1. June 21, 2010
Industry Report
Think Entertainment: Gaming Reason for Report:
Gaming: Takeaways From E3, 2010 Industry Update
Atul Bagga
THINK SUMMARY: 415-249-6362, abagga@thinkequity.com
We believe that the biggest highlight of E3 was Nintendo's 3DS; the popularity
of 3DS is validated by an impressive line up of casual and hardcore games on
the platform, in our view. We are generally positive on Kinect and Move, which
we believe could help drive some demand for hardware and software this year.
Microsoft may be eyeing a bigger market (broader entertainment dollars) than
just games by positioning Kinect for family users; unlike Sony's Move, which
seems positioned largely for the hardcore gamers. We believe that COD: Black
Ops could be the top title of the year and offer tough competition to other army
shooter titles. We will be watching closely the upcoming beta testing of Medal
of Honor.
KEY POINTS:
• In our view, the biggest highlight of E3 was Nintendo's 3DS. The line of the
expo floor to test drive 3DS was almost 2-2.5 hours long (recall that when
Nintendo first showed off Wii on E3, the line to test drive Wii was almost
2-2.5 hour long). We think that the lineup for 3DS seems pretty impressive,
with titles such as DJ Hero, Saints Row, Madden and FIFA, Resident Evil,
Batman, Assassin's Creed, and Metal Gear Solid in addition to a number of
first party titles.
• We were not totally blown away by Microsoft Kinect (previously known as
project Natal) because of (a) what we thought was a mediocre line-up of titles
(Kinect Animals, Kinect Sports, Kinect Adventure) except for Dance Central
from MTV/Harmonix, and (b) slightly underwhelming feedback from a few
developers (who developed games for Kinect) and bloggers who test drove
Kinect. While Microsoft didn't announce the pricing, market speculation
pegged the Kinect price at $150, which seems too aggressive to us.
Microsoft could be trying to use Kinect as another way to grab bigger share
of the home entertainment (not just games) market. The company highlighted
other applications on Xbox, music (Last.fm, Zune), movies (Netflix, Zune),
videos (announced partnership with ESPN to distribute live games events
and on-demand events, available at no cost to Xbox live subscribers) and
social networking (Facebook). We like the new Xbox Slim, $299 for 250 GB
and built in Wifi, which affectively cuts the Xbox 360 price by $100-150, and
view it as a slight positive event for the industry.
• On the other hand, Sony Move seems to be more positioned for the hardcore
gamers, and the line up seems impressive with titles such as SOCOM 4,
NBA 2K11, Ruse, Heavy Rain, Toy Story 3, Resident Evil 5 . Sony Move is
priced at $50 for a controller, $30 for a camera and $30 for navigator.
Please see analyst certification (Reg. AC) and other important disclosures on pages 4-6 of this report.

2. June 21, 2010
Industry Report
• Electronic Arts showed off 10 games, including three EA Partners' games. We believe that the key titles this year would be
Medal of Honor (slated launch date 10/12, multi-player beta scheduled to start on 6/21, which could give some early read
on users' reception), Need for Speed (11/16), Dead Space 2 (1/25/11), and Madden NFL 11 (August). ERTS also showed
off a 3D game (need glasses to play the game) Crysis 2, by its partner Crytek, which looked pretty impressive to us.
• We also like a few new programs, EA SPORTS Live Broadcast (lets players record videos of their gameplay and
broadcast it online for their friends), Gun Club (loyalty program for EA shooter games), and Online pass (monetization of
used games buyers by selling the online gameplay option).
• We believe that the key titles this year would be Medal of Honor (slated launch date 10/12, multi-player beta scheduled
to start on 6/21, which could give some early read on users' reception), Need for Speed (11/16), Dead Space 2
(1/25/11), and Madden NFL 11 (August). A few other games highlighted were Sims 3 for console (October), Active 2 for
all consoles (11/16), EA MMA (10/19). The only game highlighted for Microsoft Kenict was Active 2 (11/16).
• We like Medal of Honor but note the toughening competition in first-person shooter category, especially the upcoming
Call of Duty: Black Ops looks very good with rich game play. We will be tracking the beta testing and pre-orders on MOH
closely.
• Activision reiterated its focus on top franchises and goal to grow business while expanding margins. Call of Duty (COD)
franchise looks stable to us, with plans for another FPS title in 2011 and potential for growth in new geographies with new
business models. We expect Blizzard titles to be a major growth driver in 2010 and like the 2011 lineup and also the
long-term strategy (focus on social and online, strong platform for online).
• Management highlighted its focus on operating margin expansion—target 27-28% in the mid term and 30%+ in the long
term, driven by focus on higher margin online business and cutting costs in the lower margin business such as Guitar
Hero franchise. The company noted Call of Duty (new geographies, new business model, more aggressive DLC
strategy), Guitar Hero, Bungie titles and Blizzard titles (WOW, Starcraft, new MMO) as the focus franchises that would
drive revenue growth and margin expansion.
