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Interview: Riccitiello Talks Game Industry's Changing Landscape, EA's Transformation
by Leigh Alexander [PC, Console/PC]
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December 2, 2009
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Although it may take a different shape than in prior years, the game industry is definitely set to see growth in 2009, says Electronic Arts CEO John Riccitiello.
"We've looked at the industry as being a combination of, really, two broad sectors: what sells at retail; and what sells through social networks, downloadable content, advertising, subscriptions and microtransactions, and all these other businesses," he tells Gamasutra.
"There's no doubt in my mind that 2009 will be an up year for the industry, sharply up," Riccitiello asserts. "That consumers to some degree are choosing to buy their games differently does not mean the industry's down."
It's been a year of tough comparisons for the industry's NPD numbers; after a summer of declines, the business returned briefly to year-over-year growth in September, only to decline again in October. Analysts now say the odds that year-end results will show annual growth are steep.
But NPD sales numbers don't track revenues from emerging and non-traditional business models like the ones Riccitiello cites -- a broader-lens view of the game industry is all that's needed to see healthy signs, he says.
"My kids are still listening to music even though Tower Records is gone," the exec points out, noting that the closure of an iconic physical music storefront signified a transformation for that industry, not a decline.
Riccitiello sees the same thing happening in games, and much of EA's current strategy depends on getting out ahead of that business trend. The company's recent acquisition of major social game developer Playfish -- and the simultaneous reduction of 1,500 jobs -- are part of the company's transformation to address the digital era, he says.
"We felt that the company we want to be had 1,500 fewer jobs dedicated to packaged goods," Riccitiello explains, "and it didn’t need two offices in two places in LA where one would do."
Looking strictly at GAAP numbers -- which include deferred earnings adjustments -- shows a $391 million loss during EA's recently-announced second fiscal quarter. But excluding those adjustments, the company saw a record high of $1.147 billion during the quarter, up 2 percent from $1.126 billion the year before.
"We've had a record first half... [and] we're pretty positive about the balance of the year," says Riccitiello.
That hasn't stopped analysts from being critical of EA shares recently, pointing to low visibility on the company's slate for next year alongside uncertainty about the immediacy of the publisher's desired gains from digital revenue -- and whether or not those gains can offset the decline in packaged goods.
But EA's CEO says that although it's natural for a period of change to appear confusing initially, there is a clear direction in which the company aims to evolve.
"It's an on-purpose transformation," Riccitiello says. "We're trying to become a company that looks more like a direct-to-consumer business."
He compared the process to that of other companies he says he admires: Intel, Apple and Amazon, who underwent "similar" transformations. "While they're doing it, it can look messy," he concedes. "But I think not doing it can look even messier at the end of the trail."
However, the CEO says EA also has no intention of leaving traditional console gaming behind. "We intend to be the number one packaged goods publisher in the world," he says -- and notes that his optimism on new business models doesn't necessitate pessimism on more traditional ones.
The company announced yesterday that its FIFA 10 is the number one game in Europe, having sold 4.5 million units worldwide to date. Yesterday, Valve also noted that its Left 4 Dead 2, which EA distributes, has sold 2 million units in its first two weeks -- two examples, Riccitiello says, that packaged gaming software is still strong.
"The retail biz is pretty healthy right now," he says. "The price reductions from first parties helped -- PS3 in particular has been a strong beneficiary. There are strong titles: Left 4 Dead 2, FIFA 10, Madden, Need For Speed, Assassin's [Creed 2], Modern Warfare 2... those all are holding up well," he says.
"I think it's probably a little early to try to call December, because it hasn't started yet," Riccitiello adds. "And overall growth in any given month, or any given year, is up and down... in 2010 pricing for first-parties, together with innovation on the controllers will likely bring growth -- but it's not a forecast yet."
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The problem IMHO is that the market is changing so rapidly that business decisions and models need to keep up with it faster then they are used to. Two or three years developing a single title becomes more and more risky.
Also NPD needs to amp up their tracking and monitoring. The numbers are not accurate and the financial statements by publicly traded companies leave still a lot of room for 'interpretation' for my taste.
From a business standpoint, it's a classic, educated risk.
To elaborate I'll use myself as a case study: I classify myself as a power gamer and my purchase behaviors have changed drastically since 2008. I've owned every current console since their respective launches, and have a high end quad-core SLI gaming PC. Only mainstream current gaming system I don't own is a PSP.
1. I have purchased zero PC games in 2009 vs ~12+ in 2008.
2. ~15 console games split on PS3/360 purchased in 2009 which is the about the same as 2008.
3. 8 DS games purchased in 2009, roughly same in 2008.
4. Nothing purchased on the Wii in 2009 compared to ~8 in 2008. They shipped nothing this year I was compelled to play. In fact, my Wii is currently boxed waiting for the next great game to buy and play.
5. DLC games on XBLA, PSN, and PC -- ~20+ DLC games this year, but nothing last year.
I'm roughly spending the same amount of dollars on games as I did last year, but my dollars are migrating to digital distribution. The retail PC market surprisingly died for me this year but has been replaced with casual flash games and free-to-play games.
I also believe the iPhone market is a disaster with too much price degradation due to overcrowding and unacceptable piracy rates. Spent about $15 on ~10 games. I feel bad for anyone struggling within that space.
Now back to the article: EA Execution is something that remains to be seen -- it seems like EA is trying to dodge the Titanic iceberg metaphorically speaking. They just got rid of a whole bunch of developers (and many of my former colleagues) which many would have been perfectly suited to work on games for digitally distributed or microtransaction games. Instead, they spend $300 million on a 2007 startup. Not a bad turnaround for 6 founders and 2.5 years -- though it's hard to quantify any time savings from the EA perspective. They have just been historically bad at managing acquisitions (Westwood, Pandemic, etc..)
But the industry is a mess right now and it'll probably take a good year for the carnage to settle down.
In addition I feel they all public figures in our industry need to be much more transparent with their hidden sales data in the new markets. They also need to pressure industry tracking services like NPD to evolve more quickly, and to push the industry lobby to undertake new PR and educational efforts on new market changes and on the current market demographics (dispelling the myth that today's games are for 14 years old boys).
Historically our industry has been poor about educating the world about our own evolution and maturity and we can and must do better at that, or risk being continually battered in the public, press and markets by the under-informed.
$0.02
Vgchartz.com estimated that the sales of smaller downloadable XBLA games market was worth just $90 million USD in 2008 and the growth for this year seems to be in between the range of 20-30% rather than in hundreds of percentages. If you compare this number to the estimates of how much COD:MW2 DLC is expected to generate revenue ($140 MUSD), it really puts things into perspective.
For fairness sake, I think EA is currently the most "progressive" big publisher out there embracing new opportunities. They have established biz units for mobile and casual already and now adding social gaming there as well. It makes perfect sense to get rid of unproductive parts and bring in potential growth segments of the business. Although the price of Playfish sounds ridiculous, we don't know how much they already generate revenue. Also, closing Pandemic sounds crazy only a couple of years after acquisition, but my guess is that they were an expensive studio to run and didn't appear to be productive enough to the management. The ratio of output vs cost might not seem worth it at all.
BTW, Yeah your kids are still listening to music . . . the question is . . . are they paying for it.