Here, in a selected transcription of a Q&A with Lazard's Colin Sebastian, Brown discusses the most relevant digital formats for EA, including some interesting stats on revenue generation, The Old Republic beta, and why the publisher is top of the charts on smartphones.
Q:One of the recurring themes we saw at GDC was the challenge that some developers are having in monetising their content on smartphones and tablets. EA obviously believes that these platforms are a real opportunity, but I think the average return industry-wide for these apps is about $4000 in total revenues. How do you deal with some of the pitfalls associated with market growth which is increasingly dominated by lower-priced items?
Eric Brown:Well, this is a market which didn't really exist three years ago. Today we peg it at about a billion dollars in the Western world, so US and Europe in terms of the aggregate amount of money generated in smartphones.
We see it growing at around 20 per cent per annum getting to $1.8 billion over the next couple of years or so. So it's a big market and it's growing rapidly. The characteristics of the market are pretty interesting.
Number one, there's the low average revenue per application - a negative you could argue. A positive that you could argue is that the barriers to entry are pretty low, so the dev costs for applications are pretty low.
What we'd like to do is get the next six to eight biggest franchises along and get tens of millions of digital revenue
Eric Brown, CFO, Electronic Arts.
You see a pretty robust app eco-system, especially on iOS enabled devices, and we think you'll start to see that increasingly on Android, as they tune their marketplace and improve their discoverability.
So the entry barriers are lower, there's tens of thousands of apps out there, so the question is: how do you drive ARPU? If you're an independent developer with one hit, I think that's pretty difficult. It's not difficult to generate the app, launch and get some sales, but it's difficult to scale and extend.
Where we've had success is to take existing EA brands, Need For Speed, Tiger Woods, Madden etc, and creating an iOS version of it. So it's not the same experience, given the different form factor, but it provides a different window into the content and the experience so what we're able to do is to aggregate users across brands, so people who try the console version see the iPhone version, they know it's high quality, they've had a great experience, so they're much more likely to try our version of the app versus someone who's creating an app for the first time with no pre-existing brand recognition.
So we've taken that brand leveraging approach. The other thing we've done is to create a community technology to bind together applications on the iOS devices which maybe come from different franchises, different genres. Sports versus racing for example - so we stitch it together with an iOS community platform which we refer to as Crystal.
So you can refer in friends, earn achievements etcetera. That also drives ARPU and stickiness and referencability from app to app. So I think that's the way to respond to a market where the barriers to entry are lower in terms of dev cost. To create scalability and efficiency you have to leverage brand and or platform and userbase, or some combination of those.
That's the approach we've taken and to date we're at the top of the charts across all of the smartphone enabled devices.
Q:Is there anyway to quantify the value of some of these franchises which you've expanded across these platforms?
Eric Brown:In some cases. We like to use the expression that in many cases the user experience starts with the physical disk but ends up being digital. So we have franchises that have originated on the traditional high-definition platforms, so the 360 or the PS3 or the PC and we've digitally extended that off the disk into digital media. Either DLC extensions direct to console hard drives or digitally delivered smartphone variants.
We have franchises with digital attach rates well north of ten per cent of the aggregate franchise revenue. I can cite FIFA as an example. We're just over $40 million of digitally derived revenue for FIFA - that's a combination of console DLC, full game downloads, mobile extensions and free-to-play microstransaction based games.
So we've started to crack the code, we're not quite satisfied with the outcomes. We view the smartphones as being one avenue of digital expansion, with full game downloads and console DLC being others.
Q:Do the emerging platforms also make you think about changing the monetisation of that disk? Of the core game?
Eric Brown:For the existing consoles we're pretty much locked in to the $50-60 MSRP for the frontline titles. For some browser-based PC games though, the model is zero dollars up front. Some people like to call it play-for-free, we prefer to refer to it as play now, pay later. In that case the initial ASP is exactly zero.
Similarly for social titles, and we're starting to see some free-to-play mobile titles. I think that for some platforms, free-to-play is a really important monetisation and revenue model approach.
