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EA: Brick And Mortar Stores Not Going Away Anytime Soon
EA: Brick And Mortar Stores Not Going Away Anytime Soon
September 20, 2011 | By Frank Cifaldi

EA may be focusing on its growth in the digital space with Facebook titles like The Sims Social, its upcoming subscription-based Star Wars: The Old Republic, its Origin online shop and its downloadable content, but that's not because it sees brick and mortar retailers going away anytime soon.

Speaking to investors and analysts Tuesday at the Goldman Sachs Communacopia Conference, CFO Eric Brown explained why the company doesn't see an all-digital landscape coming in the foreseeable future.

"You need a retail partner to stock the consoles. I don't see all consoles being ordered via mail," he said. "There's going to be people that go in and want to see the display, the form factors, etc."

Console makers are asking a lot when they ask retailers to stock their systems: the boxes take up a lot of valuable shelf space, and the margins are traditionally low. To make up for this, the companies market their physical game discs, so that retailers have enough incentive to stock the consoles. That's the way it always has been, and according to EA, the way it's going to be for quite a while.

"If you were to completely eliminate physical distribution of the disc, the margin opportunity is lost in the entire category. To the retailer, holistically it radically alters their view of the category," explained Brown.

"So it's for that reason that I just don't see in the foreseeable future a complete shift to digital gaming delivery."

The company has been dramatically reducing its output of packaged games over the past few years. In FY09 EA released 67 titles, then subsequently reduced that figure to 54, 36, and this fiscal year, just 22. But that trend may not continue.

"We feel that we're in a pretty good spot" in terms of packaged game output, said Brown. "It's not to say that 22 is exactly the right number of titles, because that number could flex up or down a little bit, but it seems to be about in the right area at this point in time."

Its packaged goods focus going into FY13 is not to necessarily reduce the number of games it puts out, but to increase downloadable content revenues from its top titles. Currently, both FIFA and Battlefield have generated $50 million on net digital revenue: the goal for next year, says Brown, is to get the next eight titles in its top ten to that level.

The company sees itself in a pretty comfortable position with its packaged goods output. Its various sports franchises are annualized, the four years in-between FIFA World Cup releases are offset by Ultimate Team, it has a number of hit franchises trickling out like Mass Effect and Dragon Age, and in the lucrative shooter category, the company is alternating between Medal of Honor and Battlefield.

But as one analyst asked today, why not combine the latter two franchises? Why not have Medal of Honor games carry the Battlefield brand umbrella? Activision benefits tremendously from annualizing Call of Duty, as one year's ad spend builds brand awareness for the following year, so why doesn't EA do the same with its two shooters?

Brown's only explanation was that consumers demand consistency in their franchises.

"What we have recognized is that people do like consistency in carry-over," he said, stressing that while Activision does release a Call of Duty every year, the games alternate between development studios and are inconsistent because of it. Instead, the company is cross-promoting its two shooter franchises via its Gun Club program, maintaining two brands under one initiative.

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Bob Johnson
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EA is right until a console maker decides to go all digital and passes on the savings to developers and/or consumers. That's the future console maker that will win big. EA is mostly a follower here. If a console maker goes this direction EA would put their games on the system no doubt. so .....not sure why this guy is yapping.

Apple is the only one in that position today. The only thing that's holding them back is they are a high-end sort of hardware company. And aren't terribly games focused.

But they could ace that market if they wanted to change things up a bit.

EA should realize all kinds of retailers stock Apple products now. Granted they are high margin devices and most of them are small in size. But there is no software being sold 'cept iTunes cards.

SEems to me EA's thinking is too protectionist. WE have to protect the way we do business. Not change. This leaves them open for competitors to provide similar product for less.

On the other hand EA could start an all digital console platform.

Remember, from what I read, this is a reason Sony broke through with the PS1. They had the cheaper distribution medium in cds. Digital distribution seems like it brings a similar bonus to the table. Plus in theory you destroy the used games market. But your prices would have to reflect the savings.

And you might have to consider those without hsi access.

Joe McGinn
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Well said Bob, that's a solid analysis. Only thing I would add is this isn't so much EA's thinking, as Sony/Microsoft/Nintendo thinking - they are the ones beholden to retail.

Apple, as you point out, is not. And in just one or two more revs the iPhone/iPad will be able to produce nextgen graphics, and stream them onto your smart TV, with wireless gamepad support too. The real challenge for console manufacturers will come then: if you can run Call of Duty on your iPad, pay half the price for the game, what's the incentive to buy yet another big honking computer-box to put under your TV?

John McMahon
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The biggest point to that last statement will be Xbox Live or PSN network of friends. If the people you play with aren't going to follow you, will you really leave them behind?

Bob Johnson
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The incentive is you get a next-gen box that would take the iPad another 8-10 years to catch up to.

By the time the iPad is as powerful as a 360 the next-gen consoles will be announced and maybe released.

Apple has the right distribution model to conquer the console market in the future, But, at the same time they would have to change in other ways to make it happen. They would probably have to adopt the subsidized cheap hardware model that is a hallmark of the business.

Joe McGinn
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In the very short term, they are correct. However, all this just increases the opportunities for competition from Apple, who is not beholden to the retailers, so are free to compete with a modern, fully digital store.