EA's Eric Brown on new platforms and digital versus physical

EA's chief financial officer Eric Brown fielded questions from investors and interested parties at the Deutsche Bank Securities Inc. Technology Conference in San Francisco yesterday, offering perhaps uncharacteristically open responses from the giant publisher.

While much of the press coverage has focused on Brown's assertion that the divisive $10 Online Pass for second-hand EA Sports titles had been broadly accepted by consumers , the wide-ranging talk encompassed a number of the industry's current hop topics.

Read on for Brown's discussion in more or less its entirely, encompassing Microsoft versus Sony versus Nintendo, the rise of DLC, 3D and Android, and the important of international markets.

[On the latest NPD results, showing a continued decline in retail sales]

"Our estimates for packaged goods this calendar, we're calling for minus 3 per cent. So that implies probably plus 5 per cent for the balance of the year, more than half of it weighted to go to get to minus. The range of estimates out there on packaged goods are anywhere from -5 to the highest outlier, probably +5 on packaged goods for the full year. We think a minus 3 per cent number is more appropriate. Obviously consumer spending is still a bit weak, we're starting to see some nuggets of positive retail information but again it's September and what really matters for videogames is the month of November and December. To put it in perspective, as much as 36 of full calendar year videogame sales are in the last two months of the year. So it's quite back-end loaded.

Used games have been a factor in terms of impacting front-line sales. The numbers tracked by NPD, number one they're estimates, number two they don't include digital and number three they don't include the used games market. We think that used games in America at this point are perhaps 20 per cent of overall business. That's not captured in any statistic. You add back 20 per cent and you probably get a slightly different view of packaged goods.

What we're starting to see is a divergence between what's going on with the different types of hardware platforms, in terms of the actual software sales. Clearly the high-definition consoles, so the Sony PlayStation 3 and the Microsoft 360, sales are doing well. Calendar year to date, again based on the latest NPD data, those platforms are up 18 per cent. By comparison the Wii is down by the same percentage, it's minus 18 per cent. I think the high-definition platforms have a clear advantage of better graphics, extensive online features and connectivity, they can be used as media players, either DVD or Blu-Ray.

Sony in particular has taken pretty aggressive price reduction. When they brought their console down to $299 they started experiencing 20 per cent unit sales go up on hardware year over year. And now half a year plus we're starting to see that translate into more software sales on the PS3 platform. They're actually up about 34 per cent calendar year to date, so PS3 is much stronger than the 360 which is in turn stronger than the Wii. So there's a lot going on right now in the software space."

[On whether sales can recover]

"I don't know if you can reconstitute the total industry profitability just on packaged goods, because the market is definitely changed. To create the same level of digital profitability you need to have digital extensions and the types of things that we think are interesting and worth pursuing are for example additional downloadable content for console games.

Big difference cycle over cycle is you have very high capacity low cost hard drives for the Microsoft and the Sony platforms and great online networks. So we're able to update the packaged goods products with digital extensions that sell for $5, $10, $15 sometimes $20 per unit delivered digitally over the first party networks. That's something that was technologically impossible last cycle.

Given the increase in dev costs to produce the artwork that's required for high definition, the way to close the gap, because you don't have the doubling in ASP, is through additional digital content. There's a much greater concentration of total software sales in say the top 20 titles, and so the amount of revenue going to the top 20 is probably up about a third or so compared to last cycle. The bigger triple-A titles are more important, they are online enabled and generally all extensible with free and paid downloadable content. These are very important factors looking back compared to say five years ago."

[On the 'project $10' Online Pass]

"So far the reception to the program has actually been pretty positive. We don't expect to be able to attach an additional $10 to every used purchaser. What we've had more success with is a digital extension to the core product called Ultimate Team. And FIFA 10 generated just over $30m in gross DLC sales – so that'd be above and beyond the revenue that we made just selling the physical disc. Now that stills represents a single digit uptake on revenue, but this is iteration two for FIFA and if we can take it from single digit to 20 per cent or so of the full franchise in the mid-term, that revenue on the margin is very profitable to us. 70 or 80 per cent fully loaded net margin digital revenue stream, and so if we bring that well north of 30 to 60/70 let's say, a lot of that's going to drop to the bottom line.

It also sells mass customisation to the end user, because instead of selling one product with a unified $60 price point we see people buying a $60 disc and then bolting on hundreds of dollars of DLC. We're happy to have $500's worth of extra content to sell.

It's hard to say [about the success of Project $10]. It's pretty early stages, but what I would tell you is that the games we've launched featuring Online Pass [NCAA and Madden] are up 8 and 6 per cent year over year respectively through August. So from a frontline perspective we're up not down. The other thing is that we thought about this pretty carefully and there hasn't been any significant push-back from the consumer, because I think people realise that if you're buying a physical disc and it requires an attachment to someone else's network and servers, people know bandwidth isn't free.

So the fact that we're diffusing or covering online costs is not viewed to be unreasonable. We're well into this program and there is no consumer backlash.

The used games market over the last five years has grown from roughly half a billion to two and half billion, so it's up roughly 5x in five years. The reality is that all publishers' catalogue business has been adversely impacted as a result. You see frontline pricing holding well, actually better than last cycle, but catalogue pricing is shorter as people look to buy [second-hand.]"