Introduction

Analysts cover everything. They are quoted in stories about the PS3 launch date, the impending death of the iPod Shuffle, and the earnings of search behemoth Google, but reading quote after quote from faceless "analysts" does little to answer the burning question: who are these people, and what do they do all day?

To find out, we had a chat with Jason Kraft and Chris Kwak, two research analysts from Susquehanna Financial Group who specialize in video games (and who we've quoted before at Ars). If covering video games sounds like all play and no work, think again. Analysts produce guidance that is used by large institutional investors to make decisions about where to put their money, and their knowledge of videogames has to be matched by their knowledge of business. Getting it wrong can cost clients a good deal of money (and analysts their jobs).

So what do these people do all day? Read on to find out.

The interview

Ars Technica: How would you describe the job of a software analyst to someone without an MBA (and without using the terms "value-added" or "actualize")?

Jason Kraft and Chris Kwak: That's metaphysically impossible. We (Jason Kraft and Chris Kwak) are equity research analysts generally, and enterprise and consumer software analysts specifically. As equity analysts, we look at equities (stocks). Our principal job is to assess a company's fundamentals and their impact on financials, and ultimately to make recommendations on stocks. Our job is to help our clients (institutional investors) make more informed investment decisions.

You guys write extensively about video games, but I'm guessing that office life consists of far more than playing Guitar Hero all day and reading rumors about the PS3 launch date. What does an average work day look like?

Actually, we don't play games at work (unless we steal five minutes to play an arcade classic). Games are for evenings and weekends. While we like playing as much as the next person, we try to focus on our task—helping our clients make more informed decisions. Whenever an important game hits shelves, we get it and play it.

Since our job is to help our clients make more informed investment decisions, we look closely at the gaming companies and the industry. We write quite a bit. We try to model everything. And we talk to our clients. Everything we do is geared toward helping our clients get greater conviction about a stock.

Our day revolves around figuring out what's important to the industry and companies, and driving toward answers. For example, THQI, the stock, is being valued this year in large measure by Cars, the Pixar movie. How big is Cars the videogame going to be? In our most recent issue of the Video Game Journal [their research newsletter], we looked at what the market (in this case, the Hollywood Stock Exchange) was pricing Cars. Based on analysis we had done in fall 2005, we determined that expectations for Cars the movie was low.

Does writing and researching games make you more or less interested in playing them when you get home at night?

Well, we kinda have to play the games. But putting Call of Duty 2 aside, we don't play a lot of games for long. We may play a new game for a week, but we have to move on. A lot of our time playing games is aimed at trying to predict if the game is going to sell well. If we feel we can make that determination after an hour, that's enough for us. If we need a week, we'll take a week.

In our "Episodic Gaming in the Age of Digital Distribution" issue of our Journal, we wrote that for many, we are approaching an era of staccato gamingan intermittent gaming life where fragments of game experiences cohere to fulfill a story. These game experiences can be sporadic and disconnected even. In other words, these game experiences become episodic, often not as a function of a game's story arc and structure, but what frees and steals our time. We like being able to play a game for 15 minutes, if we want.

Is the gaming business unique, or does it turn out to be just like any other business?

Gaming is definitely more fun. Gaming is a lot like other cyclical industries. There is an ebb and flow to the industry. It is also a secular growth story—that is to say, if one were to line up the gaming cycles, the slope is up and to the right. So even though video games (as we know them today) have been around for as long as the personal computer, there is a sense the gaming market is still relatively young and trying to understand what it wants to be when it grows up.

It seems like there's a lot of responsibility that comes with issuing research reports for a well-respected firm; your words, after all, may have a direct effect on a company's share price. Does this ever make it difficult to say negative things about companies who deserve them?

We believe truth will have its day. Saying negative things is probably different in our professions. For a game reviewer, saying Madden '09 is boring may be construed as negative. If we were to say Madden '09 is boring, it would be somewhat laughable. Now, if we were to say we expect Madden '09 will sell only one unit next year, that would certainly be negative. Investors expect us to put a number or a range to things. You tell us what's negative: GUN is a terrible game? Or, GUN may miss expectations? The first question may have something to do with the second. But the second question is ultimately what matters. Just look at the front pages of our VGJ issues. We say some pretty honest things. Some call them negative; others have called them mean. We think they're true.

In your experience of covering the software industry, what is the single biggest business blunder you've ever seen a company make?

This is like asking a kid to pick only one kind of candy in a candy store.

What's the most exasperating thing about your job?

When readers jump on us because we say something unflattering about Nintendo.

It's difficult for many readers to understand that we are writing principally for investors. There are lots of purists out there who want games to be about challenging the norm, aesthetic models, and theory. That's not what the business of games is about, and that's not really our concern. EA is not a nonprofit organization or the NEA. There are shareholders out there who have put billions of dollars of your money to get a return on their investment. And we can measure this. EA and its brethren had better invest to grow and to generate returns for shareholders.

We saw a survey recently that had the following upcoming games (among others) in order of interest: Black, The Godfather, Madden, Spore, and Cars. The least interest in Cars! We had a good chuckle. There isn't a publisher out there who wouldn't kill to have Madden. Put your aesthetic sensibilities aside. Madden is a great business. And the returns on that business (among others) allow things like Spore to be made at all. Spore is not a cheap endeavor. People point to Geometry Wars and how successful that's been. And they point to Katamari. If you were an alien and you read the gaming press, you'd think Katamari is the biggest game around, driving huge sales and contributing significant margin to a publisher. Katamari is an afterthought to an Activision or THQ. They may be darlings to many readers, but few investors care about Katamari.

If analysts and their research reports all disappeared tomorrow, what would be the effect on the industries that you cover?

If Leonardo da Vinci had had four arms, what would the Renaissance have looked like? It's an interesting thought. But wherever there are financial instruments, there will always be analysts, whether we like them or not. They may take on a different look (Web only, for example), but someone will be looking for opportunities in stocks.

Conclusion

Those last words are good to keep in mind, because they highlight the basic difference between an analyst and a reviewer. While analysts are often quoted in news reports because of their detailed industry knowledge, their concern is on whether a given company or product will make money for a company. As Chris and Jason point out above, "quality," "social importance," and "value for the consumer" are only relevent to an analyst insofar as those things translate into a higher stock price. "Making money for the company" and "making sense for you" are two different categories, though, so keep an analyst's perspective in mind when you see a quote in the newspaper.

That said, analysts are paid to know their industry top to bottom, and they're often willing to speak on the record in a way that corporate insiders can't or won't. Even if they spouted the hottest of hot air, we'd still love them for keeping the tech rumor mill grinding away. The fact that they're so often right is gravy.