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LOS ANGELES | SAN FRANCISCO | NEW YORK | BOSTON | SEATTLE

IndustryRep

ortEntertai

nmentSoftwa

rePublishin

gandRetail

Entertainment Software Publishing and Retail
INDUSTRY REPORT
July 2009

Money for Nothing

How Ancillary Revenues Can Extend The Console Cycle

We expect favorable industry dynamics over the next several years to provide the foundation for entertainment software publishers to grow revenues by nearly 10% per year, with the top publishers realizing a much higher rate of earnings growth during this period. In this report, we analyze the fundamentals of the interactive entertainment industry and detail our criteria and methodology for identifying its champions.

Michael Pachter

Edward Woo, CFA

(213) 688-4474

(213) 688-4382

michael.pachter@wedbush.com

edward.woo@wedbush.com

Wedbush Morgan does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see page 206 of this report for analyst certification and important disclosure information.

ACKNOWLEDGEMENT

We thank our good friend, Junkwaffle, for the fabulous cover art and for demonstrating that there is tremendous value to entertainment that is digitally delivered, even though it is intangible and nearly impossible to trade in at GameStop.

We also thank the folks at GameTrailers.com and especially at GameTrailers TV for giving us many of the

ideas discussed in this report.

It is important to acknowledge the contribution from media sites IndustryGamers.com, Edge-Online,
Kotaku.com, bitmob.com, VentureBeat.com, gamesindustry.biz, eurogamer.net and gamasutra.com for
keeping us on our toes and always asking us to think about the industry in real-time.

Finally, we feel we must call out NeoGAF.com and its members, for challenging virtually everything we say

as being wrong, and for making us re-think many positions over the years.

i Interactive Entertainment Industry Report

Michael Pachter (213) 688-4474

Edward Woo, CFA (213) 688-4382

TABLE OF FIGURES...................................................................................................................................... 5 EXECUTIVE SUMMARY................................................................................................................................. 7 DEFINING THE INDUSTRY.......................................................................................................................... 17 INDUSTRY SIZE: THE ADDRESSABLE MARKET OPPORTUNITY........................................................... 21

GEOGRAPHIC MARKETS................................................................................................................ 21 HARDWARE AND SOFTWARE SALES SPLIT................................................................................ 23 SOFTWARE VS. OTHER ENTERTAINMENT SECTORS................................................................ 23

DEMOGRAPHIC TRENDS............................................................................................................................ 26

WIDENING AGE DEMOGRAPHIC................................................................................................... 26 RAPID TEEN GROWTH.................................................................................................................... 28 FEMALE MARKET............................................................................................................................ 28 INCREASING YOUTH INCOME....................................................................................................... 28

HARDWARE PLATFORMS.......................................................................................................................... 30

HOME CONSOLES........................................................................................................................... 31 WHY THIS IS LIKELY THE LAST CONSOLE CYCLE...................................................................... 49 HANDHELD, PORTABLE AND MOBILE CONSOLES...................................................................... 52

MONEY FOR NOTHING...............................................................................................................................59

ONLIVE COULD CHANGE THE LANDSCAPE................................................................................. 61

THERE MAY NOT BE ANOTHER CONSOLE CYCLE (BUT LOTS AND LOTS OF CONSOLE

SKUS)............................................................................................................................................... 62 DIGITAL DOWNLOADS ARE HERE AND NOW.............................................................................. 64 THE WII PLUS (HD) IS COMING (EVENTUALLY)........................................................................... 65 THE XBOX 360 COULD END UP A WINNER, EVEN IN THIRD PLACE.......................................... 67 THE NEW, DIGITAL PSP IS NOT QUITE DEAD, YET, (OR IS IT?)................................................. 69 THE NEW DSI WILL ADVANCE THE BRAND.................................................................................. 69 BLIZZARD IS THE PRESENT AND FUTURE OF ONLINE GAMING............................................... 70 IN-GAME ADVERTISING IS NOT A BIG DEAL................................................................................ 73 DIGITAL DOWNLOADS WILL LIMIT GAMESTOP\u2019S GROWTH....................................................... 75 FREE-TO-PLAY GAMES HAVE POTENTIAL................................................................................... 79 MOBILE PHONE GAMES ARE A FAD............................................................................................. 80 POST SCRIPT\u2014LESSONS NOT LEARNED FROM THE LAST CONSOLE CYCLE....................... 81 CONCLUSION.................................................................................................................................. 82