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Markets punish video-game makers in wake of Newtown massacre

Carr Lanphier, an analyst at Morningstar Equity Research, cut his fair value estimate of Activision Blizzard, the maker of the “Call of Duty” game, by 10 per cent Dec. 20 “because of lower near-term revenue assumptions.”


Nearly two weeks after the horrific school massacre in Newtown, Conn., the market still thinks there are long-term issues for gun makers, based on the decline in their share prices. And it thinks much the same about the major video-game makers which profit from violent but imaginary gunplay.

Sturm, Ruger & Co. Inc. and Smith & Wesson Holding Corp. are down about 9 per cent and 13 per cent, respectively, from their closing prices the day before the mass killing.

Electronic Arts Inc., and Activision Blizzard Inc. are down about 8 per cent over the same period. Take-Two Interactive Software Inc. is down more than 15 per cent.

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Certainly, some of the video-game makers' decline could be caused by fears that a fiscal-cliff-driven recession in the U.S. could dampen spending on frivolities. Economic factors, plus the gaming shift to mobile devices, cause many to believe there will be fewer games sold in 2013 than this year.

But fears of a backlash against the video-game makers seem to be contributing to the slide in their share prices.

Carr Lanphier, an analyst at Morningstar Equity Research, cut his fair value estimate of Activision Blizzard, the maker of the "Call of Duty" game, by 10 per cent Dec. 20 "because of lower near-term revenue assumptions."

"We fear a slowdown in sales momentum from Call of Duty due to the tragic violence in Newtown, Conn.," he said. "We think it is probable that the public recourse from the horrific shooting may cause parents and other potential CoD buyers to reassess the societal treatment of guns and mental health, and closely examine the effect violence in video games and the media has on children and adults."

Call of Duty is the bestselling first-person shooting game in the history of video games, Mr. Lanphier says; this year's edition, "Black Ops II," hit $1-billion in sales in 15 days.

Michael Pachter of Wedbush Securities is more sanguine about the fallout.

In an e-mail response, he said "there is a lot of talk in the U.S. Congress about fixing blame for the shooting on anything except government, so oversight of violent video games came up as a topic, again. The U.S. Supreme Court rejected a state law attempting to restrict sales of violent games as a violation of our First Amendment free speech protections, so it is unlikely that anything new will come from this."

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Mr. Pachter noted the Newtown killer was 20 years old, so he would have been allowed to buy violent games even under a government-imposed rating system.

"The murders are tragic and incomprehensible, and the games industry is one of the scapegoats for people trying to make sense from a senseless act," he says.

Agree with Mr. Pachter? Electronic Arts' forward price-to-earnings ratio has dropped below 13, per Standard & Poor's CapitalIQ; Activision Blizzard is around 10, while Take-Two's forward P/E is below four. (Take-Two is highly dependent on its Grand Theft Auto franchise, and it has yet to announce a firm release date for the next instalment, which is expected for 2013.)

Agree with Mr. Lanphier? Best to see how the coming months unfold for the game makers – and ask yourself some of the same questions about whether violent games are an innocent diversion.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More


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