Don't Cry for Electronic Arts

On October 27th I wrote a post entitled "Video Games Uber Alles" speculating that Activision (ATVI) and Electronic (ERTS) would be good acquisition candidates for other larger entertainment companies. I put my funny money where my mouth was when I purchased shares of ATVI on www.SocialPicks.com for $19 on November 20, saying that "Guitar Hero was ATVI's Grand Theft Auto." Now Vivendi Universal is buying ATVI for $27 and merging it with its great Blizzard Entertainment massive multiplayer franchise. (By the way, is that an amazing franchise? Blizzard is projected to have $1.1 billion in subscription revenues from 9.3 million World Of Warcraft gamers in 2007. Operating margins of 50%!)

Vivendi Universal understands the power and stickiness of these video gaming franchises understands that no media company of the digital age will thrive without gaming as a core competency. Video gaming, virtual worlds, social networks, Youtube, iTunes, Pixar, Kaneva, its all finally converging.

ERTS is still independent, has an amazing sports video game franchise and would make a nice fit for Disney (DIS)/Pixar/ESPN. It's new CEO from Elevation Partners is a deal maker, who obviously saw opportunity at his former employer EA. Now he's back to make EA a major force. Why else would you leave the cushy and lucrative world of private equity? EA under John Riccitiello has already purchased former Elevation video gaming companies Pandemic and Bioware for over $800 million. A few days before the Vivendi/Activision deal broke, Ricitiello was quoted saying most of the best independents had been bought up. So how do you make your mark and get ERTS stock out of its mid-50s malaise? You sell out to a big entertainment company like Disney or Sony (SNE) the way ATVI did.

So don't cry for Electronic Arts because it's no longer the undisputed VG leader or because it now has formidable foe in Blizzard and Activision. Rejoice because BIG media is finally waking up to the power and potential of a good video gaming franchise. ERTS is now in play.

Video Games Uber Alles

Why are stocks like GameStop and Nintendo and Activision among the best performing stocks over the past few years [see stock chart]? Because video gaming has become pervasive. People who were raised on Space Invaders, Tetris and Pong are now the movers and shakers of our society. The video gaming market has swelled from the 16 year old boy locked in his room to practically anyone with a cell phone. I have two children ages 12 and 9 and I can honestly say that some of our best family time has been tethered to a controller in front of our TV. This is one reason why I am a longterm bull on these stocks and a reason why I think sometime soon, one of the big studios is going to make a play for these largely independent creative content companies. Now that Nintendo is something like the third largest company in Japan as measured by market cap (surpassing Sony), it may be too late and too difficult for them to be acquired. However I look at Activision and Electronic Arts as possibilities. And GameStop may be in the best position of all as a well run retailer with a diversified stake in the business.


Check out this recent article in Wired by Rex Sorgatz entitled "When Reality Feels Like Playing a Game, a New Era Has Begun". The author does a really nice job explaining the paradigm shift.

Who Will Buy GameStop?

With all of the reports of excess capital sloshing around the globe you can't help speculating about potential mergers and buyouts.

How about GameStop [GME] - one of my favorite stocks. I just read that the company recently opened it's 1,000th store overseas. Since its acquistion of EB Games, GME has been on a tear. As of the end of Q1 2007, the Grapevine, Texas-based video game retailer had 4816 which is roughly double the number the company had 18 months prior. And earnings have been breaking records thanks to the boom in video game hardware and software brought on by a new generation of consoles from Microsoft, Sony and Nintendo.

GameStop's overseas footprint falls mostly in Europe, specifically in Italy, Norway, Portugal, Spain, Sweden, Austria, Denmark, Finland, Germany, Great Britain, Ireland, Switzerland, Australia, Guam, New Zealand and Puerto Rico.

Video Gaming is clearly a global business and one of GameStop's main "brick and mortar" competitors in the U.S. is Best Buy [BBY] which has a market cap of $21 billion. That's more than three times greater than GameStop's $6 billion market cap. However apparently electronics retailers like BestBuy dont get the respect on Wall Street that certain specialty retailers like GameStop do. GameStop has a p/e of around 36 while Best Buy's is less than half that.

