What If Electronic Arts & Activision Develop Skill-Based Games For Las Vegas Casinos?

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ATVI: Activision Blizzard logo
ATVI
Activision Blizzard

The U.S. gaming industry has undergone a major change over the last few years, with the gamers shifting from physical software titles to digital gaming. On one hand, the new physical software sales dropped gradually, driven by lack of core titles in the market. On the other hand, the launch of next generation consoles by Microsoft (NASDAQ:MSFT), Sony, and Nintendo, revived the hardware (console) sales. According to the research group NPD, the software sales in the U.S. declined 22% from $6.9 billion in 2012 to $5.3 billion in 2014, whereas the hardware sales rose nearly 28% from $4 billion in 2012 to $5.17 billion in 2014.

Source: NPD research group

Top U.S. video game developers, such as Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ: ATVI), have changed their business plan over the last few years. Both the companies decreased the number of new franchise releases and focused more on improving the existing core franchises. The core titles of both the companies are the top selling games in their respective genres.

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However, the increasing popularity and demand for digital gaming has already started affecting the physical media sales for video games. The U.S. game developing companies have already started looking for new markets to tap into, primarily online gaming. Recently, a bill has been proposed in the state of Nevada that will allow the entry of slot machines with arcade-game elements, skill-based games, and other unique features, which would require more skill and less luck, in Las Vegas casinos. Considering all the industry and company trends, as well as the current financial condition of the companies, this scenario can strongly impact the stock of both the companies.

Our $60 price estimate for Electronic Arts’ stock is 3% below the current market price, whereas our $25 price estimate for Activision Blizzard’s stock is in line with the market price.

See our complete analysis for Electronic Arts | Activision Blizzard

Arcade Gaming In Las Vegas Casinos To Provide Incremental Revenue Stream

In December 2014, the Association of Gaming Equipment Manufacturers (AGEM) proposed a bill (Senate Bill 9) that allows adding an element of skill to the slot games in Nevada casinos. It requires the Nevada Gaming Commission to adopt regulations relating to the development of technology in gaming, as well as to allow flexibility in payout percentages or a game’s outcome. [1] The bill is aimed at introducing arcade-game style gambling and video game technology in Nevada casinos. This means that if a player masters certain skills included in these games, his/her chances of winning would improve. We have discussed this in detail in our prior article. (See: Skill-Based Slot Machines To Provide A Win-Win Situation For Casinos & Gaming Industry)

These games, if the bill becomes law, will be introduced on the slot machines in the Las Vegas casinos. Slot machine gambling in Nevada is alone a $7 billion market, which now makes it a very lucrative segment for the game developing companies. If Electronic Arts and Activision Blizzard plan to enter this market, after the bill becomes a law, it will be a whole new market for the two major gaming giants and it can provide them with incremental revenues.

For Activision Blizzard, Trefis estimates the revenues from distribution segment to reach $572 million by the end of 2021. Moreover, according to our estimates, the distribution gross profit margins were nearly 30% in 2014, and it might remain around the same figure till the end of our forecast period. If Activision enters the new market, and develops & distributes arcade and hybrid games to Las Vegas Casinos, the annual revenues from the segment might cross $1 billion by the end of our forecast period, with the gross profit margins reaching 40% over the same period. This scenario will provide a 7% upside to the Trefis price estimate for the company.

For Electronic Arts, Trefis estimates the number of games other than FIFA and Madden NFL released per year to be 11 in 2015 and to remain close to this number by the end of 2021. Moreover, we estimate the product gross margins to be 63.6% in 2015 and thereafter, to rise to 70% by the end of our forecast period. If Electronic Arts taps into the casino gaming market, and starts developing new games for the Las Vegas Casinos, the number of games other than FIFA and Madden NFL released per year might jump to 16 by the end of our forecast period, whereas the product gross margins might jump to 72% by 2021. This scenario will provide a 15% upside to the Trefis price estimate for the company.

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Notes:
  1. Senate Bill 9, Nevada Legislature []