Players of video games have tended to be stereotyped as young male couch potatoes who have preternaturally nimble thumbs from the ceaseless pushing of console buttons and who, in their parents’ view, need to get a life. But that stereotype is changing, since it’s increasingly less grounded in reality. A study by Nielsen, the market researchers, showed that only 40% of video gamers are teens. And a survey by the Entertainment Software Association revealed that the average age of people playing video games is 38, with nearly 40% of them women.

The demographics of video gamers are changing because the market for video games has broadened dramatically in recent years, thanks to what hard-core video gamers call "noobs" -- or newbies, consumers who are playing video games for the first time. Newbies include women, baby boomers, and seniors, who have embraced a new type of video game: the "casual game," which is easier and thus more fun to play. The casual game is largely the invention of Nintendo, due to innovations such as its Wii (pronounced Wee) console. Wii’s ease of use appeals to many people who previously didn’t have the time, the inclination, or the dexterity to master traditional video games, which tended to require the manual skills of a safecracker.

The heart of the Wii console is a wireless paddle, called the Wii Remote, that can detect 360 degrees of motion and that players can, among other things, swing like a tennis racquet or point and shoot like a gun. The Wii Remote has made possible games that are based on normal upper-body movements and as a result has led millions of consumers to conclude that they "finally have something they can pick up and figure out instead of feeling like they couldn’t compete [in video games] without years of practice," as one Web journalist puts it.

In effect, Nintendo has injected a new source of growth into the video-game business and dominates the market for casual games. Nintendo estimates that about 20 million Wii consoles will have been sold worldwide from their introduction in November 2006 to the end of this year. In our view, video games overall will reap their strongest year ever in 2007, producing revenue of at least $17 billion -- as well as one of the few retailing success stories in what may be a lackluster holiday shopping season. Video-game systems top the list of gifts that consumers plan to give over the holidays, according to the Consumer Electronics Association.

What’s more, we think demand for video games should remain strong once the holiday season ends. We concur with the basic premise of a PricewaterhouseCoopers report that foresees robust growth in the video-game business into the next decade. According to the report, sales of video games should increase at a compound annual rate of 9.1% through 2011, generating $48.9 billion in sales by that time. Much of that growth will come from Asian, European, and Latin America markets.

Video games have become such an entrenched cultural phenomenon globally that universities now offer degrees in video-game design and development. As an offshoot of their ubiquity, video games are being designed and developed that offer markedly more sophisticated graphics and compelling story lines than in the past. Indeed, video games more and more are resembling movies. For instance, Halo 3, developed by a unit of Microsoft, contains short expositional movies that complement the action. And as another indication of the continued blurring of lines between video games and movies, Electronic Arts, the leading producer of games for Microsoft’s Xbox 360 console, has arranged a partnership with Academy Award-winning director Steven Spielberg to develop three new video games. Although Electronic Arts has been reticent to talk much about the partnership, it has described one of the games under development as involving "an emotional journey where each player’s actions tell a story." We anticipate that many video games of the future, like movies, will contain elements of tragedy, comedy, and romance that appeal as much to players’ emotions and intellect as to their desire to master the games.

Other games, such as Wii Fit, scheduled for release in early 2008, may appeal to players’ desire for greater personal physical fitness. Wii Fit’s exercise games are designed to help players lose weight and reach their optimum body mass index, or BMI, a measure of fatness or thinness. Some highly optimistic pundits at CNET Networks speculate that fitness games like Wii Fit may prove so effective that they could ultimately make memberships at health clubs seem quaintly obsolete, like the Columbia Record Club. We don’t know what we think about that, but we do think that Wii Fit should help expand the market for video games further.

Here are four factoids that suggest to us the vast breadth of video games’ potential market:

• A 2007 Mayo Clinic study found that children expended the same amount of energy playing a Wii game as they would walking on a treadmill.
  
  
• Riley Hospital in Meridian, Mississippi, uses video games to rehabilitate stroke patients, helping them to regain their hand-eye coordination and balance.
  
  
• Playing Wii bowling games is now the rage in certain retirement centers because the games are easy to play and involve a recreational activity that many seniors relate to.
  
  
• Microsoft’s market research shows that video games that allow players to engage in "social networking" -- for example, to create and swap content and keep in touch with each other on the Internet

-- have proven enormously popular with women, who are the fastest-growing group of video gamers.

Among the companies that we think have auspicious prospects in the video-game market over the next two years are Activision (market capitalization: $6 billion), Electronic Arts ($18 billion), GameStop ($8 billion), and Nintendo ($50 billion). Activision, Electronic Arts, and GameStop are based in the U.S.; Nintendo, in Japan.

