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Former EA Exec Lasky: 'EA Is In The Wrong Business'
Former EA Exec Lasky: 'EA Is In The Wrong Business'
January 13, 2010 | By Chris Remo

January 13, 2010 | By Chris Remo
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More: Console/PC



Electronic Arts is holding on to an outdated, top-heavy business model as the industry undergoes significant change, says former EA executive Mitch Lasky, now a partner at tech investment firm Benchmark Capital.

"EA is in the wrong business, with the wrong cost structure and the wrong team, but somehow they seem to think that it is going to be a smooth, two-year transition from packaged goods to digital," Lasky wrote in an an analytical blog post this week, adding, "Think again."

Lasky served as an executive vice president of mobile and online at Electronic Arts in 2006 and 2007 after JAMDAT, the mobile publisher he co-founded in 2000, was acquired by EA. At Benchmark, Lasky has overseen investment deals in game industry firms like League of Legends developer Riot Games and streaming service Gaikai.

In the post on his personal blog, he says he tried in February 2007 -- just prior to the return of current CEO John Riccitiello from Elevation Partners -- to convince then-CEO Larry Probst of the need to mitigate EA's rising costs and address the industry's ongoing "sea change."

At the time, he recommended "reduc[ing] expenses immediately by a minimum of $200MM annually by reducing headcount and cutting back on ridiculous expenditures on risky titles" like Spore and The Godfather, and putting forward "hyper-aggressive R&D investment and acquisitions in a transition to digital distribution and games-as-service."

Lasky claims company leadership resisted his proposal, which would also have partially sacrificed traditional year-on-year revenue growth in favor of a focus on profitability.

The problem, he says, was in willingness to execute, not in awareness: "They saw their looming innovator's dilemma as clearly as any company in the video game business back in 2006. They just weren't bold enough to act on that knowledge."

Since Riccitiello's return to EA in 2007, the CEO has attempted various reforms, including an initiative to increase the stature and market share of the publisher's internally-developed intellectual properties. This week, after EA reduced its fiscal year guidance, he admitted that "what we've described as a two-year comeback is clearly taking longer," noting that EA as well as other companies misread the state of the market going into the current economic environment.

Riccitiello's statement that EA has "the right strategies going forward and the right team executing them" stands in sharp, direct contrast to Lasky's claim that the company is "in the wrong business, with the wrong cost structure and the wrong team."

Lasky believes EA's long reliance on yearly sports franchises (which are already "fully accounted for in the Wall Street estimates" and thus can't be relied upon to actually grow the company) and hit-driven but less consistent franchises like The Sims, Need for Speed, and Command & Conquer are part of the "old EA model," and are not sufficient to move the company forward.

The "only stool leg left intact," he says, is EA's collection of online assets like Pogo, EA Mobile, and most recently Playfish, and its third-party publishing business EA Partners, which distributes games like Harmonix's Rock Band and Valve's Left 4 Dead.

Lasky believes the company's market value has decreased to the point that it could easily be the target of an acquisition by Disney -- which he says has been eying the company since the early 1990s -- or even a foreign firm like China's Tencent.

"Not to mention the shut-down of Pandemic, half of the justification for EA's $850MM acquisition of Bioware-Pandemic," Lasky added, underscoring his evaluation of the company's financial woes. "And don't think that Dante's Inferno or [MMO Star Wars:] The Old Republic is going to make it all better. It's a bankrupt strategy."


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Comments


Robert Lou
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What business would that guy suggest for EA? Baked goods?



Just curious. Using "wrong business" suggests their would be a "right business" for this kind of management.

Chris Remo
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Robert,



I think by that, Lasky means "the traditional video game packaged goods business."

wes bogdan
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While i can see digital distribution for the portables ds,psp and i-touch/phone i seriouslly doubt a game like ff 13 on a 50GB blu-ray disc is geting streamed anytime soon. We need zetabytes more memory and a cheap T6 connection before we could get a cable box and have a nintendo,playstation and xbox channel where downloading itself would be looked on as we already do look at dial-up.



