EA: “Why Didn’t Wii Focus on Nintendo?”

Note: this post was
carried today on Wallstrip

Overview

Make no mistake: EA is a game-creating machine. A techno-behemoth
making big-headline games for the Big Three: Microsoft, Sony and
Nintendo. But at $58 per share and 43x earnings I would be afraid -
very afraid. What was once a company able to focus on harvesting its
category-leading franchise is now under siege: high development costs,
uncertain platform plays and lofty equity valuation. While EA has
deftly navigated the vagaries of the fickle gaming marketplace, it is
now facing a competitive landscape unlike any other it has seen in the
recent past. Ergo, this is one complex business encountering an array
of complex market and business risks. This is not a scenario that makes
me terribly comfortable as an equity investor. For a little more
insight, read on.

The Business - Like Venture Capital for Gaming



EA creates products for the three major console providers: Microsoft,
Sony, and Nintendo, as well as the PC platform. Success in the game
creation business is all about economies of scale, flat development
costs and luck. Just writing this makes me queasy. Making games is not
just coding - it is internalizing the ethos of Hollywood, leveraging a
hot idea/story to make a big splash that ripples throughout the
addressable market.

In gaming, as in movies, the idea/story can be proprietary or
licensed from others. Once an interesting and/or compelling theme is
selected, there is the added complexity of choosing a platform for
which to adapt your software. If the state of technology is relatively
stable, all is well. You pick the platform(s) with the largest
installed base(s) and the lowest development costs and code away. This
is not much different than a VC spreading bets across multiple
early-stage investments, except in gaming-land one is allocating
development costs among multiple titles hoping that your hit rate
results in an attractive ROI.

However, when a platform technology shift happens (roughly every
five years), game developers encounter a rough patch and need to
increase diversification by making fewer titles across more platforms.
They then wait for the fall-out and watch for the winners to emerge,
after which point they revert back to the original operating model.
While this is a business that has the capacity to mint cash, it also
has the capacity to result in a lot of dry wells. Clearly not a
business for the meek.



EA - Does Success Breed Complacency?

EA has had it easy for the past few years, becoming the biggest,
baddest, hottest game creator on the planet. EA has ridden Sony’s PS2
platform to market dominance and an $18 billion market cap - wow!. With
PS3 around the corner (and in light of their blue diode supply
problems), EA is taking a wait-and-see approach to Sony’s newest
platform. They are actively supporting the large installed base of PS2
consoles (100 million strong) while closely monitoring the progress of
PS3.

EA has announced and launched three titles so far for the PS3:
Madden NFL ‘07, Need for Speed Carbon, and Tiger Woods PGA Tour ‘07.
For the Nintendo Wii EA has launched Madden ‘07 and Need for Speed
Carbon. For Microsoft’s Xbox 360 EA has delivered 15 games, and all of
those mentioned for Wii and Sony are also available for Xbox 360.

One interesting note: EA just pulled NBA ‘07 Live for PS3, shocking both the market and its user base.

Electronic Arts has decided not to pursue its plan to
port NBA Live ‘07 to PlayStation 3, deciding instead to focus on the
upcoming next-generation version of NBA Street.

That’s according to EA Canada PR Manager David Tinson, who told IGN
that the developer is “concentrating [its] efforts on creating a
spectacular NBA Street: Homecourt”. That title is due out on PS3 and
360 “early next year”, he added.

In other words, basketball fans will have to wait until the release of NBA Live ‘08 before the series takes its PS3 bow.

That comes as a bit of a surprise, not least because Sony actually
had EA demonstrate the game during its E3 2006 press conference, where
Live was one of the few games shown off in playable demo form.

Not that the PS3 will suffer from a dearth of EA titles at launch,
with Fight Night Round 3, Need For Speed Carbon, Tiger Woods PGA Tour
‘07 and of course Madden NFL ‘07 down for release in the US on 17th
November.

More on NBA ‘07 pull-out:

Electronic Arts has canned the PS3 version of ´NBA Live 07´, as IGN reports.

It´s perhaps not too surprising, since IGN lists another three NBA titles as confirmed for the console:

* ´NBA ‘07´ by SCEA (launch)

* ´NBA 2K7 by 2K Sports (launch)

* ´NBA Street Homecourt by Electronic Arts (Q2 2007)

Still, that very game was an integral part of Sony´s pre-E3 show, showcasing the console´s power, as the article remarks.

Though PS3-specific features or fixes for the PS3 edition of NBA
Live ‘07 were never announced, the game was used to demonstrate what EA
Sports could do with the system’s hardware during Sony’s onstage
presentation prior to E3. Specifically, the demo focused on NBA Live’s
“Procedural Awareness Technology” and how that would translate into
realistic on-court reactions. Pulling the product neither bodes well
for Sony nor for EA, contributing to concerns over both the competitive
landscape as well as dependence of what has been a historical cash
machine for EA.



PS3 vs. Nintendo: A Celebrity Death-Match in the Making

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 exculsive 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.

For a little additional reinforcement of this theme read:

WMS: Wii To Double PS3 Game Sales This Xmas?

What are Wii Doing? This Market has Gotten Real Ugly Real Fast

It was only a few years ago that EA owned sports games. This
included exclusively licensed content from the major sports leagues:
NHL, FIFA, MLB, NFL, and the NCAA. All that changed when a little
company called Take2 (being investigated as part of options scandal)
came on the scene and decided to compete with EA through a subsidiary
called 2k. 2k Sports has been challenging EA on game play, graphics,
and “sports-feel.” Continued encroachment on the Sports franchise is
the spot to watch for weakness. With the release of Madden ‘07, chinks
in the EA armor have appeared. Yes, it is a great selling title and
there has historically been no competition due to an exclusive
licensing relationship; however, there is a growing discontent with EA
among the user base. Check these comments out:

EA’s premium ripoff: football tutorial videos on XBLM

3. Just another example of EA ripping their Madden fans off. The
xb360 version 06 was bare bones. having a pay per view early viewing.
EA is really pissing me off.

Posted at 3:07PM on Oct 4th 2006 by jonm

4. Its a freakin shame that EA has the exclusive NFL license because
I would have loved to have seen some competition the last two years. I
can still dream of NFL 2K7 on the 360. EA Sucks!

Posted at 3:09PM on Oct 4th 2006 by Dominic

8. Did you guys see that there’s also “classic stadiums” available
for the Rams and Seahawks for 300 points?! This is ridiculous, this
stuff was FREE in all the other games, 300 points for ONE old stadium.
I dont even want to know what they’ll charge for each individual
alternate and classic team jersey for each team. Makes me sick.

If only they could bring back NFL2K series, the world would be a better place. But then again, they might do it too.

Posted at 3:15PM on Oct 4th 2006 by Mike

Conclusion

EA has some real problems. Historic market dominance, rising
development costs, backing high-end platforms with limited user bases -
none of these factors point to an explosion in valuation in the near
term. And these issues are compounded by EA’s gold rush resulting from
the run-away success of PS2, which does not look to be replicated by
PS3 in light of both production delays and fierce competition from the
lower-priced and highly innovative Wii. As noted by the ‘Net, all ain’t
well. In short, all I can say is: Buyer Beware.



Thanks to Rob Passarella for his passion for gaming and his assistance with this post.

The Author does not hold a position in EA.