EA "anxious" as it tries to navigate murky water

Not a great quarter, and once again we're told it will get better... eventually

Have you ever had one of those nightmares where you you're running just as fast as you can, but you don't seem to be going anywhere? That's what EA is going through right now. While digital sales are increasing, it's not happening fast enough to overcome the slide in packaged goods sales. Throw in a major franchise underperforming, and you've got the disappointing results EA delivered. Another quarter of marking time until good times come again... and when exactly will that be?

For all the bad news, EA sees hopeful signs in the year ahead. Mobile games continue to boom, EA's digital business grew rapidly and is now a respectable size, and new consoles may revive the badly sagging retail packaged goods business. Is EA indulging in overly wishful thinking, or can it really navigate to profitability through this sea of uncertainty? Let's examine what EA said and read between the lines a bit to find the key information.

The revenue miss came about for two reasons, according to EA: Medal of Honor tanked, and sales were worse than expected for the industry in general (the classic Monty Python 'It's a fair cop, but society's to blame' defense). It's not exactly reassuring that one title performing poorly can be blamed for a company as large as EA missing its numbers; you shouldn't reasonably expect every game to be a hit. At least, not if you want them all to ship on the date originally scheduled. As for the whole business doing worse than expected, it's true enough - but it doesn't mean you can't try and buck the tide.

"We're going to continue to maintain a smaller slate of titles than we had historically"

EA CFO Blake Jorgenson

A key point of the earnings call revolved around just how many profitable franchises EA has, and what's really driving the company's profits. Medal of Honor has now been sidelined for a while, and EA seems to be reasonably content to work with existing franchises, focusing on extending titles through digital content. "We're going to continue to maintain a smaller slate of titles than we had historically," CFO Blake Jorgenson stated. "The franchise build is try to build the profitability by not just having a big title, but by having a long digital life associated with that title. Battlefield is a great example; we're now over a year and a half outside of when that title was released, and we'll book at least $108 million dollars of revenue in the 4th quarter associated with the Battlefield Premium service."

Riccitiello followed up by listing EA's top franchises, then said: "Ten franchises, all profitable. Let me dispel the notion that it's only Battlefield and FIFA that contribute to our profitability. We have a deep bench of highly profitable, great franchises." Though Riccitiello had to admit that the company's top games matter. "Titles at the scale of FIFA and Battlefield are what drive the profitability of EA. My view is that the top 5 franchises globally in the industry probably define half the industry's profitability or something close to that."


One analyst asked, "In the event that the new consoles (from Sony and Microsoft) are not that competitive, what is plan B?" Riccitiello responded by saying "Over the last 12 months we've generated 37 per cent growth to get us to a $1.5 billion digital business. I could make a reasonable argument that absent all of our packaged goods business, that a billion and a half dollar digital business growing at 37 per cent might well be more valuable than the entirety of our current market cap, if I were to venture a guess. I think that's a vital, fast-growing, massive opportunity business for us. I think we've got a great story absent consoles." That may not make console makers very happy, but it does illustrate that EA is thinking beyond the console market.

"We know we've got a fast boat, we just don't know how deep the water is right now"

EA CEO John Riccitiello

Still, Riccitiello is not writing consoles off by any means. "As you might well expect, we know more about the road map and more about what's coming in consumer electronics in terms of specifics, devices that would play games than you might otherwise be exposed to. With the information we have, we remain bullish. That's why we planned to invest for this current fiscal year $80 million in that opportunity. Plan A is explode along with the opportunities we see in digital and console, and plan B is console written a little smaller, but we have high confidence in what we see coming."

One thing Riccitiello failed to note when pointing out the growth in digital sales: A large part of that revenue for EA (probably the majority) is based on brands that are driven by packaged goods releases. So if consoles continue to slow, and new consoles don't bring in packaged good sales at the levels of a few years ago, EA's digital sales are going to take a hit. Will the FIFA brand always be driven by the latest console release? Maybe not, but that day is not soon. Right now the most exciting, visceral, and graphic part of the FIFA franchise is driven by the console release. All the Ultimate Team revenue and DLC is linked to that, to a greater or lesser extent. Yes, the release date of the packaged good may not always be the most important revenue point, but it's still the engine that moves the whole ship.

EA is continuing to develop its mobile, online and free-to-play titles, but that revenue is not going to replace packaged goods revenues for the company for years. The prospect of growth in the social game sector has dimmed to the point where it was hardly mentioned in this earnings call, other than for Riccitiello to say "Social hasn't done as well for us, and the overall sector is significantly softer than we anticipated it going forward." Ouch.

"We like what we've got and we're not looking to draw"

EA CEO John Riccitiello

Looking at the current quarter things are still murky. "We are about to launch the first of three major packaged goods titles that will define our quarter," Riccitiello noted. "We know we've got a fast boat, we just don't know how deep the water is right now. We don't know precisely what to do with that; it's why we've widened the range a bit, to give us room to be sure we have the right answer. We think the content's great; we're anxious a little bit about the sector." Aren't we all?

