While the initial idea of owning an original Pac-Man machine for a reasonable price was somewhat intriguing, seeing a room full of these dirty, noisy machines had a sobering effect...
They reminded me of a dark, dingy pub where through plumes of smoke, you could spot two overgrown kids battling head-to-head with Pac-Man or indeed Space Invaders.
The room to which I'm referring was just about 30 miles north east of London at a run down fairground in Southend - don't ask.
The event was a coin-operated video game and amusement auction, temporarily located in a building that each year plays host to the livestock exhibition of travelling fair.
Heaven for computer game fans
That day, though, it was more of a video game graveyard than anything else...
At least one model of every computer game ever produced was up for auction or for immediate sale at a fixed price.
Their conditions ranged from a few pristine models to mostly those that had seen heavy use.
Bidders were encouraged to bring their own extension cords to test that the games did indeed function. The panels to the coin slots on the machines were open so that savvy buyers could activate the games without actually dropping in quarters.
Something struck me Midway Games was the daddy of this industry throughout the 1980s, when arcade games were big business. Today, arcades only seem to exist at beaches, amusement parks and downtrodden town centres.
What had happened to them?
Back in the 80s, arcades were popular. The big names in this business, along with Midway, included Taito, Atari, and Williams, to name just a few.
Midway, however, had a significant number of top titles back then that have ultimately been modernised and transferred to PlayStation and Xbox. (You might remember Spy Hunter or one of their later titles Mortal Kombat) . These games have spawned sequels, spin-offs, and some have become franchises that are still alive 25 years later.
Well Midway certainly sounds like it should be successful, so where are they going wrong?
Midway Games (MWY: NYSE) is a small-cap that's been cut in the last 12 months.
It's down 54.7% and now has a market cap of $785 million.
Midway started to fall apart in mid-December 2005. During that month, the company's largest shareholder, Sumner Redstone of Viacom, shifted a substantial amount of his direct holdings in the video game company to off-load personal responsibility of over $400 million in debt to a holding company.
While Redstone wasn't really dumping Midway stock on the open market at the time, it did turn a lot of negative attention on the game company.
Analysts began to pile on with negative statements about its lofty valuation, Redstone's ownership making it basically an illiquid stock, and the company's inability to post positive earnings.
I'll admit I was very hopeful of finding a compelling investment in Midway at these depressed levels.
It's still a powerful name in a very big market, especially in the US, and we're entering another cycle where lots of cash is going to be thrown at new video game consoles from Sony and Nintendo.
At the very least I had to see if Midway was going to be a smart buy for this new cycle...
Missed opportunities
There have been a lot of opportunities for Midway to capitalise on surges in computer game sales, but the company has consistently failed to execute.
The first PlayStation was launched in 1994 and 1995 in Japan and the US, respectively. PlayStation 2 was launched globally in 2000, and PlayStation 3 will be launched in Japan and in the US in about two weeks.
Overlapping these releases were new entrants from Microsoft in the forms of Xbox and Xbox360, Nintendo's 64, GameCube and the upcoming Wii. A few entrants fell by the wayside - notably Sega and their Saturn console.
Doing great things - but still no profits
Midway didn't just get tied down to one game company, either. They have produced software for virtually all of the systems, and yet profitability has been elusive.
Midway's been losing money since 2000 up through 2005 - arguably the greatest "video game bull market" in this industry's short history. A big drop in revenue from 1999 to 2000 occurred when Midway exited the coin-operated arcade business... and they haven’t posted an annual profit since.
The Entertainment Software Association (ESA) reports that consumers spent $7 billion on video and computer games in 2005. That's double what was sold in 1996. If we look at Midway's home video game sales during the period between 1998 and 2005, it's sales dropped 34.7% while the industry's sales as a whole marched forward 45.8%. And for most of those years, this company was losing money.
Midway shares are certainly not popular, which can sometimes be a good opportunity to buy, but this one looks like a real dog, and I would avoid it like the plague.
In the last 12 months, Midway has taken on more debt than they have in the last 10 years combined, and the company is not cash flow positive on any level.
Many of their key franchise software titles are getting very long in the tooth and may not remain marketable for much longer.
Management have reported a loss for Q306 that was an improvement over Q305. However, they did guide full-year earnings to be a loss of $73 million, which is a greater loss than they had previously told the Street. Always good to boost morale!
Traditionally, the months leading up to a new generation video game console's launch is tough on game makers who are still producing titles for the existing platforms (the ones that no one is going to want in a few months).
That's why Midway's management is telling investors that recent losses are associated with their efforts to gear up for a strong 2007.
If I believed that Midway was going to make a massive turn to consistent profitability, now would be the perfect time to take a position. But I'm not convinced.
Have a great weekend.
Until Monday,
Melissa Carroll
for the Penny Sleuth
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