In an exclusive interview with The Fly, Wedbush Securities analyst Michael Pachter discussed a number of matters pertaining to the video game sector, including Nintendo's (NTDOY) latest Switch Lite announcement, the future of virtual reality, EA's (EA) "Apex Legends," and working conditions at AAA studios.
SWITCH LITE: When asked whether Nintendo's latest Switch unveilings, including a smaller handheld-only Switch Lite and a standard Switch with improved battery life, would lead to the Japanese game giant launching a higher-end Switch system, Pachter said he doesn't believe the company has the "desire" to do that, adding that he doesn't know "what the point is." "If they did that, it would have to be higher priced, and that’s just not the Nintendo way. They tend to create lower priced versions," said the analyst, who has an Outperform rating on Nintendo. “It’s not like the PS4 Pro (SNE) is setting the world on fire, or that the Xbox One X (MSFT) is setting the world on fire. So I think Nintendo is fully occupied introducing a much cheaper model, handheld-only. And I don’t know what they gain from introducing a higher resolution console. It’s not going to move the needle for them.”
NEXT GENERATION: Nintendo released the Switch in the midst of a console generation, when typically the company launches new consoles within a year of its competitors rolling out new systems. When asked if Nintendo will struggle to keep up with Sony and Microsoft during the next console generation, which is expected to occur in late 2020, the Wedbush analyst said that Nintendo "maybe without realizing it always intended the Switch to be a handheld.” Pachter said that he doesn't think Nintendo ever planned to compete head-to-head with PlayStation or Xbox, and instead their focus was on making a "great handheld" that has the "best handheld graphics of any handheld ever" with "the most complicated games of a handheld ever."
“I think the intention of the Switch all along was to make the handheld experience just as good as the console and I think they pulled that off," he told The Fly. "I don’t think they consider themselves competition for Xbox One or PS4.”
'APEX LEGENDS' TWITCH VIEWERSHIP: Piper Jaffray's Michael Olson said in a note last week that his firm's Q2 "TwitchAdviser," an analysis of video game viewing data from Amazon's (AMZN) Twitch, showed that viewership of EA's "Apex Legends" was on a downward trajectory. Wedbush's Pachter, on the other hand, dismissed the notion that Twitch viewership is any indication of sales for video games, saying that there's very little to correlate from such information. “As soon as someone can tell me what the correlation is between Twitch views and revenues for games, then I’ll start to worry about Twitch views," the analyst said. "I just don’t understand what people think that you’re supposed to get out of Twitch views. Before ‘Fortnite,’ nobody cared. So now we’re trying to correlate Twitch views to revenue, and certainly can’t do that for any other game.”
“Twitch views tell you how many people are interested in learning about the game, but it doesn’t tell you whether they are spending money," he continued. "And the people watching Twitch aren’t playing ‘Apex’ while they’re watching Twitch, so if anything I’d say that takes away. I think the right way to think about this is that more than half of ‘Fortnite’ users are teens or younger, and ‘Apex,’ by my estimate, more than half their users are in their twenties or older. I think that younger people are A) more likely to be Twitch viewers and B) more likely to need help on how to play a game.” Pachter also noted that "Fortnite" is a more social experience than "Apex" and tends to have a more female audience than the EA shooter. Investors in Epic Games, which makes "Fortnite," include Tencent (TCEHY), Disney (DIS), and KKR (KKR).
OCULUS: The Information reported earlier this month that Facebook (FB) is eyeing acquisitions of game studios and signing exclusive deals for virtual reality editions of well-known video games to bolster its Oculus VR headset business. The report noted that the company had already inked deals for exclusive VR versions of Ubisoft's (UBSFY) "Assassin's Creed" and "Tom Clancy's Splinter Cell." When asked if such deals could eventually lead to Facebook becoming a major player in the console market, Pachter said "sure," though "not for a long time." “I don’t think [Facebook is] going to become a meaningful console player," the analyst said, adding that VR headset sales just don't compare to traditional console sales just yet. "And you’re about to expand the market dramatically for console games with Stadia (GOOGL).” Pachter added that the Oculus Quest is "interesting" because of the lower price, but the system won't have a lot of games for a while since it's "just complicated" to make a game for VR. "So no, I think it’s going to take 5-7 more years to evolve," he said.
CRUNCH: Video game media has placed greater emphasis in recent years on reporting about labor conditions at major developers, including at Take-Two's (TTWO) Rockstar, Activision's (ATVI) Treyarch, and Epic Games. Such reports describe extremely long hours and harsh work environments that occasionally lead to employee burnout or health problems. On the topic of whether changes to labor conditions in the video game industry would have a major impact on the financial side of the sector, Michael Pachter said that "good planning" could be a solution, though public companies are "stuck" with a release schedule, meaning that they'll do whatever they can not to miss scheduled launch dates.
"The stories are all heart-wrenching," the analyst told The Fly. "Obviously, people getting ill or divorced over this is bad. So, I guess the issues with crunch are that it’s something that good planning can eliminate. Unfortunately, public companies are sort of stuck with a release schedule, and so if they say ‘Red Dead Redemption’ is coming out October 15, then if you get to July and it needs six more months of work, then you’ve got to double your work time. That’s what happens. So I think that the problem with crunch is that public companies have it in their models, in their earnings estimates, and they’re afraid of missing on delayed games. If you look at what happened with EA and ‘Battlefield V,’ they didn’t even delay it very far: they only delayed it from October to November, and its sales were half as big as the prior version. And it was a pretty good game! So I understand why public companies feel the need to put out a date, and I understand they pressure their developers to work hard, but the model I think that’s going away, unfortunately, is putting a game out when it’s ready.”
Pachter also said, however, that people who choose to work at these studios largely understand what to expect when they take these jobs. “While I am sympathetic and think that all avoidable crunch should be avoided, I do think that developers understand that this is what they are getting themselves into," he said. "And there are some studios that never have crunch because they plan appropriately.”
"Game On" is The Fly's weekly recap of the stories powering up or beating down video game stocks.
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