Still, EA doesn't plan any dramatic moves for the near future. "Yes we have made some M&A; we've acquired a number of companies. I would argue at this point in time that we have the IP we need and the channel access we need," Ricitiello said. "We feel very good about the portfolio of digital assets we have. We think we're in a position to lead digital in the West and perhaps with great execution over time, take that lead into Asia, because we're now seeing our titles resonate there. We've got a full house with the things that are working: PC, console, mobile, free-to-play, premium. That's a great hand and at this point we're not going to trade anything. We like what we've got and we're not looking to draw."

How have investors reacted to EA's results? The stock closed up over 4 per cent the day after the earnings were reported.

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Latest comments (7)

Pier Castonguay Programmer 9 years ago
I feel bad for them because they do try hard on every platforms and game genres and distribution methods and it don't seem to work. Thing is, EA lost it's public image. It was a bit bad for a specific subset of people years ago when they bought loved studios and scrapped good IPs, but the general opinion was still good. What they did in the last year by stopping to publish on Steam, releasing Origin with an intrusive end-user license agreement cost them a lot. The biggest mistake they made was to hire complete idiots for their customer support who don't know anything technical and just use lies to try to close the ticket as fast as they can, and it's still going. Because of that, the name EA will stay a synonym of bad for the general public for a few years even if they come back with good products and service.
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Morville O'Driscoll Blogger & Critic 9 years ago
I kind of agree with Pier. EA always act like a business, in the strictest sense. Everything they do is for (technically good, I'm sure) business reasons. But this means that when they interact with the consumer - whether it's up-close through their customer support, or at arm's length like letting games fall afoul of their agreement with Valve - it always negatively affects the consumer. A good example of this is this offer:

Great! Everything for a fiver! Except if you live in Europe, where everything was 10 Euros (£8.70). Why? Possibly because of currency conversion costs, who knows? But so what? The European consumer feels aggrieved that they spend more money than someone in the UK, and EA ill-will continues. Another example is the Sim City DRM fiasco. It's like they didn't even witness the epic failure of Diablo 3's always online DRM in the first few weeks.

Ah well.

Edited 1 times. Last edit by Morville O'Driscoll on 1st February 2013 8:29pm

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The Atari, Midway, Ubisoft, Activision, THQ, Rockstar and EA business story seems to be - "forget this is about games and try and turn it into a business that ignores the audience and you implode - slowly and painfully.!"

I am looking at the consumer games scene the same way many looked at the music industry in the 1940's - manufactured hits come round the haunt the publishers - while fundamentally, it would seem that consumer gaming has yet to find the right medium in-which to grow - a model similar to how the Beatles was incubated may be the future for the sector. Games developed in a hot-house atmosphere while the publishing is handled through a network of middle men with low overheads?
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Show all comments (7)
Bruce Everiss Marketing Consultant 9 years ago
I have said this before.
Thanks to Kristian Segerstrale EA are far better positioned for the demise of plastic and cardboard distribution than any other of the traditional big publishers. As EVP Digital at EA he has made all the difference.
As Riccitiello says " I could make a reasonable argument that absent all of our packaged goods business, that a billion and a half dollar digital business growing at 37 per cent might well be more valuable than the entirety of our current market cap".
Which is a good thing because physical distribution of digital IP is just plain silly and is in terminal decline.
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Andreia Quinta Photographer 9 years ago
EA's problem is always the same for years now, they don't know how to deal with people. Like Kevin mentioned, it's strictly business for them, and that's why they keep failing over and over. Riccitiello is just another clueless CEO that knows a lot about business and how it works, but is a disaster when it comes to how to treat their own customers.
Obviously over time it's backfiring and it shows at the end of the fiscal year. Let's just review how EA has been behaving for a second here:

1) - Steam sales “cheapen intellectual property” says EA Origin boss, David DeMartini. But what was on a Steam sale a month later between the 3rd and 5th of July? The Command & Conquer franchise.
( Scroll down for the charts.

2) - The dodgy looking 'neutral' stance on SOPA (Stop Online Piracy Act ) in which it was claimed they weren't for or against it, but when it (incorrectly) broke out they were supporters it was extremely hard to clear that image, something their PR department didn't handle very well to broadcast.

3) - They buy developer companies and either terminate IP's or degrade the ones they decide to re-imagine and re-create. A few examples are MAXIS, the creators of the SimCity series, in which since SimCity Societies the brand has been degraded in quality and 'milked' to the bone with The Sims expansions and accessory payed packs (H&M, Ikea, etc).

A second example would be Westwood Studios, of which the Command & Conquer series was retrieved and miss-handled over time, receiving mixed reviews on each title released since, instead of being considered an example to follow when it comes to RTS games like it was prior to EA's acquisition.
Decisions like making C&C Generals 2 (not the best awarded iteration of the C&C franchise to begin with) free to play and without a single-player campaign, whilst ironically saying "“really want to get back to the roots of what made Command & Conquer great." when the campaign and it's live action videos were some of the most enticing, defining and characteristic things in all C&C games.
Fans had to intervene and tell EA what C&C was actually about for them to re-introduce a single-player campaign. It's great that they've heard consumer feedback, but it just shows how they know little of the IP's they develop.

