Comment: Profit warning punctures EA's invincible image

The giant is winded - but let's not fool ourselves for even a second into thinking that it is defeated, or even on its knees. This week's profits warning has certainly done no favours for Electronic Arts' share price and may have shattered some illusions among investors about the company's market strength, but you'd be hard pressed to find an analyst who views it as much more than a temporary setback - or even, in some cases, as a good opportunity to pick up some cheap EA stock.

However, it's still worth looking at the reasons behind EA's profit warning - both as a study of how even most powerful companies are only as good as their product line-up, and as a note of caution in an industry which is often guilty of valuing brands and release dates over quality and good design.

The problem with EA's Q4 figures isn't that the games released during the period - which runs from the start of January through to the end of March - have performed badly. In fact, they've largely met their expectations. The problem is that the trailing end of EA's Christmas product sales has died a death much, much earlier than it did in previous years. Last year, EA's Christmas 2003 releases continued to perform well right the way through into summer. This year, many of them barely limped into January.

Why? It's not like EA didn't have big brands to pump out before Christmas. Need for Speed Underground 2, GoldenEye Rogue Agent, The Urbz: Sims in the City, FIFA 2005, two new Lord of the Rings titles - it's hardly a weak line-up in terms of marketing, brand recognition and franchise continuation. Certainly, it faced strong competition before Christmas from the likes of Half-Life 2, Halo 2 and Grand Theft Auto: San Andreas, but that alone can't explain why titles like GoldenEye had died a death at retail before most people had even recovered from the New Years celebrations.

Here's a theory to throw out there, then; games like GoldenEye and The Urbz didn't sell because they were bad games, and all the brand recognition and slick marketing in the world couldn't change that fact. In fact, after a few years of producing really quite good games - with the odd stinker thrown in, admittedly - EA dropped the ball badly on many of its key Christmas titles. Amid allegations of massively overworking its development staff and forcing products through insane crunch periods, the publisher released a few games which reeked of exactly that approach to development - rushed, uninspired, repetitive and downright unloved.

And ultimately, gamers don't forgive that kind of thing easily. Videogames are very expensive purchases, and gamers aren't stupid. Even those who don't read reviews will often consult with friends before putting down their hard-earned cash on a game store counter, and the word about bad games is quick to spread. Negative word of mouth won't kill your first week sales - because nobody has played the game yet - but it'll ruthlessly amputate the tail end of your sales graph, which is exactly what just happened to EA.

To give the company its due, it does seem to understand this. The conference call where the profit warning was announced was remarkably honest and humble about the problems which have just knocked $200 million off the firm's revenue projections. The question now is, can it make the tough decisions required to make sure it doesn't happen again?

EA, like several of its rivals, has followed a path in recent years which has focused its decision making on brands, franchises, and ever closer tie-ins with celebrities, music and movies, rather than on game design. These things have certainly helped to push videogames into the mass market, but the balance seems to have shifted too far. Now that it's been proven that putting the Black Eyed Peas or the James Bond franchise in a game doesn't add up to great sales if the game involved isn't also great, will the power to make key decisions start to move back towards the people who simply understand how to make great games? Not without a power struggle, we suspect, but this week's profit warning may be a powerful catalyst for the turning of the tide.