Pac-Man Finally Meets His Match Feverish competition takes its toll on video-game stocks
Over the past several years, almost no business has grown faster than video games, but last week stocks of most of the industry's highflying participants came crashing down with a thud. Warner Communications, owner of Atari, the king of video games, unexpectedly forecast a slump in fourth-quarter earnings. The news reverberated through Wall Street. Analysts began recalculating profit estimates of the best-known games manufacturers, trying to divine whether the Atari setback had more cosmic implications. By week's end no one was quite ready to declare that the stock market was flashing a bleak "Game Over" for the popular amusements. But it seemed clear that video-game makers would no longer be able to rack up record profits with the ease of a twelve-year-old joystick junkie who stars at Pac-Man.
When investors finished adding up the losses after the stock market closed on Friday, the extent of the devastation was electrifying. The most money was lost on Warner. The company's stock sank during the week like a runaway elevator—from $54 to $35, a loss in market valuation of an astounding $1.3 billion. Shares of the other market leader, Mattel Inc., which makes Intellivision, lost $192 million, fully 40% of their earlier value.
Until last week, the only question most people asked about home video games was how fast they would spread. It seemed as if every child in America, and many adults, was interested in buying plastic game cartridges and playing them on consoles (which typically cost $200 or more) hooked up to a television set.
No one sold the cartridges and the consoles better than Warner's ten-year-old Atari. By acquiring the rights to popular arcade games like Space Invaders and Pac-Man, and designing them to fit players of its own manufacture, Atari saw its sales leap from $30 million in 1976 to $1.1 billion last year. As late as last summer it still held about 80% of the world market, and in doing so had got a lock on an enormously profitable business in which cartridges that cost only about $6 to manufacture can usually be sold for a retail price of $25 to $50.
Atari's success quickly lured other competitors. A year ago, Mattel was still the major one, but at least 20 companies have products on store shelves this Christmas. In order to hold on to its market share, Atari spent heavily to promote its new E.T. and Raiders of the Lost Ark games. But sales failed to reach expected levels.
Suddenly last week, Consumer Products Division President Perry Odak, 37, who had been with Atari for only eight months, was ousted. Although his removal was attributed to personality differences, the announcement came the same day as the revised fourth-quarter forecast. Warner now predicts that it will earn only about $4.05 or $4.10 a share this year. While that is an increase of 10% to 15% over 1981, it is well below analysts' earlier estimates of as much as $6.63.