Has EA Finally Gotten the Joke? Moving Beyond the Core Gamer

I have been a pretty harsh critic of EA and it’s betting-on-the-frontrunner, low risk, incremental strategy to game development. It was late to understand the power of the Wii, the impact of the mass-market gamer on both console and game sales and the waning fortunes of the PS3. As a result, both its stock price and public perception have suffered. However a story in today’s Wall Street Journal indicates that maybe, just maybe, they have gotten the joke, that EA needs to move beyond the core gamer to continue its growth and domination in leading-edge game development.

Just to set the table, here is what I had written back in November concerning EA and it’s strategy. From my post titled EA: “Why Didn’t Wii Focus on Nintendo?” 11/21/2006:

So if EA continues its emphasis on Sony it is clearly exposed to the
degree of adoption (and supply) of new PS3 consoles. If PS3 flops then
what? EA will need to identify and milk another future cash cow. They
could look to Microsoft’s Xbox 360, with a current installed base
approaching 10 million by Dec 31. Not exactly the 100 million installed
user base of PS2, but not too shabby nonetheless. However, if the
situation evolves such that the Nintendo Wii becomes the rising star,
EA may be in trouble. FYI, the French company Ubisoft has lined up nine
titles for Nintendo including that exclusive to the Wii: Red Steel.

Ninendo has forecasted up to 4 million units shipped worldwide and
with sharply lower development costs than Xbox and PS3: $5-$8 million
per title for the Wii vs. the $15-$20 million for Xbox 360/PS3
platforms. This makes the Wii far more attractive (and less risky) for
both developers and publishers. If EA sticks to their PS3/Xbox 360
strategy, they may miss the boat on Nintendo, spending too much in
development costs while missing what looks to be a home run console in
the Wii. This could dent the next several quarters of EA’s earnings,
painting a pretty ugly picture for the stock price going forward.

Is it just me, or is this pretty much what happened? PS3 sales have been weak, Xbox 360 has had more than its share of problems, and the Wii has surpassed all expectations for both console sales and its impact on the gaming landscape. About two weeks later, when it appeared that EA had started to wake up to the threat posed by the Wii’s success and announced the purchase of a gaming studio dedicated to Wii game development, I wrote the following. From EA Revisited: Playing Catch Up on the Wii, Waking up to the Failure that is PS3 12/07/2006:

Truth
be told, IA, or rather the Internet, had it right from the get-go. EA
has been riding the PS2 gravy train which has boosted its earnings,
bolstered its coffers and provided the resources to become the dominant
player in the gaming space. Problem is, you place your bets and
sometimes you win, sometimes you lose, and sometimes you are good at
managing your risks. I’d say EA is now trying to manage risks after
they have become reality, kind of like buying health insurance after
you’ve been diagnosed with a terminal illness. Ergo: the cost of
insurance is high. The costs of catch-up are significant, whether they
manifest themselves in higher costs (such as those required to buy the
development shop Headgate or to bring in new development talent to code
for the Wii) or lost profits (due to the time between when they could
have been selling Wii games and when they’ll actually be able to sell
Wii games - and every month that goes buy results in a compounded loss
of revenue). EA will still be able to milk PS2 for a while, and Xbox
360 profits will continue to roll in. This will buy them time to get
their Nintendo (DS and Wii) strategy right. But this will invariably
cause a dent in their lofty P/E, much to the chagrin of current
investors. But don’t be surprised. You could have seen this coming.
Just listen.

And finally, I had written this May that EA’s transition towards development for the Wii and adding complexity to its myriad development platforms was hurting - badly. From EA: Backing the Leaders, Feeling the Pain 05/29/2007:

Catching up on my feeds this weekend saw me stumble over a story that brought back some memories: from the San Jose Mercury News, “EA’s fumble: Game maker may have misjudged popularity of Nintendo Wii.” This story is, in essence, at least six months old. Even this blogger penned a post over six months ago titled “EA: Why Didn’t Wii Focus on Nintendo?”
The interesting thing is that I was going out on a limb back in
November when I was calling EA to the mat, back when it’s stock price
was $58 and it was trading at 43x earnings. Fast-forward to today: the
stock is trading at $48, having dropped 17% from my original post. One
of the principal reasons: stagnant revenue growth, skyrocketing
development costs. Why? Having to ramp up development for yet another
platform, but one that will be absolutely vital to its growth prospects
in the near and medium-term: the Wii.

