More On SEC Probe Into Game Publishers

Thanks to Reuters for a follow-up article discussing the SEC investigation into videogame publishers, in which Acclaim, Activision and THQ are already a part. Analysts elaborated on the probe: "..the investigation was probably considering two key questions: at what point in a game's release did the publisher recognize revenue from its sale, and whether reserves taken as insurance against weak sales were being used to smooth out revenues." This may mean the rush to get product out at the end of the financial year, as recently occurred with Tomb Raider, may be changed somewhat: "For example, some video game publishers book software revenue on the day the product is shipped. A more conservative approach could be to book revenue the day a retailer takes possession of the goods." Update: 07/21 22:14 GMT by S : There's also a good CNN Money article discussing the implications of this probe.

Re:IYAAL, please explain..

[Ian_Bailey]

SEC is involved, so the reason is because the information available to investors is either not complete or misrepresented. This is important, because if companys do not fully disclose all important details, CEOs (and other owners of big bunchs of stock who know more details about the company) can artificially manipulate the stock for their own personal gains.

Now, the current issue is that game companies record a 'sale' when the recieve an order from the store. The article mentions that a better measure might be to record the 'sale' when the store recieves the shipment. This would make sure no games that were lost or damaged in shipment are recorded as sales (although this would most likely be fixed afterwards).

Now, this might not seem like a big deal, they were talking about 2-days in differences. Here's a possible scenario:

CEO hatches a plan to make money of his (or her) game company's stock. CEO buys a bunch of shares at their regular price. CEO launches game, and ships game to stores. Only the CEO knows uses a cheap shipping service, which damages half the shipments. Very few copies have been sold (so far), but 'the books' say tons of copies sold. Issue press release "x million copies sold". Shares go up. CEO sells stock at high price, making a profit. Truth of bad shipments comes out week later. Stock Price plummets, leaving everyone else with a big loss. Repeat a couple of times, and you could make a couple hundred thousand quite easily.

The SEC is suggesting changing this so the situation I mentioned here (and no doubt various other ones) will not be possible. I don't know if what they're doing is illegal, that is for the Commision to decide.

Re:IYAAL, please explain..

[jwilloug]

Most of the article wasn't devoted to outright insider trading like you're describing, but the shady but very common industry practice of not recognizing revenue as soon as it comes in.

Let's say you're Acclaim. You've just put out Turok, and times are good. Wall Street was predicting you'd make $0.10 per share, and instead you made $0.12. So do you announce that you've beat by two cents? Of course not, you can the same amount of good press with $0.11, and the rest goes in the CEO's mattress for a rainy day.

It's two years later, you've just put out Turok 7 and the kids who loved Turok are starting to get old enough to tell quality games from the crap you're putting out, and now you're about to miss expectations by a penny. The rainy day is here, time to dip into the savings and bump up earning a bit. Yeah, it's a bit artificial, but who's it hurting...

Re:IYAAL, please explain..

[Anonymous Coward]

Acclaim ALWAYS did this. We would get to the end of a financial quarter and there would ALWAYS be a mad scramble so that it would fit within the current financial quarter. Cooked books. Before Turok first came out, a *LOT* of pre-orders were taken before the end of the financial quarter (some vendors were even persuaded to pay ahead of time - so acclaim could have enough cash to duplicate the game). I never understood the logic behind this, now I see the light. It's dishonest and illegal. Fancy Greg Fischbach doing something dishonest? My that's a shock.