Best Buy is also eager to expand overseas however it has mostly focused on China. European expansion is glaringly absent. Even though they have very different approaches to retailing ( big box versus mall stores), they both are targeting the same customers. Capital is easy and the urge to merge is becoming more infectious. Would GameStop make a nice acquisition for Best Buy?
GameStop is one of the best pureplays in video gaming. Besides the retail stores, it has a thriving Web commerce operation and a magazine that has over 2.7 million subscribers making it one of the strongest magazine franchise out there. Most of these subscribers have provided GME with their email addressses and they also have affinity bonus cards that bring them back to the stores after weekly emails are sent out advertising deals. GameStop is a clear example of a tradition retailer that is using the Web effectively to improve business. So if another bigger retailer like Best Buy doesn't buy GME, who will? A media company? News Corp [NWS], Interactive Corp [IACI]?

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Dual Buffett Strategy

Christopher Rees' wild life is the stuff of Jimmy Buffett songs. His investment track record is more like Warren's.

Chris Rees may be the best virtual portfolio manager in the world. In terms of five-year performance his 44.6% annual return, as measured by Marketocracy.com, is the No. 1 of all 88,000 online portfolios it tracks. Still, Rees is quick to point out that he is not "a very smart" guy.

Forty-seven years ago at age 10, British-born Rees was pegged by his teachers, as he puts it, "to shovel horse manure on loganberry plants." Rees never went to university and instead left his home in Stony Stratford at the age of 16 to see the world. Over the next 20 years, that is exactly what he did.

These are the first three paragraphs of another Armchair Guru column I recently posted on Forbes.com. This guy is an amazing stock picker. If you click through on the link below, you can read the full story and get his top five stock holdings. If you are interested in investing in a portfolio tracking Rees' picks you can contact Marketocracy.com.

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Sirius & XM: Is Advertising Up Mel's Sleeve?

As expected the National Association of Broadcasters is lobbying vigorously against the proposed merger between satellite radio companies Sirius[SIRI] and XM[XMSR]. Here are some excerpts from a recent dispatch to its member radio stations:

• When the FCC authorized two satellite radio operators in 1997, it specifically prohibited the nationwide systems from merging. Nothing has occurred in the 10 years since to warrant changing the rules for XM and Sirius.
• XM and Sirius are unique in their ability to provide portable radio service on a nationwide scale. Clearly a merger between these two satellite radio giants would create a monopoly.
• Companies who make bad business decisions, such as spending hundreds of millions of dollars to secure talent, should not expect a government bailout. If that's the case, the floodgates will be open to bailout the more than 30,000 companies that filed for bankruptcy in 2006.
• The precedent is clear based on the FCC's action in the DirecTV/Echostar proposed merger ? the FCC prohibited that merger, finding that even if they considered the merger in the context of the whole market, they could not find the merger "in the public interest."

Cut through all the posturing and it is clear that the radio folks are scared. Their mature cash flow business has been in trouble for years. That is why LBO firms run the show now. Moreover many listeners are bored with terresterial radio because it has increasingly adopted cookie cutter corporate approach to radio. The stations are all the same and there are too many ads.

Nobody in the radio business wants to deal with a bigger and stronger satellite competitor that will essentially have a lock on the automobile industry. Drive time listeners are the heart of the radio business and a few months of free satellite radio to all new car buyers leads to a lot of subscribers.

However I think there is an even greater threat to the radio business. Radio's share of the advertising dollar has been under attack for years, first cable and more recently from the Web. Despite his new post atop a "commercial Free" subscription radio company, Mel Karmazin's is still one of the greatest advertising salesmen in the broadcasting. That is how he started his career, how he made Infinity great and how he built CBS radio. It is his strength.

If the merger goes through he will have a company with a 14 million subscribers around the nation and in Canada. He also has content deals with some great franchises, from Howard Stern to Nascar, NFL, Oprah. I listen to Sirius and I can tell you that, yes there is advertising on talk shows. And it is significant. The problem is most of it is schlocky. Things like Mangroomer, a back hair remover or diet pills or adult web sites.

