Exclusive Michael Pachter Interview

Greetings GameZone. Tate Steinlage here and I am proud to be talking to Mr. Michael Pachter from Wed Bush Securities. As a gaming analyst at Wed Bush, Mr. Pachter is here to answer a wide range of questions covering the industry. Lets jump right in:

GameZone: Mr. Pachter, you’re obviously one of the best when it comes to gaming analyst, but most people don’t realize what you actually do. Can you explain to everyone what your duties are and what you do on a day to day basis?

Michael Pachter: My job is to help institutional investors (mutual funds, pension funds and hedge funds) make better decisions about investing in one of the 18 stocks I cover. Among those 18 stocks are the video game companies, and my job entails helping the investors understand what is likely to happen going forward. I primarily project revenues and earnings, but to get to those projections, I have to consider unit sales, pricing, costs to produce, competitive environment, etc. I communicate primarily through writing notes about the companies, and my notes receive broad distribution, including many members of the gaming press. The journalists are free to decide what I have “predicted” that day, but I write an average of around 15 pages of text per week, and they manage to pull two or three lines out of that each week.

On a day-to-day basis, I read as much as I can about the companies I cover and their industries, adjust models, write notes, and speak to investors. I generally work 12 hour days in the office, and another hour or so each night, 4 – 8 hours each weekend. I also travel 60 nights per year to meet with investors and to attend (and speak at) conferences. My travel entails trips all over the U.S. and Europe.

GZ: You have been extremely outspoken on the topic of paid multiplayer subscription. The Call of Duty: Elite service, on the service at least, seems to be taking a balanced approach for both future paying and not paying subscribers. Most would say that other popular developers will start taking the same route to generate more revenue. If so, what other ways do you see paid multiplayer subscription services being implemented and carried out?

MP: I think that paid multiplayer is a natural beginning to “games as a service”. While I don’t believe anyone will ever be “required” to subscribe, I envision something similar to cable TV in the future for games, where people pay big monthly bills in exchange for packages of games. Those who wish to watch a la carte can still do so today (rabbit ears antennas and renting or buying movies), but the majority has opted for a monthly cable subscription. I think games are heading that way in 20 or so years.

GZ: Several reports lately have spoken on games’ standard $60 price tag on games being adjusted. The rise of multiplayer has transitioned the focus from singe-player, essentially creating shortened single-player games. This has caused many to question games’ value. Where do you see the $60 price tag going in the future?

MP: I think game prices are going higher or staying the same, and don’t see any possibility that they are going lower. If there is a next generation of consoles, development will cost more, and game prices will go up.

GZ: With a poor launch lineup, the 3DS has made one of, if not the, most drastic price cut in Nintendo’s history. Some say that the 3DS is doomed – especially with Sony’s Vita on the way – but some say it has a brighter future with an excellent fall lineup, along with it being at a reasonable price. Where do you see Nintendo’s sales going with the 3DS and what should they do to better market the device?

MP: I think that the market for handheld dedicated game devices is shrinking in correlation to the growth of the smart phone market. While the games are completely different, a substantial minority of handheld gamers play casual games like Tetris on their devices, and smart phone Tetris for $1 is an acceptable substitute for $20 Tetris on the DS. Accordingly, I think that the dedicated handheld market will slowly lose the 20 – 30% of gamers who play casually to smart phones. That means Nintendo’s addressable market is 70 – 80% as large as in the past, and if the Vita is successful, it will capture some of this market share. This is not an issue of Nintendo doing anything wrong; rather, their business model does not permit them to adapt to changing technology and to compete on price. They simply cannot stop the growth of smart phone games.

GZ: With every new console generation, expectations are high. The normal improvements gamers expect are graphically, but with the current generation (speaking mainly of the PS3 and Xbox 360) still producing spectacular looking games with better engines, what can we really look forward to – or expect – with the next generation of consoles?

MP: Although it is clear that humans can see images displayed at higher than a 60/second frame rate, the differences are not dramatic. However, the costs to produce games at 120 frames/sec are likely substantially higher, and a more expensive display will be required. I agree with you that there is not really any need to improve the quality of games by improving processor speeds, and don’t expect the next generation to come over the near term as a result. My best guess is that somebody puts Kinect and Wii U together, and sells us a really cool experience that integrates a tablet into the process. That could be Apple, and if anyone were able to marry the iPad with a console, I think it would be a huge success.

GZ: As an analyst, where do you see Battlefield 3 and Modern Warfare 3 stacking up sales wise. This is the first year where many are seeing Battlefield as a threat to Call of Duty’s “crown.” Call of Duty’s player base is unanimously the largest out there, so does Battlefield 3 really have a shot of outselling MW3?

MP: I think that Battlefield 3 is a lock to sell 8 million units, and if quality is extremely high (as in a metacritic score > 92), there is a chance the game will sell more than 12 million units. Call of Duty Modern Warfare 3 has the benefit of a “network effect” from multiplayer, so when all of your friends stop playing Black Ops multiplayer and shift to MW3, you probably will do so as well. That suggests to me that MW3 could sell as well as Black Ops, which sold 16 million at holiday and 25 million through July. The sell-through might be compressed (20 million or so at holiday) if Activision pulls out all the stops and spends a ton marketing the game. No, BF3 doesn’t have a shot of outselling MW3.

GZ: Services such as OnLive and Steam have pushed for a more digital oriented way of purchasing games. Arcade games on both PSN and XBLA have also grown in quality and demand. All of this centers around digital releases. Is this the dissolve of physical copes and beginning of standard digital copies, or is this simply another option for gamers to purchase titles?

MP: I think physical goods will be around as long as there are enough people who want them (say 10% or more). So long as there is substantial value from trade-ins, I think it’s safe to assume 30 – 40% of gamers will want physical copies, so I don’t expect physical goods to go away for 20 years or more. Thus, I think digital distribution will be offered as an option, but not as an exclusive option.

GZ: Kinect and Move have now been available for quite a while, and its no secret that Kinect has had the greater success. Truthfully, though, we have not seen a game to satisfy the “hardcore” gamer enough to make Kinect a “must buy.” At this point in both of the motion controller’s life-cycle, will we ever see them take their capabilities to the next level where everyone must own and use them, or will they simply be devices with interesting features for some?

MP: I think Kinect is going to continue to enhance the multimedia functionality, so I expect it to slowly gain acceptance as a “must have”. Give it some time.

GZ: This fall is most likely one of the biggest in gaming history. November alone features several blockbusters. Are there any titles currently flying under the radar that you see moving a massive amount of units by the end of the fourth quarter?

MP: No, don’t see any big hits under the radar. Everyone pretty much expects the big titles to do well and the smaller ones to be squeezed.

GZ: Last question Mr. Pachter: The end of 2011 is just over the horizon (crazy, isn’t it?), but as another year in gaming is already beginning to unfold, are there any predictions you’re making on consoles, services, etc.? There has to be something interesting you see happening!

MP: I think that all eyes are on Call of Duty Elite. If it works, expect others to emulate, if it doesn’t, they won’t.

GZ: Well Mr. Pachter, thank you so much for taking time out of your busy day to answer some questions. It is always great hearing from you and what you have to say about the industry.

We all hope you enjoyed what Mr. Pachter had to say; stay tuned for more interviews.