So what we've done is extended our product lines. You'll see FIFA across every single platform, with every conceivable monetisation model. You'll see the frontline $60/€60 disc, then in Asia FIFA as a browser-based game as free-to-play, zero dollar client with microtransactions. You'll see FIFA superstars, out social game, with a similar model. You'll see FIFA mobile with an upfront cost to download to the iOS device, and you'll also see digital advertising sponsored variations there.
FIFA in Korea, which was previously a purely packaged goods model... over three years migrated completely to a free-to-play model
Eric Brown, CFO, Electronic Arts.
So we've taken a pretty broad-base approach. We co-exist across all revenue models, with some of our key franchises we'll have exposure across ten different revenue models.
Q:So as opposed to focusing on the price compression you would argue that the overall monetisation per user could improve, by leveraging your branding and franchises?
Eric Brown:Absolutely. We've actually experienced a real world case study with FIFA in Korea, which was previously a purely packaged goods model and has now, not perhaps very recently, but over three years or so, migrated completely to a free-to-play model.
So we're looking at a very compressed time-frame, maybe three years or so, end-to-end, from packaged to purely free-to-play. I think that you have to be prepared for that. For a certain combination of certain markets and certain platforms, that will become the consumers' preferred monetisation model.
That's not to suggest that the current high-definition console market and Wii market doesn't continue to exist with the $50-60 ASPs.
There you're seeing variance or extensions where people pay $50 or $60 and $15 or $20 of additional digital content to accompany the original disc content.
Q:What's the bigger opportunity, social networking or mobile games?
Eric Brown:They're probably of comparable size. You can see an additional $1 billion of addressable total segment revenue over the next several years in both markets. Social network games may get there sooner. Mobile games are currently at $1 billion, we see that getting to $1.8 billion over the next three or four years, social network games are harder to pin down, but again, probably around $1 billion. Comparable to Western world smartphone games. That'll probably be at $2 billion a little quicker than mobile.
Q:Let's talk about Battlefield. It's getting some very positive buzz right now across the markets. I'm curious as to how this franchise stacks up internally against some of your legacy shooter games, perhaps Medal of Honor from last year to give us some sense. Also given that this is the next game that you're putting up against the industry juggernaut in the fall.
Eric Brown:Certainly there's competition out there. It's a really vibrant genre, FPS as a genre is growing. It's a multi-billion dollar opportunity and clearly we're quite interested in it, we have multiple properties arranged against that opportunity. We have Medal of Honor, we had Battlefield Bad Company 2 which we talked about last year. Five and seven million unit sellers respectively.
Battlefield 3 will be the iteration of Bad Company 2. It's the same team, they've taken the techbase, the Frostbite engine, and revved it to 2.0, so it'll be the first game we launch with Frostbite 2.0 technology. We think it's going to offer innovation in terms of environments, full destructability, scale, diversity of platforms. It's unlike anything we've produced to date.
We think it's going to be a real, direct challenger to the CoD franchise and we're looking forward to it. What I think is going to be unique is, that all the technology which we've developed over the years for our sports games, FIFA, Madden - the character animations, how a character runs, ducks, covers - when you benchmark, as we started to do at GDC, what the Frostbite engine can do, now having fully integrated all of that great sports technology which we've built over the years, you can see a real difference in how the other characters move and interact.
That's really important for a first person shooter because it's all about what the individual players are doing in single or multiplayer. That's going to be a unique differentiator. The other thing that's going to be important is that this team has been working on Battlefield 3 not just for one year, but for 2 years or more. It's a full dev cycle.
Personally I think it's going to be a fantastic title. I think it's going to do better than Bad Company 2 in terms of commercial outcomes.
Q:Turning to Star Wars, obviously very big opportunity for EA and Lucas in the not too distant on future. The game appears to be on track at this point. But can you talk about, when we might expect an open beta, what that involves in terms of time, investment and to then gauge specific launch timing and then a follow up to that. What gives you the confidence, that the subscription MMO model is still relevant, given this massive diversion of content on these other platforms?
Eric Brown:I'll just address timing first and then speak to opportunities. So we have for the first time street dated within a date range the Star Wars MMO. We said it's going to launch sometime in calendar, but not within fiscal 11.