• The company confirmed COD FPS title will be launched in 2011, which should clear any ambiguity for investors relating
to COD franchise; and detailed plans of COD in China (noted the brand awareness of the title and, in general, growing
appreciation for FPS genre in China). We believe that China launch could still be out by a few years given the regulatory
hurdles. We believe a near-term opportunity could be in other emerging markets such as Russia, Latin America, Asia,
and Eastern Europe.
• Without giving details, management highlighted that the company is working on a potential win-win solution for used
games market (we think an approximately $500 million opportunity for Activision) for Activision and retailers.
• The company expects World of Warcraft growth to come from (a) China, from increasing penetration of WOW in the
lower tier cities, (b) Wrath of Lich King launch in China, (c) Cataclysm launch worldwide, and (d) value-added services
including virtual item sales.
• Starcraft 2 business model will likely involve time-based model in emerging countries, which could be meaningful
potential upside, especially from Korea (currently the company sells disks to PC cafés and doesn't have any economy
on gameplay, going forward the company plans to sell game play hours to time to PC Cafés that will resell hours to
users) and participation in tournament (which is already a big sport in Asia).
• Consistent with our view, the company noted that Battle.net opens up a bigger potential opportunity and monetization
plans could include sponsorships (advertisers who want to reach the potentially lucrative hardcore gamers) and
tournaments.
• The company believes that PCTV could emerge as another possible growth opportunity; with browsers within TVs, the
installed base of games-playable devices likely goes up significantly and broadens the potential opportunity, mostly for
online games.
• THQ seemed optimistic about the line up for CY2011 (Saints Row, HomeFront, deBlob [3D title], Warhammer Space
Marine, Red Faction, WWE, and UFC) and CY2012 (Warhammer MMO, Devil's Third, and Darksider). While the line-up
seems impressive, we believe that risks are higher due to a toughening competitive environment and changing consumer
buying patterns (narrowing bell curve).
• THQI blamed the UFC underperformance to a tough competitive window due to Red Dead Redemption, which validates
our view that the industry is becoming more lopsided, larger titles are getting stronger and second and third titer titles
getting marginalized. Management was hopeful that it is too early to make a call and was optimistic that a continued
marketing and upcoming long weekend could drive some sell-through for UFC.
• We believe that while the company has a natural FX hedge (international expenses roughly match international
revenue), FX affects the bottom line for the company as the company capitalizes software development expenses
versus revenue recognized all up-front, which we think explains why the company took down EPS guidance
disproportionate to revenue guidance.
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3. June 21, 2010
Industry Report
INVESTMENT RISKS:
Gaming continues to be a hit-or-miss-driven business, and predicting successful titles versus unsuccessful titles is extremely
difficult. The risk is especially high for the new and unproven IPs, and a company's reliance on the new IPs and the titles in
the established franchises to reach the revenue target opens it to risk of a revenue miss.
Macro headwinds and popularity of the used games and free-to-play online games. Given the current macro headwinds,
used games and free-to-play online games create higher substitute competition for video games.
The industry is dependent on the console cycle; unexpected start of the new console cycle will likely constrain the revenue
growth and affect profitability of gaming vendors.
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4. June 21, 2010
Industry Report
COMPANIES MENTIONED IN THIS REPORT:
Company Exchange Symbol Price Rating
Activision Blizzard, Inc. NASDAQ ATVI $11.47 Buy
Electronic Arts Inc. NASDAQ ERTS $16.03 Buy
THQ, Inc. NASDAQ THQI $4.97 Hold
Important Research Disclosures
Analyst Certification
I, Atul Bagga, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subject
securities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed in this research report.
The analyst(s) responsible for preparing this report has/have received compensation based on various factors, including the firm's total
revenues, a portion of which is generated by investment banking activities.
ThinkEquity LLC makes a market in Electronic Arts Inc., THQ, Inc., and Activision Blizzard, Inc. securities; and/or associated persons may
sell to or buy from customers on a principal basis.
Rating History for: Electronic Arts Inc. (ERTS) as of 06-18-2010
07/17/07 05/27/09 07/09/09
D:NR I:H B
75
60
45
30
15
0
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2
2008 2009 2010
Created by BlueMatrix
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5. June 21, 2010
Industry Report
Rating History for: THQ, Inc. (THQI) as of 06-18-2010
07/09/07 06/24/09
D:NR I:H
40
32
24
16
8
0
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2
2008 2009 2010
Created by BlueMatrix
Rating History for: Activision Blizzard, Inc. (ATVI) as of 06-18-2010
07/12/07 06/15/09
D:NR I:B
21
18
15
12
9
6
Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2
2008 2009 2010
Created by BlueMatrix
Rating Definitions
Effective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tier
Buy/Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, including
previously published reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600
Montgomery Street, San Francisco, California, 94111.
Buy: ThinkEquity expects the stock to generate positive risk-adjusted returns of more than 10% over the next 12 months. ThinkEquity
recommends initiating or increasing exposure to the stock.
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6. June 21, 2010
Industry Report
Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stock
is fairly valued.
Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquity
recommends decreasing exposure to the stock.
Distribution of Ratings, Firmwide
ThinkEquity LLC
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [B] 144 69.60 16 11.11
HOLD [H] 62 30.00 1 1.61
SELL [S] 1 0.50 0 0.00
This report does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The
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