That is as cruel and unusual punishment. Imaging if,not unlike today,you bought digital content but unlike today as soon as they had your payment it was streamed to you from the servers instantly for as long as you wanted because you paid the full $49 for the game. The original intellectual property would remain with the developer/publisher and you'd NEVER see it just insert coin to play.



For this to work everyone must get much faster access for a much cheaper price than we currently do.



Even though i own many games on umd all my new psp games are digital and that's because i can take 30+ games with me and when sony irons out the bluetooth support i can play using my ds3 regardless of ps3.

Mike Lopez
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I agree with him. In the past EA was the best at spotting new trends and the first to lead the way to new tech like the CD media transition (from floppy), which in that case allowed them to dramatically decrease manufacturing costs and gain a competitive edge over others who too slowly made the switch. Now days they seem to be way behind on clear emerging trends like digital distribution and on-line worlds without any clear strategy to catch up. I expect they will continue to try to buy there way into those areas like they are doing in social gaming with Playfish but I feel they are already behind the curve in many newly emerging areas which is historically unusual for them.

Paul Hope
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Maybe EA should give away free high speed internet so that they can begin to sell downloadable content to the masses.



"Price of Zero" has elasticible markets for the taking!

Amir Sharar
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"For this to work everyone must get much faster access for a much cheaper price than we currently do."



It hasn't really stopped people from buying full retail games on Microsoft's "Games on Demand" service on the 360 and on Valve's "Steam" service on the PC. It's clearly catching on and in a few years storage space and bandwidth will be improve and become more affordable. I don't think this is the issue at this point, and I don't think EA is debating this either.



Lasky's points have more to do with the right sort of content and the right sort of strategies in getting the most out of digital distribution.



DD is more than just retail games sold online, it could entail smaller sized titles like BF 1943, which sold fairly well. I'm guessing the profit margin was better on this downloadable title than large scale titles like Dante's Inferno. Secondly BF 1943 faced little competition on the XBLA/PSN services (not many other multiplayer FPS games on those services) whereas Dante's Inferno is coming out at a time where Bayonetta and God of War 3 are also coming out (or have come out). BF 1943 looks to be a "smart" decision whereas DI looks to be very risky (and not in a good way). As you can see one strategy was superior to the other.



It could also entail DLC, which, DLC has been made possible by digital distribution. One question we could ask is whether or not EA has provided enticing DL content for us and one question EA can ask themselves is whether or not they could have generated more revenue from that channel. Having bought EA's hockey titles since 07, when the series got a reboot, I was never tempted by any DLC offering until this most recent version (NHL 10). That's (almost free) money that could have been made over the last few years if there was a bit more insight and understanding of DD.



DD has opened an entire world of possibility, and EA isn't restricted to the channels we've seen crop up (Steam, XBLA, PSN) they could even create their own. Valve has shown a lot of foresight and took a risk but it has paid off in the form of Steam. EA on the other hand hasn't really impacted the DD space in the same way...so I can see where Lasky is coming from.

Armando Marini
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I believe Lasky's opinions are still too myopic. Although digital distribution may indeed be the norm (if not the exclusive choice) in 5 to 10 years there is still a great number for whom it's important to have something tangible to show for their purchase. There are also a great number of people who are yet to be considered digital natives. Many people do like to go out, shop, impulse buy, etc. Looking at Lasky's comments you get the sense he wants to dump the entire packaged goods business and I agree with EA's decision to approach that strategy with caution and/or hesitation.



When you work in an industry composed almost entirely of the digitally immersed, it's difficult to keep in mind that there are many for whom this lifestyle is still foreign.

David Hottal
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@Armando



I agree 100%. Too often we think everyone is like "us". Look at cell phones. The majority of people still have regular cell phones. They aren't carrying around iPhones and Android phones.



Many people have a PS3, Wii and 360 without internet access.



EA needs to have the infrastructure in place for digital distribution while supporting packaged games. It's going to be a gradual transition.