That basically pins it down between April 1 and December 31 of this calendar year. It's also reasonable to infer that it's not in our Q1 guidance. We gave Q1 fiscal 11/fiscal 12 non-GAAP revenue guidance, minus 39, 44 cents and I think it's not unreasonable to infer that it's not included in that 90 day period. So we've narrowed the window, provided a window for the first time provided on the progress we've made closed beta testing.
The next phase will be to expand the beta testing. Up until now it's been the EA friends and family testing program. We need to expand the testing universe to make it more open to scalability, back-end systems, etcetera. Figure out concurrency. Where there are choke points on different maps, tune it accordingly.
We will be increasing the beta. The business is that we have over a million, closer to one and a half million, opted in happy to step up and be beta testers. North of a million demand to do some free testing, I think is a great indicator of the interest level of the franchise. We haven't given specifics as to milestones, but we will move from closed, to semi-closed, to open in preparation for launch. We'll talk more about Star Wars at the coming E3 event.
Q:Is there a typical time frame open beta or is it such a unique game that it's difficult to?
Eric Brown:It's hard to say it's typical. There's only one other relevant data point in terms of this scale of MMO. So it's hard to provide a rule of thumb. You need months of different flavours of beta testing to making the product generally available.
We're really focused on providing a great user experience, because not only do we want to retain the core tier one users, we want word of mouth reference ability to bring in tiers two, three and four. In terms of addressable market, MMO's are a growth segment. If you look at the western worlds, again North America plus Europe only, we'd estimate there about 12 million people or so playing one or more MMOs. Roughly half are playing World of Warcraft.
I believe Activision cites about a six million western world subscriber stat. So there's 12 million people to go after, six of whom are playing one game, another six of whom are playing some combination of other games. And then there's an opportunity in Asia, not necessarily the same RPU characteristics. So we think that's 10-12 million people to go after, that's a great addressable market right there.
Like I said, we've got well north of a million, million and a half ready to test for free. We're not that concerned about generating initial demand. For us it's about creating the right experience, expanded beyond the tier one and the tier two users. You've got people that have never played an MMO before but are interested in Star Wars, to engage and give it a try. What's really important to us is striking the right balance so that we serve the needs and demands, requirements of the core, pre-existing MMO subscribers.
They demand a lot of content, a lot of community, guilds are very important, special group activities, raids and things like that are real important inside an MMO. But then at the same time we want to make it accessible, so someone can pick it up and play it for the first time, recognise the Star Wars fiction, build a character and get into the game without feeling overwhelmed or intimidated by the hardcore experienced MMO player.
If we're successful in doing that, our addressable market is well beyond 12 million people, you know current MMO players and the western market expands into more of a general gamer population. Basically anyone that has certain minimum spec personal computer. That's a very large potential addressable market. We look at it as a tiered opportunity but starting with an addressable market of at least 12 million.
Q:Extending that market is assuming that the monthly subscription model could also be extended to a broader audience or are there other potential modifications?
Eric Brown:We've talked about going in with a traditional subscription model, which is, requires the purchase of a game client, a PC game client. That's the going in assumption. But we have nothing ruled out, in terms of intent or design future micro-transactions because some interesting opportunities are there. The key is, what do you include in a base monthly fee versus what do you charge extra for? So that requires some pretty careful decisions making. For now we're focused on the more traditional monthly subscription model.
Q:I think there was some restructuring of the contract with Lucas, given some changes there. How involved will it be in promoting the game that they have some Blu-ray movies coming to market, some 3D versions of movies coming to market? Does that give them an opportunity to inform people that this game is there and available? Or is it all up to Electronic Arts?
Eric Brown:It's a great partnership and our interests are nicely aligned. They were under the old deal structure, under the new deal structure, their just as aligned. It's more of a traditional licensing model that we're quite familiar with, it's the way we deal with our sports license or so it's just more in our zone of familiarity and comfort. They're deeply involved in many aspects of the game, the branding, the characters, the stories, the trailers.
It's obviously one of the most powerful if not the most power brands in existence and one would expect them to be involved in the game itself and also work in partnership with EA to make it a success, because success in a game ultimately benefits them, so there is a great alignment of interest. We haven't announced any specific joint marketing programs and that will just have to evolve over time so, nothing I can say specifically in that regard today.