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EA: 'No Coincidence' That Layoffs, PlayFish Buy Emerged Simultaneously

EA: 'No Coincidence' That Layoffs, PlayFish Buy Emerged Simultaneously

November 12, 2009 | By Kris Graft

November 12, 2009 | By Kris Graft
More: Console/PC

To Electronic Arts, acquiring a major online social gaming company for hundreds of millions of dollars while at the same time announcing deep studio layoffs was a calculated move, perhaps a statement to anyone still questioning the company's strategy moving forward.

"It's no coincidence that we simultaneously announced a cost reduction in connection with the acquisition of PlayFish, because that represents, in our mind, a very important shift to digital direct," said EA SVP and CFO Eric Brown, speaking at the BMO Capital Markets 2009 Annual Digital Entertainment Conference in New York Thursday.

On Monday, EA announced that it sealed a $300 million deal to acquire Pet Society developer PlayFish, which specializes in viral social networking games, making money primarily from microtransactions. That same day, EA announced it would cut 1,500 jobs -- about 16 percent of its total workforce.

EA said that it plans to leverage some of its most recognizable franchises into the social network space via the social networking expertise of PlayFish, a company that hosts 60 million monthly active users, Brown said.

"One of the things they do exceedingly well is make a game for viral distribution … [another is] the quality of the revenue model," the CFO said. Playfish makes its money almost exclusively from microtransactions -- the purchase of virtual items that users can drop into PlayFish titles to enhance their interactive and social experiences. "We bought them for their IP and their game design expertise," Brown said.

But PlayFish isn't the only piece of EA's online puzzle. Like other publishers, EA is becoming increasingly focused on downloadable games and extra content. Brown said that the download-only PlayStation 3 and Xbox 360 title Battlefield 1943 has sold 1.2 million units to date across both platforms. Half of those sales were in the game's first week.

DLC trends at EA will continue to snowball. Dragon Age, a packaged and digital game developed by EA subsidiary BioWare, is selling "very well" and will receive regular DLC through the next "12 months-plus," Brown said. Giving consumers the option to spend more than the $50 or $60 can be advantageous for game makers. "You can find extra demand customer by customer," he said. And that goes for microtransactions too in free-to-play games.

There are other advantages to keeping a sharp focus on digital trends. "The added benefit we get, is that when you're distributing digitally, you get better customer telemetry." The company can better pinpoint the kind of consumer that's buying a certain piece of content, allowing for improved marketing, he said.

"The second is you have zero sales return risk," Brown added. "What you build sells through. There's no physical good that has to be handled, printed, transported, et cetera, so you pick up this real efficiency gain in terms of the sales return allowance. So overall it's slightly more beneficial to us as the publisher."

EA isn't abandoning the packaged goods market, even if it recognizes the digital market as rapidly growing. Mass Effect 2, Dante's Inferno, Army of Two: The 40th Day and Battlefield: Bad Company 2 are all high-profile primarily packaged products due in the coming months. "We expect to have a very strong Q4 in the back half of the year," said Brown.

The exec said that EA's marketing strategy is also evolving. The company is making an effort to spread out releases, instead of stacking them on top of each other in the holiday quarter. EA's marketing is also practicing longer marketing lead times, instead of doing short bursts of promotions only around the release of a game.

Like most publishers, Brown expects the current console cycle to be relatively long, as consoles max out HDTV resolutions, hardware pricing comes down, add-ons such as motion sensors emerge and digital direct sales gain traction.

For EA going forward, the four key principles of its business are to drive hits, expand digital services, "aggressively manage costs," and continue focusing on the Nintendo Wii. But digital services -- DLC, subscriptions, free-to-play, PC browser gaming, advertising -- is clearly where EA sees its future.

"I think it's important that everyone understands that the definition of the interactive sector needs to include online. It can't be associated with the more limited definition of packaged goods through retail. Online is indeed a high-gross segment," he said.

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