Riccitiello's EA is taking huge risks - but so far, they're paying off. Can the winning streak continue?
When I last wrote about the EA acquisition of PopCap two weeks ago, the reaction was interesting, to say the least. In comments and even more so in emails, the deal has clearly polarised opinion between those baffled at the huge risk EA is taking - "Riccitiello is going to destroy shareholder value with this," one analyst opined bleakly in an email - and those who think it's a bold, important move that'll quickly prove its value to EA.
Personally, I'm still on the fence about the PopCap deal - but in the spirit of that polarisation, I think it's worth taking a look at exactly what's going on at EA, which remains one of the most fascinating companies in the industry. With John Riccitiello's hand on the tiller, EA has steered an extraordinary course - turning around its strategy, its reputation and its commercial performance.
That's something which is perfectly underlined by this week's first quarter figures from the company, which saw revenue rising to within touching distance of a billion dollars, while profits doubled to $221 million. Crucially, that improvement in the figures was reflected across the company's business; both digital and packaged goods saw solid revenue rises, reflecting strong performance in both traditional and emerging markets.
EA has managed to engage with new markets without ever lessening its focus on the core markets from whence it came
After spending over a decade as the most hated company in the core games market, standing accused of milking franchises at the expense of quality, of swallowing excellent game developers and destroying them, and of churning out endless low-quality licensed games - accusations of which the company was indeed guilty on all charges - EA is now one of the most beloved. That's partially due to some very intelligent PR - whoever decided to set the EA legal department on copyright troll Tim Langdell deserves a handsome payrise, for example. Five years ago I might well have believed that gamers would learn to love EA again, but that they'd learn to love EA's lawyers? Solid gold genius.
However, for the most part, it's just down to the company's output, and the financial results underline that perfectly. What are the stand-out successes listed in the report? Dead Space 2, Dragon Age 2, Crysis 2, Portal 2 and Battlefield: Bad Company 2 - all sequels, yes, but sequels to recent new IP launches which reviewed extremely strongly and enjoyed widespread praise from gamers. More success is on the horizon, too, with Star Wars: The Old Republic and Battlefield 3 pre-orders soaring - another pair of titles that will delight the core market.
Even the company's sports games, once utterly derided by the core market, have attracted significant respect in recent years. The report singles out FIFA 11 as a success story, with the football game having reached (appropriately enough) 11 million sales. A few years ago, that would have been met with rolled eyes at the willingness of the masses to buy anything with the FIFA name on it - this time out, it's been met with remarkable critical acclaim, with a Metacritic average of almost 90 per cent.
Outside the core market, EA has enthusiastically embraced new platforms. It's got a significant presence on iOS and Android, is increasingly keen on tablets, and is going head to head with the PC digital distribution platform, Steam, with its own online store, Origin - which it claims it will shortly open up to third-party content, potentially creating a real rival for Valve's dominance.
What Riccitiello has done, in essence, is a twofold strategy. Firstly, he has carefully charted a central course for the publisher, striking a careful balance between its traditional business in core PC and console gaming and its interest in emerging, mainstream markets. Where Disney, for instance, has hacked off its core gaming interests entirely in the pursuit of the emerging social market, and Activision has stubbornly ignored everything but top-selling core franchises, EA has managed to engage with new markets without ever lessening its focus on the core markets from whence it came.
Secondly, Riccitiello has adopted a strategy on product development which focuses on the two things that gamers always say they want from publishers, but which most publishers seem unable to actually pursue - a focus on developing original, self-owned IP, and as a corollary to that, strong processes aimed at bringing through quality in the company's products. EA has become a company unafraid to pursue original IP and willing to invest the time and money required to make the calibre of products required for that IP to become successful.
Of course, that's the positive spin. Looked at from another angle, Riccitiello's strategies are both risky in the extreme. By continuing to develop the company's core business while expanding into the casual market, he risks spreading EA too thinly across markets which arguably don't have many economies of scale between them. By working on original IP and investing heavily in development for the sake of quality, the company takes creative risks that could end up costing heavily in the event of a flop - and of course, it bets a great deal on its own ability to assess "quality", which has not always been a surefire skill of publishers in the past.