Christopher Plummer
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I can't agree with this guy at all. I don't necessarily like EA but their strategy since overpaying for Bioware seems to be "the right one" to move THEM forward; and they are very much at the forefront of digital distribution when comparing them to other publishers of their magnitude.



Wall Street may have Sports Games' figures factored into their estimates, but one of the huge changes has been to add multiple forms of PDLC(new content expansions and microtransactions) to each game. That's an area of growth in all games and with the evergreen business of sports games, and the high percentage of people already playing them online, it can mean serious growth should they get a decent attachment rate.



They can't really sell you more game if the game sucks. Hence the quality movement, which they have been executing quite brilliantly IMO (see NHL, FIFA, and Dead Space). Where they can't make quality changes, they seek out people who already have it with aquisitions (Bioware & targeting Take 2).



Their biggest problems stem from a '3 pronged execution of retardedness'=):

1. The pocket lining move of acquiring Bioware and Pandemic at such a ridiculous price

2. Their brands were allowed to become non-factors before Riccitiello

3. The new ones were positioned to fail by competing with at least one juggernaut in the same genre.



Over the last 3 years, EA has had NO REAL PRESENCE (Bioware sneaks in twice but doesn't even put up Top 5 numbers; Valve/Harmonix games don't count) in the top selling games!!! They keep putting out underdeveloped talent in the most competitive times of the year. You don't need a crystal ball to predict that not only will these matchups fail, they will most likely not be worth the investment put into them either:



- Warhammer Online vs World of Warcraft (at its peak)

- Mirror's Edge versus Call of Duty: Modern Warfare & Gears of War 2

- Dead Space against Fable II & Fallout 3

Patrick Dugan
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I think people who invest money for a living tend to know that money talks and bullshit walks and they know it when they see it.

Beyond Good and Evil
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Here are the plain and simple facts. IF you have worked at EA, THEN you know that Lasky's analysis is right on the money. EA's troubles are serious and structural. Their failure to hold key people accountable; their inclination to promote the architects of their current predicament and their tendency to both alienate and fire intelligent change agents - means the status quo will reign. It is very grim indeed.

Justin Nearing
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JR's whole philosophy is that high-quality games equate to profitability. And since he took over, the games EA publishes have been much better. And in his tenure he has swayed public opinion, with people no longer viewing EA as a money-grubbing, borg-like empire.



Its easy to point the finger at Riccitiello, just look at the stock price, but consider the problem he was facing when he came in. EA games sucked, their operating costs were soaring, and their was no plan to respond to the changing market. The company as a whole was bloated, along with it's stock price.



The necessary deflation has destroyed its stock-price. And when stockholders start losing money (especially losing $40 a share), they start making drastic decisions. Given enough time, I believe JR can make EA profitable again. Its unfortunate that time is not on their side.

Eric Adams
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I look at NPD: The tracking firm said that physical console game purchases -- both new and used -- accounted for 90 percent of all paid video game buys during calendar Q3, 2009 in the U.S. Meanwhile, 79 percent of games for portables, PC/Mac, mobile, and smartphones were bought in physical form.



I agree with Wes that for a console digital distribution a buyer needs a huge HD in the console and super fat pipe. I have a Cable modem and a 1GB demo still takes over 20 min to download. Until our broadband infrastructure matches Korea (currently targeting 2090 for this) - digital distribution will a niche (rich man's world).



I also have to think that our economy with its job losses is hitting the under 30s pretty hard with personal finances. A perfect storm comes in when you have so many superb games on the market (props to our industry). Limited funds and a large selection of great games means some great games/companies will lose.

Beyond Good and Evil
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The thing that drives me insane about the people that post about how "we lack the infrastructure" to support digital distribution currently - is that this misses the central point. Business is about having PLANS, short, middle and long term plans. To the nay sayers - let me ask you this simple question, "how long do you think it would take a company like EA to develop a robust, efficient, easy to use, proprietary digital distribution platform?"



