[Editor’s note: Leave Michael Pachter alone! — CTZ]
I am always surprised at the amount of hate and venom that is directed at Michael Pachter. He generally seems like a nice friendly guy and he has on many occasions spoken on behalf of gamers despite the fact that his responsibilities are first and foremost to his business and investor clients.
Until today, I have generally just attributed the Pachter hate to Internet trolls. However, after reading neveranything’s blog post “A message to Michael Pachter – STFU” yesterday, I felt compelled to defend Pachter because it is clear to me that many of the people who hate him either have no idea what his job is or are completely without any sense of simple business concepts.
What the hell is a research analyst?
As far as I know, Michael Pachter is a research analyst for Wedbush-Morgan Securities. Let’s look at this for a moment.
According to their Web site, “Wedbush Morgan Securities is a leading financial services and investment firm that provides private and institutional brokerage, investment banking, private capital, research, and asset management to individual, institutional and issuing clients.” What does this mean? It means that you give them your money and they either invest it for you or help you invest it.
So where does Michael Pachter fit into this? Well, a securities firm is not going to make their investment decisions on Google Finance or Jim Cramer’s “Mad Money” and so they are going to do a lot of in-depth research and analysis of their own in order to support the financial decisions that Wedbush Morgan makes with money that is entrusted to them. Given his position, Pachter’s responsibility is to basically provide this type of research by looking into and understanding the market to best serve his investors with as much hard data as possible.
Nostradamus?
Let’s talk about “predictions.” If you are smart with your money, you are always making some sort of “prediction” before you put your money out. What videogame system should I buy? Disregarding the loyalty factor, your decision is most likely in some way based on your perceived future of each system: in other words, what is the long-term value of the system. For example, in the beginning, many people who bought the PS3 bought it because they expected it to be the exclusive home of the next Final Fantasy. That’s an example of a prediction and it happens to be a prediction that we know to be completely wrong since Microsoft obviously managed to snag the exclusive away from Sony. Just because you are wrong, should you go STFU? I wouldn’t say so given that back in 2006, I think we can all agree that the idea of Final Fantasy XIII on the XBox 360 was quite simply ridiculous.
Pachter’s “predictions” ultimately deal with the short-term and long-term value of stock in the videogame industry and in order to accomplish this, he not only looks at financial and sales numbers, but he also has to put himself in the mindset of these companies and speculate as to what the company can and mostly likely will do to meet their goal of increasing their stock value (which is legally supposed to be the goal of any publicly-traded company).
Let’s look at two predictions he has made that have been wrong. Year after year, Pachter has “predicted” that Sony would drop the price of the PS3 and year after year this prediction has not come true. Again, Pachter is not “predicting” as much as saying that given Sony’s current position and what the future appears to be, it would be most wise for Sony to drop the price of the PS3. Therefore, given that companies are in it for the money, this would probably be the best thing for Sony to do. From this point of view, I am hard-pressed to see how Pachter was “wrong.” I think that just about everyone can agree that Sony would have been best served by dropping the price of the PS3, even at the time of launch and have screwed themselves by not doing this. Again, I know that we call these “predictions” but I am not sure that this is the best way to describe it.
Another failed prediction is the Wii HD, a HD-enabled version of the Wii with WiiMotion Plus built-in, that would be the next iteration of the Wii. I ought to point out at this time that Pachter’s “prediction” of the Wii HD hinged on the opinion that the Wii’s astronomical demand would someday reach a massive halt and that in order to reinvigorate the Wii brand, Nintendo would probably release the Wii HD. Let us first acknowledge that given Nintendo’s past, the idea of the Wii HD is not too far-fetched. Nintendo replaced the GameCube with a backwards-compatible upgrade that we know as the Wii, which he conceded as being essentially a slightly more powerful GameCube. Nintendo did the same incremental upgrade strategy with the Game Boy, the Game Boy Color, the Game Boy Advance, the DS, and now the DSi. Given Nintendo’s past history, the advantages and disadvantages of the Wii, the trend of videogames moving towards HD, I find it hard to deny that the Wii HD as described by Pachter is very possibly what Nintendo would release when the time comes. Indeed, the astronomical demand of the Wii does in fact seem to have finally slowed down in both Japan and the United States, but again, who would have predicted that the fascination could have lasted so long?
