What's Important in the Financial World (11/9/2012)

The Changing Video Game Industry

Video game sales have collapsed just as retailers begin to rely on strong holiday sales. Industry research firm NPD reports that in October, U.S. video game retail revenue dropped 25% compared to the same period last year when sales were $1 billion. The sales of game consoles fell 37% to $296 million.

The companies that will be most badly damaged by the trend are the major console makers, which include Microsoft Corp. (NASDAQ: MSFT), Sony Corp. (NYSE: SNE) and Nintendo. They cannot follow the migration of games to smartphones and tablets because these new devices take the place of their console products. There is a bit more hope for companies that make software - the games themselves. At the top of this list is Electronic Arts Inc. (NASDAQ: EA), the largest of the traditional game makers. It has begun to create games that can be played on new portable devices, which means EA has begun to undermine the hardware sales of its traditional partners like Sony. But EA and its long-time rivals may be unable to stay ahead of new companies that do nothing but program for the next generation of portable devices.

The Looming Budget Battle

The most widely covered story by the financial press, and perhaps the news media in its entirety, between now and year's end will be the war between the president and Republicans in Congress about how to simultaneously solve the related problems of the debt ceiling and fiscal cliff. Tax cuts might require the debt limit to be raised. So could government spending cuts, which also would tend to undermine economic growth. Of course, tax increases could hurt growth as well, which would in turn affect the debt limit. There has been some hope in the past few days that the two sides can find mutually acceptable solutions. That is unlikely, in large part because the number of moving pieces in the puzzle is so great. Each side believes that its path is best for the U.S. economy, and there is the tension over whether taxes affect the economy much at all. Many members of Congress believe that the debt limit and tax and budget matters should be linked. This would prevent the president from spending "too much" money without permission from Republicans in the future. The math to calculate the relationship between cap and taxes is immensely complex, which makes it tough for both sides to agree on, and equally tough to have any assurance a combined solution will work. The debate is not just one of philosophy. It is also one of complexity.

Foxconn Coming to the U.S.

Sina News reports that Foxconn, which makes components for Apple Inc. (NASDAQ: AAPL) products among others, may open a factory in the United States. Among the sites being evaluated are Detroit and Los Angeles. Since labor is so cheap in China, it is hard to see why Foxconn would make such a decision and hurt its margins. One reason may be political. Foxconn's labor abuses have been in the news almost every week. Apple probably is concerned about the reaction of American consumers, and whether these reactions eventually will hurt sales. A factory in America, particularly in a place as badly damaged by the drop in manufacturing jobs as Detroit, would help Foxconn's image, even if there is a financial cost. The factory also would help silence the "China has taken American jobs overseas" movement. But the jobs that would be created in the U.S. may not be for highly skilled and highly paid labor. ZDNet reports:

[T]he production of Apple products is "very complex", market watchers expect the new plants in the U.S. to only manufacture LCD televisions - the production process of which is highly automated and relatively simple, the report noted.

American labor just cannot hack it.

Douglas A. McIntyre

Filed under: 24/7 Wall St. Wire, Market Open Tagged: AAPL, EA, MSFT, SNE