I'll provide the answer - years and years (ask Valve, ask Microsoft). This is the whole point and it has been the point for years already. If you agree that the future is Online and you agree that perpetually giving a large portion of your profits to third party distribution platforms (XBox Live, Steam, Gamespy, Games for Windows Live etc. etc.) doesn't make long term sense (which it doesn't) AND if you have the deep pockets to invest in infrastructure of this scope and complexity (which EA clearly does) - then you have to start NOW.



If you wait to start working on this until we have "Korea level broadband" - you're dead in the water. It's called having vision.

alexis bonte
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Hum Mitch has been wrong before, I actually remember when at benchmark over 1 year ago he told me that eRepublik would interest 250.000 people at most (we just announced our millionth user :). Still he has a point about EA's strategy and the industry in general. There is way to much focus on so called AAA boxed titles and not enough people with web / internet experience and that is where the cake is going. Still moves like the Playfish acquisition are encouraging but they probably need to do more than that to get back on track (ie: get some web guys at the top with the game guys and business guys.. fast).

steve roger
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Kind of interesting that he is saying that EA shouldn't eat what they kill but rather kill themselves to eat. That's a big philosophical change for executives and more difficult to sell to Wall Street investment analysis. Ultimately, it is an admittance of failure in business strategy and model. Nobody wants to do that.



I don't think the game in box retail business is on life support just yet. In fact, I think that it will continue to be were the big numbers are for the biggest titles. Console games are tremendously popular and the platform is not physically capable to sustain digital download growth that matches the physical discs on the shelves.





My 360 hard disk is full. What do I do about that. That is the question isn't it.

Dale Doback
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He isn't wrong very often and he definitely is not wrong about this. As for eRepublik...it is a little confusing because your own blog bio says you 250,000 active users. Seems to be the very number he said it would be. Maybe your post just needs updating:

Alexis Bonte (33) is the co-founder and CEO of eRepublik Labs. eRepublik one of the top 25 European start ups according to TechCrunch is transforming the way strategy games are created, distributed and played by leveraging the power of communities and the Web. erepublik.com its first massive online social strategy game, is set in a mirror version of the real world and launched in November 2007. Erepublik.com has over 250.000 active citizens, 7 million monthly visits and was a prize winner in the LeWeb3 start-up competition in 2007 as well as the TechCrunch FOWA competition in 2008.

Dale Doback
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You guys are missing the point. He isn't saying to abandon box product. He is simply pointing out that if they don't develop new strategies and taking advantage of opportunities in real time then they will continue plod along. For their investors to be happy the multiple on forward earnings needs to get back up to double digits and that is not going to happen on the backbone of traditional packaged goods business.

Boxed product is not going to be a game changer- Period.

Kevin Reilly
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Lasky's observations could be applied to any big publisher. Other than Activision-Blizzard, they are all on quicksand with their increasing budgets and shrinking profits. At least EA has established footholds in the Mobile, Online and Casual spaces. Why would Disney or Tencent be interested in a bloated behemoth that is dependent on licensed sports titles that could be terminated in the event of a merger? Better to pick off developer talent as EA continues to cut off its limbs.

Beyond Good and Evil
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Heck, there's still at LEAST 5 more years worth of lumber in those hills - why on earth would I think about about different career than logging...ummm...oh wait...nevermind.

M C
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EA never needed to radically transform its business; EA needed to evolve online steadily, focus on developing high quality internal projects using their unmatched library of IPs

(Ultima? Strike? Syndicate? Crusader? Road Rash? Dungeon Keeper? Batman? Wing Commander? Archon? LOTR? Harry Potter? Zany Golf? Dune?), while empowering their R&D, and leverage the STUPID amount of cool technology it has developed across its many studios.



Instead these guys approach game development like a fast food kitchen, constantly starting from scratch, developing by recipe, directing via marketing, and squeezing their people for efficiency over quality.



Solution: ditch Riccitiello instead of laying off 1500 people. His sort of knee-jerk, reactionary leadership stinks of desperation and lack of clarity/introspection.

