Gaming: Takeaways From E3, 2010

Please see analyst certification (Reg. AC) and other important disclosures on pages 4-6 of this report.

Think Entertainment: Gaming

Gaming: Takeaways From E3, 2010

THINK SUMMARY:We believe that the biggest highlight of E3 was Nintendo's 3DS; the popularityof 3DS is validated by an impressive line up of casual and hardcore games onthe platform, in our view. We are generally positive on Kinect and Move, whichwe believe could help drive some demand for hardware and software this year.Microsoft may be eyeing a bigger market (broader entertainment dollars) thanjust games by positioning Kinect for family users; unlike Sony's Move, whichseems positioned largely for the hardcore gamers. We believe that COD: BlackOps could be the top title of the year and offer tough competition to other armyshooter titles. We will be watching closely the upcoming beta testing of Medalof 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 whenNintendo first showed off Wii on E3, the line to test drive Wii was almost2-2.5 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 offirst party titles.

• We were not totally blown away by Microsoft Kinect (previously known asproject Natal) because of (a) what we thought was a mediocre line-up of titles(Kinect Animals, Kinect Sports, Kinect Adventure) except for Dance Centralfrom MTV/Harmonix, and (b) slightly underwhelming feedback from a fewdevelopers (who developed games for Kinect) and bloggers who test droveKinect. While Microsoft didn't announce the pricing, market speculationpegged the Kinect price at $150, which seems too aggressive to us.Microsoft could be trying to use Kinect as another way to grab bigger shareof the home entertainment (not just games) market. The company highlightedother applications on Xbox, music (Last.fm, Zune), movies (Netflix, Zune),videos (announced partnership with ESPN to distribute live games eventsand on-demand events, available at no cost to Xbox live subscribers) andsocial networking (Facebook). We like the new Xbox Slim, $299 for 250 GBand built in Wifi, which affectively cuts the Xbox 360 price by $100-150, andview it as a slight positive event for the industry.

• On the other hand, Sony Move seems to be more positioned for the hardcoregamers, 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 ispriced at $50 for a controller, $30 for a camera and $30 for navigator.

Reason for Report:

Industry UpdateAtul Bagga

415-249-6362, [email protected]

June 21, 2010Industry Report

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• Electronic Arts showed off 10 games, including three EA Partners' games. We believe that the key titles this year would beMedal of Honor (slated launch date 10/12, multi-player beta scheduled to start on 6/21, which could give some early readon users' reception), Need for Speed (11/16), Dead Space 2 (1/25/11), and Madden NFL 11 (August). ERTS also showedoff 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 ofused 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 scheduledto 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 forall 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 upcomingCall of Duty: Black Ops looks very good with rich game play. We will be tracking the beta testing and pre-orders on MOHclosely.

• 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 newbusiness models. We expect Blizzard titles to be a major growth driver in 2010 and like the 2011 lineup and also thelong-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 GuitarHero franchise. The company noted Call of Duty (new geographies, new business model, more aggressive DLCstrategy), Guitar Hero, Bungie titles and Blizzard titles (WOW, Starcraft, new MMO) as the focus franchises that woulddrive revenue growth and margin expansion.

• The company confirmed COD FPS title will be launched in 2011, which should clear any ambiguity for investors relatingto COD franchise; and detailed plans of COD in China (noted the brand awareness of the title and, in general, growingappreciation for FPS genre in China). We believe that China launch could still be out by a few years given the regulatoryhurdles. 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 usedgames 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 thelower tier cities, (b) Wrath of Lich King launch in China, (c) Cataclysm launch worldwide, and (d) value-added servicesincluding virtual item sales.

• Starcraft 2 business model will likely involve time-based model in emerging countries, which could be meaningfulpotential upside, especially from Korea (currently the company sells disks to PC cafés and doesn't have any economyon gameplay, going forward the company plans to sell game play hours to time to PC Cafés that will resell hours tousers) 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 monetizationplans could include sponsorships (advertisers who want to reach the potentially lucrative hardcore gamers) andtournaments.

• The company believes that PCTV could emerge as another possible growth opportunity; with browsers within TVs, theinstalled base of games-playable devices likely goes up significantly and broadens the potential opportunity, mostly foronline games.

• THQ seemed optimistic about the line up for CY2011 (Saints Row, HomeFront, deBlob [3D title], Warhammer SpaceMarine, Red Faction, WWE, and UFC) and CY2012 (Warhammer MMO, Devil's Third, and Darksider). While the line-upseems impressive, we believe that risks are higher due to a toughening competitive environment and changing consumerbuying 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 titlesgetting marginalized. Management was hopeful that it is too early to make a call and was optimistic that a continuedmarketing 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 internationalrevenue), FX affects the bottom line for the company as the company capitalizes software development expensesversus revenue recognized all up-front, which we think explains why the company took down EPS guidancedisproportionate to revenue guidance.


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INVESTMENT RISKS:Gaming continues to be a hit-or-miss-driven business, and predicting successful titles versus unsuccessful titles is extremelydifficult. The risk is especially high for the new and unproven IPs, and a company's reliance on the new IPs and the titles inthe 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 revenuegrowth and affect profitability of gaming vendors.


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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 CertificationI, Atul Bagga, hereby certify that all of the views expressed in this research report accurately reflect my personal views about the subjectsecurities and issuers. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specificrecommendations 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 totalrevenues, 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 maysell to or buy from customers on a principal basis.

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Rating History for: Electronic Arts Inc. (ERTS) as of 06-18-2010

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Rating History for: Activision Blizzard, Inc. (ATVI) as of 06-18-2010


Rating Definitions

Effective October 7, 2009, ThinkEquity LLC moved from a four-tier Buy/Accumulate/Source of Funds/Sell rating system to a three-tierBuy/Hold/Sell system. The new ratings appear in our Distribution of Ratings, Firmwide chart. To request historical information, includingpreviously published reports or statistical information, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600Montgomery 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. ThinkEquityrecommends initiating or increasing exposure to the stock.


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Hold: ThinkEquity expects the stock to generate risk-adjusted returns of +/-10% over the next 12 months. ThinkEquity believes the stockis fairly valued.

Sell: ThinkEquity expects the stock to generate negative risk-adjusted returns of more than 10% during the next 12 months. ThinkEquityrecommends 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 11.11HOLD [H] 62 30.00 1 1.61SELL [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. Theinformation provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. Theopinions expressed reflect our judgment at this time and are subject to change without notice and may or may not be updated. Pastperformance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express orimplied, is made regarding future performance. This notice shall not constitute an offer to sell or the solicitation of an offer to buy, nor shallthere be any sale of these securities in any state in which said offer, solicitation, or sale would be unlawful prior to registration orqualification under the securities laws of any such state. This research report was originally prepared and distributed to institutional clientsof ThinkEquity LLC. Recipients who are not market professionals or institutional clients of ThinkEquity LLC should seek the advice of theirpersonal financial advisors before making any investment decisions based on this report. Additional information on the securitiesreferenced is available upon request. In the event that this is a compendium report (covers more than six ThinkEquity LLC-coveredsubject companies), ThinkEquity LLC may choose to provide specific disclosures for the subject companies by reference. To requestmore information regarding these disclosures, please call: 866-288-8206, or write to: Director of Research, ThinkEquity LLC, 600Montgomery Street, San Francisco, California, 94111. Stocks mentioned in this report are not covered by ThinkEquity LLC unlessotherwise mentioned. Member of FINRA and SIPC. Copyright 2010 ThinkEquity LLC, A Panmure Gordon Company


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Gaming: Takeaways From E3, 2010