Why Investors Won’t Make Money On Next-Gen Video Games: Microsoft Corporation (MSFT), Sony Corporation (ADR) (SNE)

Video games are a billion-dollar business by sales, but they are a bust for investors. As the console wars heat up, we’ll look at why video game companies are the worst way to play rising consumer discretionary purchases.

The business of gaming

The video game console industry is built on the idea of “platforms,” much like more modern smartphone and tablet makers. The idea is simple: video game companies subsidize the sale of console hardware in order to grab gamer marketshare. From there, licensing and game sales are expected to generate the profits.

Betting on gaming is difficult, as there are no true pure-plays in the space. Here’s a quick background on videogame stocks and why they’re uninvestible:

The company has net cash of $11 per American ADR. The balance, literally about $800 million of market cap, is attributed to a combination of Nintendo’s vast video game franchises and the partial ownership of the Seattle Mariners. Despite carrying no debt, Nintendo has no plans to pay a dividend or repurchase shares, which makes Nintendo just one massive value trap, regardless of the Wii U’s performance.

Sony Corporation (ADR) (NYSE:SNE) – This down and out electronics company used to lead where it mattered. Sony was the company that was known as the innovator for big products like the smallest transistor radio and a record-selling Sony Walkman.

Sony’s foray into video games has been marked with losses, however. The company lost a combined 415 billion yen in video games from 2006 to 2008, only to turn a tiny 47 billion yen profit in 2010. The “One Sony” plan has yet to turn around the video game segment, which can hardly sustain another subsidized generation of consoles. Sony’s silence on its future video game plans – with the exception of a launch with zero new details – should steer investors clear.

Microsoft Corporation (NASDAQ:MSFT) – Microsoft’s bread and butter are the operating systems and Office Suite, which provide the company with virtually all of its operating profits. The Xbox division provides virtually little upside for this behmoth. Investors would likely gain more from attacking its $68 billion in cash and short-term investments, which should be paid out to investors as part of larger dividend or share repurchase plan.