A final and most recent example would be the acquisition of Bioware in 2007, where consumers heralded the end of the legendary Baldur's Gate studio, and the consumers where correct in the long run. The lead writer for Mass Effect 1 and 2 has left to pursue other goals, leaving Mac Walters to lead the writing team, which he didn't bother to consult when writing the end-game mission, leading to the controversy fans know all too well.

The cherry on the top of the cake would be the renaming of studios to 'Bioware' due to the respect and weight the original studio carries. Like Bioware Victory and KlickNation.

But it gets better, after the estimated $150.000.000 to $300.000.000 disaster that was Star Wars: The Old Republic - or "TORTanic" - EA is - a year after release - giving the impression to the public that the Bioware brand was actually harming the company's reputation by renaming studios back to it's original name.

4) - The support - or lack thereof - for older titles, in the likes of shutting down online servers for Fifa 11 because 13 is out. Granted most of the titles listed are fairly old, but we don't see Blizzard shutting down servers for Starcraft 1 or Valve doing the equivalent for Left 4 Dead 1 because newer titles of those franchises are out. The online management is still poor and not unified into a '' type space.

5) - Control, control, control. In an effort to combat second hand game sales EA invents the Online Pass, forcing everyone to create an EA account (or origin account, more on that later) in order to play any title online on XBox Live or PSNetwork. Another effort to control the online piracy was the DRM included with Spore where a limit of 3 activations was imposed, helping Spore becoming the most pirated game ever by the end of 2008.

6) - First announced by Kotaku, EA removed printed manuals from its games, claiming it to be for a greener initiative, when the obvious agenda being to save paper, shipping and printing costs. A lot of people liked the manuals for the extra lore bits and teasing character & weapon designs, removing them with the excuse of going greener, while not a lie, it's also not the absolute truth and insults their customer base.

7) - Origin...
Origin is the culmination of everything innovative EA is trying to be in this new digital market, but it is also the culmination of all the bad things EA represents as a game publisher. The list goes on and on, from claiming that Origin wasn't created to compete with Steam to saying - well, the exact opposite - nearly a year later.

- Like mentioned in number 1), Steam sales cheapen the IP, but I guess Origin sales is a different thing altogether...

- Another aspect that really burned the consumers was the exclusivity of certain titles like Mass Effect 3 and SW:TOR showing the public that EA is indeed on a battle with Steam.

- While 30 million registered users is an impressive number, it becomes feeble when only 4.4 million are paying for it's online services, and it impresses even less when we realize that most of these accounts exist because EA converted all EA legacy accounts to origin accounts, so your Need For Speed Most Wanted (2005) account that you forgot it even existed, is now an Origin account racking up to the 30 million, and even that created it's own issues with users.
The same goes for Online passes found in XBox 360 and Playstation 3 games, for each pass that is used, an Origin account must be used (or created from scratch), thus helping even more with the 'impressive' number.

- Steam however has around 50 million users, which is not such a big stretch from who achieved 30M, but if we think of the actual yearly ARPU of one and the other I'm sure we would find a big difference, unfortunately I couldn't find any recent data or figures to back it up - apart from Steam in 2010 - and it remains only my speculation. Hopefully we will see some numbers announced at the end of this fiscal year.

- The dodgy EULA released with Origin didn't help and had to be revised as it caused uproar a midst users, and the fact the Origin client was a resource hog didn't help.

- The new SimCity is coming out sometime in 2013, and despite being promised that you can buy the game outside of Origin, you won't be able to play outside of it, as it's required to be online to play the game. We all know how that worked out for Diablo III.

8) - All of this has help lead to the inevitable result that was being voted the worst company of America, despite being voted one the best workplaces. Two things that don't actually contradict themselves since best workplace does not necessarily mean best work done.

The vote for worst company was just the aftermath of consumers being sick of hypocrisy, poor costumer service and being treated as numbers, a means to gain profit.
EA has a lot of ground to cover in what regards people skills, because as it is they're terrible at it.

Edited 1 times. Last edit by Andreia Quinta on 4th February 2013 11:07pm

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Jeff Wayne Technical Architect 9 years ago
@Andreia - Good post and I agree with your points.

As a consumer they frustrate me hugely ("support" department and Origin) and as a professional I find myself wondering is there absolutely zero middle ground or even one of the senior management team that isn't a cloud zealot in their boardroom.

I hope they can turn it around but they really need to properly connect with their customers rather than treat them like a minor inconvenience if they expect to promote a service versus a single transaction.

They should take a look at Blizzard for an example on how to do a proper support department at an enterprise level.
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David Serrano Freelancer 9 years ago
Actually, the large game publisher's AAA and AA strategy for the current generation of consoles has mirrored the American auto industry's strategy in the 70's and early 80's. Largely based on a false sense of invulnerability and complacency created by decades of uncontested market dominance, they shifted their focus away from manufacturing innovative products based on the preferences of the majority of consumer towards manufacturing derivative products designed to create high profit margin but the majority of consumers knew provided much less value compared to the new foreign competition. Detroit didn't change the strategy until it was far too late and it has never fully recovered.

So if EA wants to fix it's AAA business, it needs to immediately start developing Priuses and stop developing Pintos and Pacers.
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