Oliver Snyders
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Man... what a downer...

mike wallenstein
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I agree with this article in that EA needs to start picking up the slack on changing with the times, but I don't think they are going to be in trouble any time soon. Their acquisition of Bioware was probably the smartest move they could have made, and I don't think they thought of Pandemic as representing "half of the justification for EA's $850MM acquisition." I think that Bioware is by far one of the boldest companies with the strongest future making games today.



Through Baldur's Gate, Neverwinter Nights, and Star Wars Knights of the Old Republic, the company developed its knack for making great story-driven games, really breaking out into the mainstream market with KOTOR. Their next major move was Mass Effect, which took RPG and bridged it to the world of action/sci-fi which had driven games like Halo and Gears of War to the top of the charts. Mass Effect to this day is one of the most memorable, fan-favorite, AND critically-acclaimed games of the past 10 years, and the sequel which comes out in a couple of days is sure to blow the roof off everything ME1 established.



And then, there's Dragon Age. Bioware's nod to their long-time fanbase of medieval RPGs, carrying the tradition of NWN's custom content and toolset, is vastly outperforming expectations, and promises to remain a foundation for DLC, expansion packs, and sequels for at least the next 5-6 years. That, combined with Mass Effect 2, is really more than any company could hope for.



AND THEN, there's The Old Republic. World of Warcraft is one of the most ridiculous success stories in the history of gaming, raking in billions since its release. At 8,000,000 subscribers (which is a conservative number by a long shot) and $15/month, WoW generates $120,000,000 a month for Blizzard. True most of that goes into hosting, but the point is that Blizzard created one single game foundation in WoW's 2004 launch version, which has seen only a couple of major updates since, and that one single foundation is responsible for all of that revenue; in other words, the game has certainly paid for itself. And to put it shortly, Blizzard is sweating its boots about the Old Republic launch and has already public acknowledged that the game will be superior to WoW (and that a follow-up of their own will be necessary soon enough).



EA having a stake in all of this, alone, ensures their success at least as a publisher. They also publish Spore, Rock Band, and The Sims -- three solid franchises that could easily become totally digital with their respective audiences probably welcoming the change. All three are at a point where new updated versions of those types of games will not be necessary for 3+ years, which means they can be sustained sufficiently simply through different forms of DLC. EA did say they are bringing back Medal of Honor, and with that alongside Dead Space they've got a solid stance in the hardcore action genre.



I want to hate on EA just as much as the next guy, and point fingers at their bloated figures and strategies and, like a previous poster said, their tendency to dig deeper holes with the same executives rather than fire them and find new, fresher minds. But that simply cannot be the case. I can't think of any other game company poised for a more successful future of games, aside from maybe Blizzard, Valve, and Nintendo's first-party line. Bethesda has Elder Scrolls and Fallout, 2K Games has Bioshock and Borderlands, and the once-great Rockstar, I fear, has seen their limelight, as both DLC for GTA4 sold well under expectations (how far can you really go with the SAME concept, anyway?).



You see there are a lot of great games out there, but EA is responsible for such a great many of them, and of such a great variety, that yeah their stocks might fall, but they are fully poised to support their lineup in a digital world if necessary, in a way that not many other companies really can. Digital distribution only really works as a primary sale method for super-mainstream games, and of that EA is currently the reigning king.

Beyond Good and Evil
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I'll chime in here again. I do agree - EA has some great IP and they have released some good games - the issue is (as in all business) - at what cost.



I challenge you to do some digging into what Dragon Age actually cost to make, then start cross referencing that against even optimistic sales figures and you begin to see why there is a serious issue. Let me be clear - this isn't specific to EA only - there are lots of publishers making this mistake. The simple fact remains, these are publicly traded companies and they have a fiduciary obligation to their shareholders to behave in a fiscally responsible manner.



Making high production value console title "that consumers want" is great, but if you can't do it in a way that makes profit - you are doomed. There are just too many examples of this writ large for it to be ignored any further.


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