Ok, so it has been somewhat of a rocky road for EA. This is clear. But they’ve spent a lot of time and money girding for battle on a new platform, and they appear poised and ready to resume their market leadership and growth trajectory. From today’s WSJ story titled Videogame Firms Need to Push Beyond Core-Gamer Audiences, EA Chief Says:

Electronic Arts
Inc. became the world’s biggest maker of videogames by relying on a
dependable formula, now widespread throughout the industry: routinely
pumping out sequels of familiar game franchises like Madden football
that consumers bought almost on cue. Now EA’s new chief executive says
EA and other companies in the industry need to change their ways or
risk losing audiences to more compelling forms of entertainment.

In his first in-depth comments since taking over the top job at EA of
Redwood City, Calif., in April, John Riccitiello says he worries that
EA and other companies in the industry make too many games that lack
innovation. Mr. Riccitiello says EA and others need to push more
aggressively beyond traditional gamer audiences to court new “casual”
consumers and to experiment more with new approaches to selling its
products, outside the norm of selling $50 to $60 discs with 40-hour
games that he says few players ever finish. “We’re boring people to
death and making games that are harder and harder to play,” Mr.
Riccitiello said in a wide-ranging interview at his home in Silicon
Valley.

The blunt comments by Mr. Riccitiello, 47 years old, are likely to
cause a stir at the annual E3 games conference next week in Los
Angeles, where game makers assemble to tout their upcoming products.
Much of his criticisms have been articulated before by analysts and
others, but rarely have they been made so publicly by the head of major
games company. They are a departure for EA management, which has
downplayed the magnitude of the challenges it faces in the past, even
as profits and revenue stagnated in recent years.

********************

Earlier this year, EA appointed Mr. Riccitiello, a
former top EA executive who had departed for a job in private equity,
to help navigate the challenges. “Prior to Riccitiello’s return, EA
kind of made the assumption that this transition would be similar to
other ones – they approached it with the same playbook,” says John
Taylor, an analyst at Arcadia Investment Corp. “I think Riccitiello
understands you’ve got to throw that playbook out.”

Mr. Riccitiello’s solution: to reengage EA’s core
audience with games that break new ground. He also wants to bring new
gamers into the fold with clever tricks that make some of its more
complicated titles more playable, in a nod to the success that Nintendo
Co. has had with its Wii game system.

For instance, new Wii versions of all of EA’s sports
titles including Madden, NBA Live and FIFA soccer will come with a
“family mode” that allows novice players to pass, shoot and kick balls
without worrying about controlling the field and court positions of
players.

Mr. Riccitiello’s plan to restart growth also include
more experimentation with new approaches to selling games, including
offering shorter “episodic” games that cost less than the titles EA
typically sells.

Ok, so for purposes of clarity, what are we really hearing from EA? Here are some of the nuggets I’ve distilled from this article and other stuff that I’ve come across since Mr. Riccitiello took the reins at EA:

1. The current core-gamer development model is broken



2. A new approach to the market is required to deal with both boredom and threats from alternative media



3. Game prices are too high



4. Games are too complicated for mass-market audiences



5. EA management is willing and able to communicate their challenges and plans for addressing them



6. It is important to take risks

While EA has made many tactical moves over the past eight months to deal with their woes, including the ubiquity of the Wii, I really feel that the messaging I’m getting from EA is of a different nature: they are looking at fundamentally changing strategy. There is a sense of hunger, a sense of the need to innovate to survive, nothing remotely like the company that was simply collecting the bounty off the back of 100 million PS2 consoles. Their new approach sounds fresh, adaptive - and smart. From an investment perspective, this is a far different company that the one I wrote about back in November. Sure, the market may be even tougher, but I’d say shareholders are much more likely to be rewarded by the current strategy than the conservative “wait and see” approach of the previous regime.