My buddy Justin Alderman at GamerInvestments.com makes the case:
Back in September 2008 the Fed drastically increased the monetary base by almost $1 trillion dollars in an effort to encourage banks to ease up on credit. That increase in the monetary base is by far the largest in U.S. history and when combined with the current Federal Government’s never ending appetite for new spending programs the end result will be either high interest rates, massive inflation (possibly even hyperinflation) or both.
What this all boils down to for the video game industry is that inflation is not a friend for anyone who imports goods into the country experiencing it, like Nintendo and Sony. To put it simply Nintendo and Sony sell their consoles in the U.S. but they are based in Japan. Being Japanese companies they want Yen for their products and not dollars. So, when a Wii or PS3 gets sold in the U.S. the money is converted into Yen at the current exchange rate before Nintendo or Sony can mark it down in their books. At stable exchange rates this is all fine and dandy but if the Yen appreciates against the dollar they are going to loose money in the transaction.
Justin makes a lot of sense here from a purely financial standpoint, particularly for the Sony (SNE) PS3, which is sold at a loss.
But although economic trends like US government overspending should result in a weakening dollar – it doesn’t necessarily mean it will. When there’s a very strong consensus on an economic indicator, that consensus may already be reflected in market prices.
I once worked in economic research for one of the largest Japanese manufacturing companies in the world, and when it comes to the economy, they were fairly conservative when it came to forecasts. It’s hard to say if Nintendo (NTDOY.PK) or Sony would be much different, but the typical Japanese business mindset is not an aggressive one. They’re not likely to base any business decisions upon the chance that the dollar collapses.
However, Sony is in a lot of trouble right now. Consumer electronics is a really tough business in a bad recession, and its video-game business has been the big profit driver until this console generation. That profitability has little chance of significantly rebounding.
If Sony keeps prices the same, they’ll just keep on losing market share to Nintendo and Microsoft (MSFT). And if they do cut, they just might create a cheap Blu-ray player, attracting more home theater fans than gamers. That means losing more money on the console without making it up on the software side.
This issue has me thinking quite a bit about initiating a short position in Sony.
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