Yet that's exactly what makes Riccitiello into one of the most interesting and successful business leaders in the games industry today - arguably the top of that elite list, in fact, since Satoru Iwata's star is presently in (hopefully temporary) decline. He takes risks, engaging in strategies that much of the rest of the industry is willing to pay lipservice to but unwilling to actually back up with money and manpower.
If you look at EA's risk profile, the extraordinary thing about it is that every major risk facing the company right now is a calculated gamble - with a precipitous downside but an equally steep upside. Other companies in the industry are exposed to external risks, factors outside their control which could damage them seriously if they turn in a contrary direction. EA, however, has knowingly entered into each of the biggest risks it faces, girding itself for the challenge and expecting to reap huge rewards in the end.
Riccitiello into one of the most interesting and successful business leaders in the games industry today - arguably the top of the elite list
What are those key risks? There are four, as I see it at present - two product risks, and two strategic risks, all four carrying with them the potential for great rewards should they turn in EA's favour.
The product risks, first. All new IP is risky, of course, and all core product launches carry with them a heavy degree of risk, but in EA's case, this year it is challenging two of the largest and best-established products in the industry. Sensing blood in the water after Modern Warfare's developers defected to form a new studio at EA, the company has openly relished going head to head with Activision's Modern Warfare 3 with this year's Battlefield 3 release, repeatedly talking up the rivalry in the press. It's less keen to position Star Wars: The Old Republic as a direct rival to World of Warcraft, but the comparison is there nonetheless.
The rhetoric around the two launches makes sense. With Battlefield 3, EA has an opportunity to steal Modern Warfare's crown outright, and it's determined to capitalise on that. It's a big if, but if it can perform as well as it hopes, by the end of this year EA could be the publisher of the world's biggest-launching game franchise - quite possibly retaking the third-party publishing crown from Activision on the way. With The Old Republic, however, the race is a marathon rather than a sprint. A strong launch will be an excellent indicator, but we won't have a clear idea of whether the game is going to overtake, coexist with or be steamrollered by Blizzard's World of Warcraft for several months to a year after launch. For now, managing expectations by talking sweetly about WoW and positing healthy co-existence is a sensible strategy.
Then there are the strategic risks. Firstly, there's Origin - an attack on Steam which starts to make more sense if Riccitiello is really serious about actually turning it into a major open distribution platform, rather than just an EA-exclusive store. Even so, there's a fairly solid chance that the coming year or two will see EA's content crawling back onto the Steam portal - it's hard to overestimate just how absolutely vital to PC game distribution Steam has become in recent years, and striking out on its own just ahead of two huge game launches, while daring, is also risky even by EA's recent standards.
Secondly, of course, there's PopCap. I maintain that this is the biggest risk Riccitiello has taken yet - a massive, expensive step into a sector which, while profitable and rapidly growing, is still in its infancy and hugely open to growing pains, not least as a result of being buffeted about by policy changes from the companies in charge of it. Even if Battlefield 3 can't displace Modern Warfare at the top of the military shooter genre, it'll sell well. A flop from The Old Republic would be damaging and financially painful, but EA could absorb it. Origin could be a disaster and EA forced to run back to Steam with its tail between its legs, but it would lose a lot more face than anything else in that eventuality. If PopCap, however, fails to perform to expectations - well, EA will survive, but it's unlikely that shareholders would countenance Riccitiello remaining in charge.
But that's exactly the kind of management style that a company like EA needs, I believe. Far too many firms in the games business are run in a way that's more suited to commodity industries than to a fast, dynamic media industry - focused on safe, incremental growth without recognising that in this kind of industry, that's a recipe for steady decline. Without risk-taking - measured, intelligent risk-taking, but regular, significant risk-taking - no business will get far in videogames. One can question EA's purchase of PopCap; one can argue that The Old Republic will struggle against WoW, or that Origin is merely tilting at windmills; but these risks are the result of the same culture and strategy that has turned EA around so far, and on the strength of recent results, I think Riccitiello has earned some benefit of the doubt.
From GamesIndustry.biz Recommendations by Taboola