I just feel like when Pachter gives his “predictions,” it’s not so much that he is doing it to tell the future as much as he is throwing out possible ideas and strategies that he believes companies could and may pursue. That way, he can not only make better investment decisions for his clients, but it also allows him to better understand trends in the marketplace. I feel as though gamers are interpreting his comments as being an attempt to show off that he is so smart that he can predict the future and I am confused as to why they are taking his comments this way because it doesn’t even seem like he does.
Pachter sticks his neck out for gamers
When it comes down to it, Pachter’s job is to please the investors of his company, not the gaming community. What then surprises me most about the gamer reaction to Pachter’s comments are how quickly gamers are to lump Pachter in with the “evil corporations” despite the fact that he a history to sticking up for gamers.
Take for example, Pachter’s recent comments on Modern Warface 2’s pricing to Eurogamer, which left him vilified by the gaming community. First of all, Pachter is simply giving what he feels is the rationale from Activision-Blizzard’s angle as to why the price increase is occurring based on his experience. Second of all, Pachter isn’t saying that Activision-Blizzard SHOULD raise the price so I am surprised as to why gamers were so angry at his comment as if he personally raised the prices himself or told Activision-Blizzard to do it (well, I suppose if Pachter were a consultant and not an analyst, I suppose the latter might be possible).
I know that the MW2 comments have been taken by some as “obvious news from Captain Obvious.” However, I disagree with this assessment given how much garbage and crap reasons have been tossed out in the past in order to explain price hikes in Europe ranging from currency exchange fluctuations, localization costs, production issues, etc. If anything, I would think that the gaming community to be happy that someone is pointing out to the gaming community a more definitive reason for this price hike that probably has the experience and potential inside information to know? Hell, by pointing out the reason, Pachter has increased the possibility that people will forgo MW2 and therefore make Activision-Blizzard’s price experiment a failure whereas if he did not point this out, people might have actually bought into the long list of reasons why MW2 is more expensive and ended up buying it at the jacked up price and as a result increased the chance of future games being similarly high priced.
I would say the same thing of what happened with Pachter and his calling out Sony for the price of the PSP Go. Shouldn’t he be commended by gamers for sticking up for the wallets of gamers? In addition to videogames, Pachter’s job involves other areas of the electronic industry and so he was able to recognize that the cost of replacing the UMD drive mechanics with a SSD did not warrant a price increase. Does anyone else on this site have the knowledge to point this out or notice it? What happened with the PSP Go was an example of someone with extra knowledge going out of his way to inform customers that there was something fishy about a price. Isn’t that a good thing, especially for the gamer customer? Since when did helping consumers maximize the use of their money warrant being told to “STFU”?
Plain ignorance
The main reason I felt compelled to write out this long ridiculous blog post is that I read neveranything’s criticism of Pachter’s theory on why Best Buy’s plan will fail and I found it to be one of the silliest and most uninformed critiques that I have ever read. Before I respond to his/her criticism, I advise him/her to pursue a career that keeps him/her as far from business as possible because the presented criticism displayed a level of ignorance on basic business concepts that is so great that I would not trust him/her to manage a lemonade stand.
I am going to take a closer look at Pachter’s theory here with some math. If you don’t like in-depth math, just skip to the next and final section. “I don’t think it will do well. The price match means that Best Buy either cuts their profit per game in half, or wipes it out altogether. I don’t think that they can afford to sell $60 games for $50, and don’t think that it will be effective in the long run. If it does well, then GameStop will cut used game prices to the point where Best Buy can’t match without losing money.”
Let’s do some simple math here. Let’s assume for simplicity sake that the first-day market for a game comprises of 1,000,000 gamers. Let us assume that Best Buy and Gamestop each command 50% of the market. Let’s assume that a new game is $60, wholesale price to the store is $40.
In this case, Best Buy and Gamestop would each make about 10 million dollars profit (1,000,000 gamers X 50% X [$60-$40] = $10,000,000).
So now Best Buy wants to “kill” Gamestop by agreeing to sell new games at the price of used games. Let’s assume, just to be optimistic, that Gamestop does not bother to react to the price change and as a result, Best Buy manages to steal consumers, now commanding 70% of gamers, leaving only 30% to shop at Gamestop. Let us assume that the “used” price is $50, which I think is about appropriate for the used game price at Gamestop.