Activision may earn $165 million this year, nearly twice what it made in the previous fiscal year, according to Wedbush Morgan Securities. Over the past five years the company’s revenue has risen by 75%; net income, by 45%.

We think Activision’s future revenue and earnings growth may be enhanced significantly by its casual game Guitar Hero III, in which players press buttons on a guitar-shaped device corresponding to notes on the screen; the more notes players hit correctly, the more points they gain. Our research shows that Guitar Hero III has been the most popular game in the U.S. this year. It and a competing game from Electronic Arts, Rock Band, are expected to sell a combined 3.5 million units this holiday season, forecasts NPD Group, a market-research firm. Parents, with fantasies of playing guitar in a heavy-metal band dancing in their heads, are supposedly snapping up Guitar Hero III and Rock Band for their children, but we suspect that in many cases they are noobs buying the games as much for themselves as for their children.

Electronic Arts, besides being the leading game producer for Microsoft’s Xbox 360 console, is the second-leading producer in North America for Sony’s PlayStation 3. Electronic Arts, like most of its industry peers, underestimated the market appeal of casual games originally but is now intensifying its efforts to develop more of them. For instance, the company is in the midst of creating casual games for traditional Hasbro board games such as Monopoly and Scrabble. The company has continued to profitably license content from sports (the National Football League), movies (The Lord of the Rings), books (the Harry Potter Series), and TV (The Simpsons) for many of its games.

In its most recent fiscal year Electronic Arts’ revenue totaled $3.1 billion, an increase of 24.5% since 2003. Its profitability has been erratic, however: net income of $76 million last year amounted to a 76% decline versus 2003. We think the company’s earnings growth should be more smoothly consistent going forward, due partly to its well-diversified customer base. Microsoft’s Xbox 360 console accounts for 50% of Electronic Arts’ revenue; Sony’s PlayStation, 25%; and Nintendo’s Wii and DS, 24%.

GameStop has rapidly become the world’s largest video-game retailer, with more than 4,400 stores in the U.S. and 15 other countries. GameStop’s 2006 sales of $5.3 billion were a 293% increase and profits of $159 million were a 204% increase over those of 2002. In an effort to keep its growth blossoming, the company has opened more than 500 new stores worldwide in the past 12 months. An independent firm hired by the company concluded that the market could absorb 500 new GameStop stores annually for at least the next five years without danger of reaching a saturation point.

Under its business model, GameStop sells both new and used games. The used-game business is the most profitable, with the original Xbox, Game Boy, and GameCube systems in particular still in demand by budget-conscious consumers. In many instances, GameStop is the only retailer still stocking these now-mature systems. Another big plus for the company, in our estimation: its cadre of 22,000 sales associates are generally more knowledgeable about video games and more effective sellers than their counterparts at competing stores are.

Nintendo, as the leading maker of casual games, has a distinct fundamental advantage: casual games use less powerful chips and hardware than most other video games do, which has helped the company to produce a relatively large number of games economically. According to BusinessWeek, many developers have to spend between $10 million to $20 million to create a single game for the Xbox 360 or PlayStation 3; in contrast, the development costs of a Nintendo Wii game are often only half as much.

The demand for Wii consoles on which to play casual games continues to exceed the supply throughout the U.S., Europe, and Japan. The New York Post called the Wii the "must-have device" this holiday season. At the same time, Nintendo covets a greater share of the market for traditional video games. If the company achieves that bigger market share, its profit margins are likely to grow (profit margins on games -- both traditional and casual -- are as much as 16 times higher than margins on consoles, JPMorgan Chase calculates). NikkoCitigroup projects that Nintendo’s earnings in the fiscal year ending in March 2008 should increase 82%, to $3.5 billion, on a 51% rise in sales, to $12.5 billion. About 80% of Nintendo’s sales are generated outside Japan.

The views expressed represent the opinions of Turner Investment Partners as of the date indicated and may change. They are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. Opinions about individual securities mentioned may change, and there can be no guarantee that Turner will select and hold any particular security for its client portfolios. Earnings growth may not result in an increase in share price. Past performance is no guarantee of future results.

Turner Investment Partners, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm that manages more than $27 billion in stocks in separately managed accounts and mutual funds for institutions and individuals, as of September 30, 2007.

As of October 31, 2007, Turner held in client accounts 190 shares of Nintendo, 3.3 million shares of Electronic Arts, 18.6 million shares of Microsoft, 3.4 million shares of Activision, and 3.3 million shares of GameStop.