those who can handle Chapter 11s, will have plenty of work. Family lawyers probably aren't worrying too much, either. As for me, a labor and employment attorney, I'm not sure how everything will shake out, but I'm not overly concerned.