SAN FRANCISCO -- In August, a traditionally slow month for the video-game industry, hardcore gamers and analysts found themselves at loggerheads over an upcoming title: BioShock, made by Take-Two Interactive ( TTWO). BioShock, the analysts said, was too dark and complex to catch the attention of a wider audience. They estimated it would sell 1 million to 1.5 million copies six months after its Aug. 21 release -- and a few more thousand before the end of the game's lifetime. But
The simExchange, an online "stock market" where gamers buy and sell virtual shares of a game or console based on how well they expect it to perform in real life, had a more bullish outlook. The exchange anticipated sales of 3.2 million copies of the game for Microsoft's ( MSFT) Xbox 360 console and 980,000 copies for PCs over the game's lifetime. The outlook was generated from the site's 7,500 registered users -- about 2,000 of whom have placed at least one trade in the last month. Had investors been keyed into the simExchange's results, they could've reaped a tidy profit. The positive buzz surrounding BioShock led shares of Take-Two up nearly 15% in the week of the game's release. And three weeks after the game's debut, Take-Two has already shipped 1.5 million copies onto retail shelves.
The simExchange is the sector's first online prediction market and aims to complement the monthly sales data released by market research firm NPD Group. "The simExchange shows a lot of trends," says Brian Shiau, a Princeton economics graduate, a game fanatic and an avid investor who started the site in November. "If you looked at BioShock on our site before its release it would have been clear you have a big winner on your hands -- something that Wall Street analysts missed." "Our market plays into the wisdom of the crowds," he says. And for investors looking to make bets on game stocks, the simExchange could become an important tool in their arsenal, says Shiau. "The simExchange is not a vision of the future, it's not a time machine that will tell you exactly what the sales will be, but it is another data point for retail investors who don't have anything
else to go by," he says. Although many trade publications and gamer blogs exist to dissect every move in the game business, they're written by gamers for gamers. For investors, the sites filled with minutiae about clips, game play and demos can easily cause information overload. The simExchange, however, gets straight to the question that Shiau believes will help investors the most: How many copies is a game likely to sell?
On the simExchange, all registered users start with 1 million DKP, the currency used by the site. 1 DKP of stock price corresponds to 10,000 copies of the game sold worldwide. Users can go long on a game by bidding for a stock's price at more than the current value -- or short it if they think it will sell lower. "The important point here is we ask gamers the question what they think will sell rather than what they think they want to buy," says Shiau. "That eliminates bias and also ensures that people always bet on what they think will win." The site also allows for futures trading, where futures contracts trade much like stocks, but expire on a certain date and pay out in the DKP currency. While any prediction forum won't be perfect, the simExchange hasn't been any further off the mark. Its estimate for game industry sales (including hardware and accessories) was off 2.1% from the total sales data disclosed by NPD. On the sales of games only, the site's forecast was off about 16%, but that margin of error is about the same as estimates by many analysts. In fact, the simExchange compares itself favorably to estimates by one of video games' most outspoken Wall Street analysts, Michael Pachter of Wedbush Morgan.
Pachter says it's too early to tell if the simExchange's predictions are reliable, since the criteria for prediction is unclear. "Many of their game predictions are for lifetime sales, so they won't be measurable for more than a year from now," he says. The exchange's lifetime sales forecasts can also be confusing to investors and difficult to quantify into a publisher's quarter or fiscal year. But Jesse Divnich, an analyst with the site, says the predictions can still give a glimpse into key trends sweeping through the business. For instance, the console lifetime sales predictions could be helpful for investors who want to judge which publisher is in a better position, he says. The simExchange currently predicts that Nintendo will sell over 100 million Wiis, while the Xbox 360 and Sony's ( SNE) PS3 are likely to move 50 million devices each. In this case, investors can focus on the break-up ratio, says Divnich. "They can see the Nintendo Wii is expected to outsell the other two by 2 to 1," he says. "Then they can analyze publishers more effectively by seeing, for example, publisher A only has 10 out of 100 SKUs from their 2008 product line-up coming out for the Nintendo Wii, while Publisher B has 50 out of 100 SKUs." For now, the simExchange is a bootstrapped site with two employees, Shiau and Divnich, and no real business model. But Shiau hopes to eventually scale up the site and generate data that can be sold to analysts and publishers. He promises investors will continue to get free access to data. And if they get tired of losing money on real-world stocks, they can always place some happy virtual trades.