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Opinion: Why The Next 12 Months Could Make Or Break EA

Opinion: Why The Next 12 Months Could Make Or Break EA

May 6, 2011 | By Chris Morris




Electronic Arts investors had a lot to cheer about Wednesday afternoon in the company's earnings call. Not only were revenues and earnings per share higher than expected, but CEO John Riccitiello also declared a shift to a more aggressive stance on several fronts.

Shareholders, who have stuck with the company through its long rebuilding process, may have sighed with relief, but it's still a little early to declare 'all is well' at EA. The coming fiscal year could be critical in determining the future course of the publisher.

While there are plenty of pros working in EA's favor, it has a number of hurdles to clear as well. And with Riccitiello's declaration that "We’re shifting to offense and running plays no other company can," it's essential that the company barrel through those obstacles or investor confidence could waver.

Let's look at the pros first: Beyond the rhetorical cheerleading that's common on any earnings call, EA outlined a renewed aggressive focus on regaining the title of the top video game publisher. That will be done, it says, by focusing on its rich, deep portfolio of games, pushing hard to recruit top industry talent and by making a leap of faith into digital distribution.

Multi-front wars don't always work out well, but EA has seen some significant successes of late. Revenues from digital income were up 46 percent in fiscal 2011 to $833 million. DLC and microtransactions are the fastest growing area (from a percentage basis), soaring 200 percent in the just-completed quarter versus a year ago.

Meanwhile, on the mobile front, EA took in $242 million in fiscal 2011 and is the leading game publisher on Apple's iPhone and iPad, commanding between one-quarter and one-third of the 20 highest grossing games, according to BMO Capital Markets.

That's the sort of stuff that investors want to hear – but in terms of pure-play digital distribution, EA is behind the pack. Steam has a commanding lead of the PC world. GameStop, a critical EA partner, is jumping into the area with its acquisition of Stardock's Impulse. Even Activision-Blizzard has a head start, via Battle.net.

In the social arena, EA could face trouble as well. Disney is making games for Facebook and other social networks its chief focus these days – and the departure of COO John Schappert for Zynga was a mighty blow (though one, curiously, that no investors asked about on Wednesday's call).

The company's push for new talent is a welcome one, especially after trimming its workforce so dramatically over the past few years. Making that public of an announcement tends to indicate something more than just mid-level coders, too. If EA was simply looking to rebuild its developer stable as it ramps up, it certainly could have done so quietly.

That's going to kick off a guessing game about who's coming on board – or who's bringing the cole slaw to JR's barbeque this summer. If we're still looking for that big name in a year, it could be viewed as a disappointment – and perhaps a setback.

From a catalog standpoint, EA has one of its strongest looming lineups in years. Battlefield 3 and Star Wars: The Old Republic stand to be two of the biggest titles the company has put out. Both face stiff competition from Activision, but in the case of Battlefield 3 vs. Modern Warfare 3, the fight looks to be a lot more fair than the curb stomping Call of Duty: Black Ops gave to the Medal of Honor reboot in 2010.

While it's possible the Star Wars MMO could slip out of this calendar year, it's unlikely. EA hedged a bit on its call, but also touted its delivery record for the past year, noting that no games had missed their ship date. With Mass Effect 3 being pushed back, it's a safe bet EA Games president Frank Gibeau will shepherd this to a fall launch.

Madden's going to suffer if the NFL lockout continues, of course. And the lack of an NBA game lets Take-Two extend its lead in that category, perhaps to a point where it's impossible to catch up quickly. But with other strong titles brewing, including a new, unnamed shooter for fiscal 2013, neither will be fatal.

Of course, one Riccitiello comment stood out from the rest: "Over the coming years, we will transform EA from a packaged goods company to a fully integrated digital entertainment company. We're transforming EA to a games-as-a-service model."

Remember that rhetoric I mentioned? There it is. Sure EA is looking to get away from discs. That helps margins. But so is every publisher. And they're all going to do it at roughly the same pace. The "over the coming years" qualifier gives EA plenty of flexibility – and you can be sure it will take advantage of that. The company is nowhere close to abandoning brick and mortar.

Amidst all of this disruption, EA set some very conservative estimates for the year to come. In the long run, that's the smartest thing the company did Wednesday. Because when you talk big and miss your numbers, investors (who are already frustrated with minimal returns over the past several years) move from annoyed to furious. And that's when heads start to roll.


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