Video Game Video Game IndustryIndustry

Analyst Report to Fidelity Analyst Report to Fidelity Magellan Fund ManagerMagellan Fund Manager

November 20, 2001November 20, 2001

AgendaAgenda

Market History: Ainsley QuiohilagMarket History: Ainsley Quiohilag Platform v. Software: Bei Wei LiPlatform v. Software: Bei Wei Li Current Market Conditions: Henry Current Market Conditions: Henry

SteinbergSteinberg Conclusions & Recommendation: Conclusions & Recommendation:

Dana KelmanDana Kelman

Market HistoryMarket History

Periods Defined by Two Major Periods Defined by Two Major PlatformsPlatforms Atari v. ColecovisionAtari v. Colecovision Nintendo v. SegaNintendo v. Sega Sony v. NintendoSony v. Nintendo X-Box new entryX-Box new entry

Atari, Sega, & Colecovision failuresAtari, Sega, & Colecovision failures

Market HistoryMarket History

Software Maker SustainabilitySoftware Maker Sustainability Electronic ArtsElectronic Arts ActivisionActivision SegaSega

Platform v. SoftwarePlatform v. Software

PlatformsPlatforms Loss LeadersLoss Leaders

MSFT expects to lose $150 per unitMSFT expects to lose $150 per unit Gillette business model analogyGillette business model analogy

Profits derived from softwareProfits derived from software Platform makers develop software for their Platform makers develop software for their

consolesconsoles Royalties from third party software Royalties from third party software

developersdevelopers

Platform v. SoftwarePlatform v. Software

Software Only CompaniesSoftware Only Companies Ability to make software for all Ability to make software for all

platformsplatforms No losses to recoverNo losses to recover High profit margins/low marginal costHigh profit margins/low marginal cost Lower fixed costs than companies that Lower fixed costs than companies that

make both consoles and softwaremake both consoles and software

Current Market Current Market ConditionsConditions

Major Platform MakersMajor Platform Makers Sony Playstation 2 debuted last yearSony Playstation 2 debuted last year Microsoft Xbox and Nintendo Gamecube new Microsoft Xbox and Nintendo Gamecube new

introductions November 2001introductions November 2001 Intense competitionIntense competition

More platforms more playersMore platforms more players $1 billion marketing blitz for video game industry$1 billion marketing blitz for video game industry Increased size of market (44 million consoles today Increased size of market (44 million consoles today

to 70 million by 2003)to 70 million by 2003) New platform technology facilitates improved game New platform technology facilitates improved game

qualityquality

ConclusionConclusion

Who wins battle of platforms?Who wins battle of platforms? Who cares?Who cares?

Value added comes from gamesValue added comes from games Examples: Movie theaters, Sega DreamcastExamples: Movie theaters, Sega Dreamcast

Real winners are software makersReal winners are software makers Capture whole market regardless of Capture whole market regardless of

platformplatform

RecommendationRecommendation

Electronic ArtsElectronic Arts Industry leaderIndustry leader

Use clout to negotiate deals with celebrities Use clout to negotiate deals with celebrities & sports figures& sports figures

Hedged against platform standard Hedged against platform standard problem – make software for all problem – make software for all platformsplatforms

StabilityStability Survived past industry shakeouts Survived past industry shakeouts