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Where Investors Should Really Look to Win the Console Wars

The Exchange
Xbox One’dan ilk görüntüler

While the gaming world obsesses over which next-generation console Microsoft (MSFT) Xbox One or Sony (SNE) PlayStation 4 will kill the other, neither company is likely to offer the real advantage for investors. Instead, retailers such as Best Buy (BBY), Wal-Mart Stores (WMT) and Amazon (AMZN) are actually in position to “win” the console wars. The two headliners, meanwhile, will likely suffer from the heavy costs of marketing and subsidizing hardware.

Fans of console gaming have waited an eternity for faster, more-powerful platforms. The Xbox 360 came out in 2005 and the PS 3 a year later. Now customers will finally be able to buy the PlayStation 4 on November 15, starting at $399, and the Xbox One on November 22, for $499.

The number of console-obsessed fans has no doubt shrunk in the interim, thanks to a growing bevy of alternatives, including gaming on PCs and tablets. But there is also no doubt the remaining millions are hankering for new hardware.

Massively expensive marketing

Microsoft and Sony have already commenced massive (and massively expensive) marketing campaigns. Xbox promotions include ads featuring "Star Trek" movie actor Zachary Quinto and English soccer star Steven Gerrard. Sony’s early ads promote ordinary users playing super-detailed games. Both campaigns are rumored to cost at least $100 million.

All that pricey promotion is free marketing for the big outlets selling the new game consoles. And retailers, who have seen revenue from video game boxes and software titles tailing off for the past few years, are poised to finally see some growth.

Best Buy’s sales of video game hardware and software could bring in $2.4 billion for its fiscal year ending February 1, 2014, up 29% from 2013, estimates UBS analyst Michael Lasser. That’s out of total sales of about $43 billion. And gaming sales could top $2.8 billion in fiscal 2015. Along with other initiatives, booming game sales could help once-moribund Best Buy shares continue to rally after nearly quadrupling already this year.

Amazon and Wal-Mart will benefit as well, although video games are a smaller part of their total revenues. Amazon could see video game-related sales reach $1.1 billion this year, up from $640 million in 2012, Lasser estimates. And sales should continue growing, hitting $1.7 billion next year and $2.2 billion in 2015. Meanwhile, analysts currently estimate Amazon sales will total almost $75 billion this year and close to $92 billion in 2014, according to Factset.

Amazon shares are up about 40% this year despite ever-shrinking net income, as the company plows most of its free cash flow back into its fastest-growing businesses. A pick-me-up from growing video game sales will aid revenue growth, one of the key metrics still impressing investors.

Wal-Mart executives have been bragging that they aim to capture 40% of video game sales in the upcoming holiday season. That’s up from about a 25% share currently, according to analysts. At its current market, Wal-Mart could add about 0.27 percentage points to its sales this year but as much as 1.6 percentage points if it hits its target 40% share, Lasser estimates. Wal-Mart shares have lagged the market, gaining just 15% this year. Improving same-store sales growth even by a small margin would be a big help.

The long-term battle

To be sure, Microsoft and Sony stand to profit over the long term if the new gaming platforms catch on. The costs of making the consoles decline over time and a greater share of marketing falls on video game publishers hawking new titles.

The winner of this long-term battle between the two companies is less certain. Both sides have amazing-looking, exclusive game titles and plenty of extra online features. Sony has a lower up-front cost but Microsoft is bundling its gesture and voice analyzing Kinect technology. And some investors would even like to see Microsoft spin off its gaming business, a course of action supported by CEO candidate Stephen Elop, according to recent reports. Picking a winner at this stage is almost impossible.

So, for this year, investors might want to take the easier route and look to the game sellers for a happy holiday season.