INVESTING IN COMPUTER AND VIDEO GAMES
Copyright 2002 www.ft.com

[ January 7th 2002 ]

A doctor friend is soon to retire. He hopes to do the occasional medical locum, spend much more time painting, and buy a computer. He uses a computer in his practice but it is limited to keeping patients' records and providing prescriptions. He hopes to attend a class to widen his skills so he can e-mail friends and family and write letters. Discovering that around the world he has at least 300 relatives - he comes from many generations of large families - a friend presented him with a novel Christmas present guaranteed to take up much of his free time. It is a 'family tree' CD-ROM.

There are computer programmes available covering almost any subject and there must be few households who did not receive at least one CD for Christmas. We were given a computer Cluedo game, not as time-consuming as composing a family tree, but fun none the less. These CDs are available in some supermarkets, by mail order and in some high street stores. The leading specialist retailer of computer software and video games in Europe is Electronics Boutique.

Electronics Boutique plc began in 1992. EB Inc of the US bought 25 per cent of the Rhino Group and its retailing subsidiary Future Zone Stores Ltd and renamed the business Electronics Boutique. In 1999 its largest competitor, GAME, with 82 stores, was added to the group. Now there are more than 300 stores in the UK, Eire and Sweden and 69 in Spain. There are Electronics Boutique concessions in Debenhams and House of Fraser stores and they stock the shelves in Sainsbury's.

We are assured we all 'shopped till we dropped' before Christmas and by all accounts the January sales are a runaway success. In the spring two new gaming consoles will be available. Microsoft's Xbox and Nintendo's GameCube have already been launched in the United States and are selling well. Computer games are fun for all ages and for most families have become just another leisure choice.

Not all companies were 'beleaguered' during 2001 and not all shareholders were forced to become 'long-suffering' and 'pessimistic'. This time last year shares in Electronics Boutique were only 66p. There are signs of optimism for the business's continued success in 2002. On the last stock market trading day of last year, when the FTSE 100 fell yet again, shares in Electronics Boutique rose 3 per cent to 137p. Savings rates are now so low and inflation at its lowest point for more than 40 years, so a rise of 3 per cent is sufficient to make any private investor feel a little 'optimistic'. Shares are now 131.25p.

Shares in the computer games publisher, Eidos, bumped along at around 60p from 1996 to 1998. Then they rose and rose to reach their peak at more than 1100p in 1999. The share graph looks like a ski slope - you reach the top, ski down, and you are again at the bottom. Eidos, leader in the field, suffered horribly from the buying frenzy by investors for new technology stocks.

By March 2000, the end of its financial year, Eidos had turned losses of 6.8m pounds in 1997 to a healthy profit of Pounds 49.3m. During the following year this turned into a loss of Pounds 96.4m and the share price dropped like a stone. Between March and September last year Eidos made a loss of Pounds 27.4m compared to a loss of Pounds 82.3m for the same period in 2000. It is in the fortunate position of having cash and now has several excellent products available all over the world.

I admit to occasionally watching Who Wants To Be a Millionaire. Our daughter recently bought the Millionaire computer game developed by Eidos. Winning virtual money makes one much more adventurous in taking risks to reach the virtual million. After all, if you are completely wrong you just restart the game. The show is broadcast in many countries and sales of the game just grow and grow.

Since September Eidos has released eight new games. One of these, Championship Manager, is the best-selling UK game ever. There are exciting prospects for 2003 with the release of the next Tomb Raider, Herdy Gerdy and Time Splitters 2. I have to rely on information from my grandchildren to understand them. Eidos might even make a pre-tax profit during its current financial year ending in March. One broker suggests it may be about 800,000 pounds but expects it to be in the region of Pounds 10m in the following year. Over the last year the shares reached 288p from a low of 150p and are now 189.5p.

Eidos has survived where other computer companies have sunk without trace. It managed to raise Pounds 51.6m through a rights issue and last year reduced its overheads by 24 per cent, by cuts in sales and administration, not in the research and development of its future blockbusters.

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