In this scenario, Best Buy would sell far more, but if you consider the drop in profit, it becomes obvious that Best Buy would have been better off by accepting the 50% market share and charging full price. By my calculation, 1,000,000 gamers X 70% X [$50-$40] = $7,000,000. As you can see, this price decision results in Best Buy losing $3,000,000 in this scenario. Don’t get me wrong, Gamestop would lose money too. In this scenario, Gamestop would make $6,000,000, therefore losing $4,000,000 dollars. Ultimately, the only thing Gamestop can do is to match Best Buy’s price for new games because as time goes on, Best Buy would steal more and more of Gamestop’s customers and eliminate Gamestop’s profitability. In such a scenario, both Gamestop and Best Buy would retain the equal control of the market and both companies would make 5,000,000, halving their profits from the status quo. Again, yes, it would seem that Gamestop would make more money by not matching prices with Best Buy. However, as I said, as time goes out, word will get out that Best Buy is better in terms of price and as a result, the amount of people going to Gamestop over time would decrease, sinking their profits.
Pachter suggests that eventually this would trigger a price war that would result in Best Buy not being able to compete. For example, perhaps the price war will intensify to the point that new games are priced equal to wholesale price, therefore ensuring that both stores make $0. So why would Best Buy not be able to compete? The reason for this is because the previous calculations I made do not consider the fact that people sell used games back to Gamestop, allowing Gamestop to make additional profit independent of how many new units they sold. Again, consider that Best Buy does not sell used games and as a result would not see any benefit from used games.
Let’s assume as a conservation estimate that 10% of the games sold in total are sold back to Gamestop. Again, remember that by total, I refer to the total of 1,000,000 because whether or not you bought the game at Best Buy or Gamestop, the only place you can sell it back to is Gamestop. Let’s assume that Gamestop buys the game from you at $20 (a very generous amount) and sells it back for $10 dollars lower than the price of a new game. What this means is that even if we assume that new games are priced so low that the retailers are making no money from it, Gamestop will still make some money based on used game sales.
In the extreme example I gave of a price war where no one makes money, a used game would be priced at $30. Given that Gamestop gives you $20 for the game, this means that they would be making $10 profit per used copy that Best Buy cannot take away.
Now neveranything states that Best Buy is safe because they sell stuff other than games and therefore can absorb the loss on game sales. There are three primary issues with that argument though.
First, Gamestop has no choice but to adjust its price to match Best Buy. As a result, there would be no additional incentive for one to change their preference of stores.
Second, let’s assume that Gamestop is stupid and decides not to adjust their prices, enticing more people to go shop at Best Buy. The problem is that Best Buy’s plan does not help them unless the game drop specifically entices a customer to buy something at Gamestop that they otherwise would not. For example, I like Blu-Rays and I will get them independent of whether or not I decide to get a game. If I normally buy games at Best Buy and I go to buy a game as well as a Blu-Ray, the price drop simply means that Best Buy lost $10 without gaining anything since I would have always been there anyway to buy that Blu-Ray. To me, the likelihood that every new Best Buy customer would always buy a game and something else that they wouldn’t otherwise get seems very small.
Third, consider that in the example I have been using, we dropped the price $10, therefore resulting in Best Buy losing $10 of profit. What this means is that no only do you have to buy something else that you wouldn’t have otherwise bought as a result of the price change, but the item or items you bought must result in a combined profit equal to or greater than $10 in order to compensate for the price cut. This means that if I went into a Best Buy, bought a new game as a used price of $10 cheaper, I would have to buy over four energy drinks that I wouldn’t have otherwise bought from Best Buy in order to make it worth their while to lower prices.
As you can see, this plan would end up fairly badly for Best Buy and they would be best off by sticking to the status quo. Now it is true that Best Buy could theoretically decide to blow off profits completely in order to completely kill Gamestop. However, how much is that going to cost Best Buy and how long will they have to lose money? Even if they beat Gamestop, how long is it going to take for them to recoup their losses? Hell, even thinking about this further, if Best Buy and Gamestop are in a price war, how is Target and Wal-mart going to react? Hell, if we are talking about competing on price, I’d be willing to bet that Wal-mart could do even better than Best Buy.
Conclusion
So yeah, I’m confused as to why people hate Michael Pachter so much. I don’t feel that he is without error or free from criticism. However, I think that before gamers go snapping their mouths, they ought to first make sure they understand the context of whatever quote or “prediction” he made and then after that make sure that their own point makes sense. Finally, in addition to following the videogame industry, I understand that Pachter also deals with and studies other home electronics markets. Most people don’t even know what they are talking about when it comes to even only one console so I’m willing to give a little leeway here to Pachter.
P.S. On second thought, why am I defending someone who probably has more money than all of his critics combined? I obviously have too much time at work to kill.