I have also noticed that since Karmazin arrived advertising revenues have grown rapidly from $6 million in 2005 to $31 million last year. I believe that once the two companies audiences are combined, Mel can and will step up his advertisting effort to national advertisers at higher prices. More subscribers will also mean better talent on his radio stations and the ability to attract A-list guests on his talk shows.

As a Sirius subscriber, I dont think Karmazin is a very good subscription marketer. My experiences with customer service have not been good. And if you cant keep your existing paying customers happy, it generally means big trouble for the business. As an advertising salesman Karmazin rules. This will be a big boon for Sirius/XM and hopefully they will hire a great subscription marketer to set that important side of the business straight.


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Seven Buy-And-Hold Stock Stars

Here is the lead to an Armchair Guru column I recently posted on Forbes.com. If you want to read the full text and all of the new stock picks, just click link.

Thanks to a resurgent stock market, ubiquitous technology and dirt-cheap commissions, America has become a nation of traders again. There are now an estimated 35 million online brokerage accounts, compared with roughly 13 million at the height of the dot-com bubble in 2000.
Meanwhile, sub-$5 commission rates can easily be had, and trading volume continues to climb. Click on almost any financially oriented Web site or turn on financial TV shows like Jim Cramer’s Mad Money or Fox’s Bulls & Bears, and you’re are being told to buy stocks like Sirius Satellite Radio (nasdaq: SIRI - news - people ) one day and sell them a month later. When stocks like Google (nasdaq: GOOG - news - people ) often swing 10 points in day, it is no wonder that “buy-and-hold” investing has been largely forgotten by individual investors.

Two entrepreneurial stock-picking community Web sites, Marketocracy.com and ValueForum.com, have set out in search of their own champions of the dying art of buy-and-hold investing. Each year for the last few years they have been running contests asking participants to pick only five stocks and hold them for 12 months.

CLICK here for the full text of the article and the seven stocks these guys are buying now.

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Barnes & Noble's Boneheaded Spin-Off

There is no question that hindsight is always 20-20, but when I recently saw that GameStop was having record earnings and its stock was hitting new highs, I couldnt help but think about Barnes and Noble's November 2004 decision to jettison the videogame seller from its retailing empire.

I think B&N made a big mistake, though its original shareholders may be pleased to have gotten direct ownership in fast growing GME, thanks to parental shortsightedness. Original shareholders would have been smart to dump their BKS after the spinoff. When B&N spun off GME it's long time CEO Leonard Riggio crowed that BKS had grown GME's value to around $850 million from a purchase price of $400 million in 1999. But why would any one with any vision at all sell the dominant retailer in the video game market? Video gaming after all, has for some time been widely acknowledged as one of the big growth businesses of our digital future. Giant companies, from Sony to Disney to News Corp are jockeying for a peice of this business. GME has an amazing franchise with millions of registered customers to their retail outposts and Gamestop.com. BKS was also a seller at a time when video gaming was in the midst of a pre-console upgrade funk. An obvious bottom in the business.

Today GameStop has more than doubled its market reach and has a value of $3.3 billion net of about $900 million in debt. Barnes and Noble has a net market value of around $2.4 billion. Wall Street apparently prefers the video game king because it sells for a PE of nearly 36 times trailing earnings compared to less than 20 for its bookish former parent. GME is currently being upgraded by analysts because of same store growth in excess of 20%. BKS is being downgraded because its same stores sales are going down.

And what about stockholdes? BKS has gone from about $30 post spinoff to a recent $40 recently. That amounts to a gain of 33% over the last 26 months. GME has gone from a price of $20 at the time of the spinoff to a recent $55, for a gain of 177% during the same period.

The entrenched and lackluster Riggio brothers shouldn't fret too much though. Boneheaded spinoff's are nothing new. Here are few others that may give them solice.

• BankofAmerica, which spun off its Charles Schwab division before most banks realized that the discount brokerage business was an important strategic business and before discount brokering exploded on the Web.
  
• And lest we not forget ATT, which first bought Craig McCaw's cellular company and created AT&T Wireless. They botched its management and after a stock spin off sold it to Cingular which is owned by SBC Communications. Now Cingular has purchased AT&T, renamed the entire company AT&T and wireless is its core business. Link