5 Things You Need to Know to Play Videogame Stocks

When “Spider-Man 3” opened on May 4, 2007, it racked up $151 million in ticket sales over three days, setting a box office record. When “Halo 3” went on sale last September, it generated $170 million in sales in its first 24 hours.

Now “Grand Theft Auto IV” is making cash registers melt – with analysts forecasting first week sales of up to $400 million. (No one’s willing to predict the first day numbers, which are not yet available.) Ultimately, the game could be the biggest entertainment event of the year, something that’s making piquing investor interest in the video game space.

The gaming industry is more complicated than it might appear from the outside, however. Before you jump in, here are a few things to keep in mind:

Things are consolidating – and that period isn’t over

Electronic Arts’ $2 billion takeover offer for “Grand Theft Auto” publisher Take Two Interactive Software has been pretty well documented. Those talks follow last December’s merger of Activision with Vivendi Games, which formed Activision Blizzard, the world’s largest video game publisher.

While it’s unlikely we’ll see anything on a similar scale, there are smaller publishers that may be aggressively courted. UbiSoft, for instance, has been considered a target for years. And Midway Games has failed to make a significant dent in the industry, despite the millions of dollars Sumner Redstone has invested in the company.

Independent development studios, meanwhile, remain ripe targets for takeover. Typically privately held, these companies often find themselves the subject of a bidding war after they have a hit title or two – as publishers try to boost the talent pool of their in-house teams.

“I don’t think we’re at the end here,” said Colin Sebastian, Senior Vice President of Equity Research at Lazard Capital Markets. “I think we’ll see a few more.”

Next Point: Duck!

The blast radius, meanwhile, is expanding

Limiting your focus to game publishers or game-specific retailers, such as GameStop could be a mistake. As video games attract new audiences, more companies are looking to get in on the action.

The latest is Blockbuster , which recently announced plans to expand its video game offerings, with more rental titles and letting customers buy games, hardware and accessories in its stores. The move could help position the company for the future as digital movie downloads become more popular.

Traditional media companies are expanding their focus in games as well. Time Warner recently invested another $119 million in SCi, which owns “Tomb Raider” publisher Eidos. The company also has bet heavily in online gaming with its GameTap division. And Disney , which has always shown an interest in video games, has expanded its publishing arm in the past few years.

“You’ve got new people coming in in droves,” said John Taylor, an analyst at Arcadia Research. “You’ve got a ton of potential advertising interest. So, basically, you’ve got users; you’ve got funders; and there are a lot of people looking at how to bring those together.”

Next Point ... It's Alive ... Alive ...

It’s growing faster than you think

The early part of the year is typically a strong period for software sales, as new console owners scramble to get the “must have” games for the systems they received during the holidays. This year, “Halo 3” gave sales an extra boost. Now, with “GTA” dominating the market, it should come as little surprise that this year is on track to be the industry’s most profitable.