Report Highlights 'Creative Destruction' in Video Game Industry

--Tiger Group experts: Secured lenders should monitor digital downloading, mobile gaming and other trends that promise to affect values of video game-related collateral.

Sep 11, 2012, 10:00 ET from Tiger Group

LOS ANGELES, Sept. 11, 2012 /PRNewswire/ -- As any fan of "Call of Duty: Black Ops 2" or "Resident Evil: Revelations" knows all too well, the likes of huge explosions, hair-raising firefights and hordes of brain-eating zombies are fundamental to today's action-packed video games. But according to a new report by Tiger Group's  Valuation Services division, a different sort of "creative destruction" is in play within the video game industry itself. Trends like digital downloading and mobile gaming are rapidly reshaping the marketplace—so much so that some observers now liken brick-and-mortar video game stores to … well, the walking dead.

Tiger Valuation Services scours industry data from a variety of asset classes with a view toward tracking trends that might affect collateral values. The authors of the eight-page report, Creative Destruction in the Video Game Industry, note that market-movers such as mobile gaming, digital downloading and cloud computing are particularly noteworthy for secured lenders who make loans against video game-related collateral. The demise of Blockbuster video, for example, is already being seen as a cautionary tale for similar retailers. After all, casual gamers are now sidestepping consoles to play "Words with Friends" or "Farmville" on their phones via Facebook, and hardcore gamers are increasingly downloading major titles to their hard drives rather than buying them at the mall.

"Speculation regarding the direction of the industry indicates that the future of content delivery to consumers revolves around broadband Internet access," the authors note. "As Internet access has expanded and broadband capabilities and speeds have increased, the likelihood is that packaged discs and cartridges, once critical to the gaming industry, will no longer be required. Rather, a gamer can simply download on demand any title at any time he or she wishes. This brings the storefront right to your living room."

But the report also highlights other factors that could affect collateral value, such as the ongoing race for game-console market share, the seasonal and hit-driven nature of video-game sales, changes in customer demographics and the mushrooming development costs associated with new titles. The latter trend makes manufacturers more likely to take big gambles by spending millions of dollars on R&D. "Gamers have demanded greater sophistication in the games themselves, requiring levels of investment that are near those of Hollywood feature films," the report notes. "This can create significant working capital issues if a large investment ends in lackluster results."

Sales of value software—those older games found in the discount bins within retail stores—also are an increasingly important factor, in part because this helps chains broaden the price points available to value-conscious consumers, the report notes. No longer prime sellers, these out-of-production games are often bought from distributors. Sales of value software tend to be less seasonal, which reduces collateral value fluctuations for secured lenders. But there are risks linked to value-software companies. For example, the report notes, these companies often make opportunistic buys of specific titles from video game distributors, thus increasing inventory-concentration risks. "Companies in the value segment of the market will likely become opportunistic purchasers of distributors that were unable to adjust business models to accommodate the change in paradigm," the report notes.

All told, the switch to digital content delivery and alternative devices like smartphones will have a big impact on distributors and retailers of physical products in the video game industry, the authors predict.  Indeed, several publishers and developers, including Activision and Electronic Arts, already let gamers download new titles. "This will result in over-inventoried positions for those companies that are unable to manage inventory levels for this change.  The impact will be strongest for those distributors and retailers that have a heavier focus on new releases (frontline products), as these are the most likely to be adopted in the digital delivery model," the report says.

"The market model for physical products will likely become dominated by value priced games and devices targeted towards the lower end of the market," the report adds. "Average selling prices will be lower on physical products in the long term as items purchased in a physical form will no longer be dominated by new releases, but rather by older and legacy titles. Distributors with established channels for value titles will likely succeed during the transition phase."

Tiger's report concludes that "while none of the current or potential trends appear to put a secured lender's collateral in immediate jeopardy, it is important to note the changes and the potential impacts which may occur in the future.  Changes within the industry can happen quickly.  As such, we strongly advise regular monitoring of key metrics as well as regular collateral valuation reviews." 

The full report is available at:

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Tiger Group and its affiliates provide advisory, restructuring, valuation, disposition and auction services within a broad range of retail, wholesale and industrial sectors. With more than 40 years of experience and substantial financial backing, Tiger offers a uniquely nimble combination of expertise, innovation and financial resources to drive results. Tiger's seasoned professionals help clients identify the underlying value of assets, monitor asset risk factors and, when needed, convert assets to capital in a variety of ways quickly and decisively. Tiger's collaborative and no-nonsense approach is the foundation for its many long-term 'partner' relationships and decades of uninterrupted success. Tiger operates offices in Boston, Los Angeles, New York and Atlanta. To learn more about Tiger, please visit

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