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ERTS AT A GLANCE

P/E ► -4.59   EV/EBITDA ► -8.63   ROA ► -23.9% AVG ROE ► -39.1% AVG Debt to Equity ► 0.883 AVG Current Ratio ► 1.69 AVG Interest Coverage Ratio ► 264 HIGH

 

 

 

 

 

 

Electronic Arts (EA) is the world's largest publisher of video game software, owning 21% market share generating $788 in net revenue in 2Q10 (ending March 31).^[1][2] In FY2009, ERTS developed and published 132 titles across 7 consoles, four of which ranked in the top ten best-selling games in North America and Europe. with no title accounting for more than 10% of total net revenue.^[3] EA's major franchises include Rock Band, Need for Speed and a number of EA Sports titles, including John Madden's NFL franchise and FIFA.

EA has built its position at the top of the video game industry through acquisitions, both of licensing rights to games (such as the sports games that carry the licensed logos of professional leagues) and top development studios that contribute their titles and talent to EA's portfolio. Purchases have included video game developer Mythic Entertainment in June 2006^[4], the popular role-playing video game giant and Bioware parent company VG Holding Corp. for $810 million in October 2007,^[5], and in November 2009 the leading social networking game site Playfish for $300 million^[6]. EA has also invested heavily in the mobile technology space, releasing 35 games for wireless devices in FY2009^[7].

Business Overview

Business and Financial Metrics

While EA's revenues have grown more or less with the greater video game industry, its margins have also eroded over FY 2006 - FY 2008. This has been caused by the launch of new consoles, which increased R&D expenses during FY 2006 and FY 2007 by $283MM, or 37%.^[9] In addition, acquisitions of additional studios such as Mythic Entertainment also added more developers to the staff, the primary cause of costs.^[10] Margin's further eroded during FY 2007 to FY 2008 due to one-time costs, such as restructuring fees of $97MM^[11], as well as high sales of Rock Band and other lower margin products. Rock Band is considered a lower margin product because of the many licenses and royalties that need to be paid for the music-related game.^[12].

EA's revenues come primarily from North American and European markets, with 53% and 42% revenue contribution respectively in FY 2008.^[14] Asia remains a market with lower penetration, due to lagging popularity of EA titles there. This is partially due to different gaming preferences in the Asian market, which do not favor the American sports titles that EA Games publishes. As a result of this historical lack of presence, EA has a weaker distribution system in that area, further inhibiting a larger revenue contribution.

Business Segments

EA's operations are highly diversified, and it collects significant revenues from the mobility platform (cell phones, handhelds, and other mobile devices) compared with its other domestic competitors, such as Activision Blizzard and Take-Two Interactive. In addition, the "Other" segment includes licensing profits as well as internet server deals that are affiliated with the games that EA has created. As seen above, the Console platform's now constitutes less than 50% of EA's overall revenues.^[15] While that has been the core business, it will not be EA's future primary growth opportunity.

EA operates under several publishing labels, and reports revenues separately for a number of other associated business units.

EA Games

This label publishes the majority of EA's games that do not fit under any of the other labels.

• Rock Band - Distributed by EA following the success of rival Activision Blizzard published Guitar Hero, this title contributed 10% of the company's revenues in FY 2008, as mentioned above, the game is published by MTV Games and developed by Harmonix, creators of the Guitar Hero franchise.
• Need for Speed - Series of popular arcade-style racing games.
• Command & Conquer - Historically a PC title, the series made its transition to console with the title Command and Conquer III in 2007.^[16]
• Battlefield - This EA series revenue model approximates what EA hopes future titles will become - a revenue model where gamers conduct micro-transactions in the game for personalization, as well as special weapons/vehicles. The next titles in the series, Battlefield Heroes will be free-to-play, pay-for-premium content.

EA SPORTS

This label publishes EA's sports affiliated games, which typically have contractual agreements with major leagues for annual titles, such as the Madden NFL franchise.

• Madden NFL - Published in agreement with the NFL, Madden is the most successful American football software title.^[17].
• Fifa - Fifa series have been famous since 1993 and hit many times the million units sold. Because Football is the most followed sport in the world, it has been a key market to attract for EA. However, this franchises have faced stiff competition during past few years with another franchise, Pro Evolution Soccer, of the Japanese publisher Konami.

The Sims

The success of the Maxis studio developed Sims series has led to a creation of an entire label dedicated to publishing titles for the franchise.

• Pogo.com - The Pogo website hosts EA's casual gaming effort, with card games and board games available for casual users to play
• Spore - A Massively single player online PC game where the player controls all aspects of an organism's evolution, from microbial stages to intergalactic exploration. Player's creatures and civilizations are uploaded to the internet and integrated into other players' games.

EA Casual Entertainment

The causal entertainment label handles casual titles for non-hardcore games all across the company's development platforms. Its two major groups are the mobile cell-phone business, and the internet based casual games business.^[18].

Trends and Forces

Influence of preferred gaming platforms

Gamers’ platform preferences are extremely important and not completely predictable. Electronic Arts was forced to shift resources from developing games for the Sony PlayStation 3 to the Nintendo Wii after Sony’s lower-than-expected sales of the PlayStation 3 system. The underallocation of Wii games and overallocation of PS3 games hurt EA's revenues because of the Wii's blockbuster sales and the PS3's poor performance, since console sales aid in game title sales.^[19] Electronic Arts and its competitors want to provide software for platforms which will garner the most users because this translates to more units sold.

Increasing demand for online-publishing

EA Mythic is a label set up under the EA Games label specifically for the purpose of developing MMORPGs (Massively Multiplayer Online Roleplaying Games). the studio was first built through the acquisition of Mythic Entertainment, creators of a popular online game Dark Age of Camelot, in 2006.^[20] The company is quite aware of the revenue opportunity in MMOs, seeing the success of competitor Vivendi Games' World of Warcraft, (with a business revenue segment CAGR of 30% between 2004 and 2006^[21]) as well as EA's own equity investment and 19% stake in Chinese MMO operator The9 .^[22] The subscription based model of these games allows the publisher to not only generate revenues at point-of-sale, but also through on-going subscription fees to the service. This grows revenues and socially drives more users to the service.

Capacity for mobile gaming development

EA's mobile gaming division will benefit from the trend of continued market expansion from casual gamers playing games on their phones, and increased numbers of women gamers.^[23] Competitors Take-Two Interactive Software, Ubisoft Entertainment, and Activision Blizzard do not have mobile-gaming operations as extensive as EA's, but are attempting to build out studios dedicated to mobile gaming. This includes Ubisoft's purchase of Gameloft India in April of 2008^[24], highlighting the importance of this platform to the competition's projections for growth.

Competition

In such a dynamic industry where "hits" are what keep the company profitable, Electronic Arts is vulnerable to any company that can take more accurately capture shifting consumer preferences. EA benefits from a wealth of developer talent and financial resources, and its competitors are relatively smaller by revenues, since they typically have smaller game portfolios. However, competitors are still flush with both of these assets, recently launching mega-hits have brought them closer to EA's revenue figures. In particular, Activision Blizzard and Take-Two Interactive have mounted the greatest threats in the past. In late 2007 EA made an offer to buy Take-Two, but was met with other competition in the takeover market. In March 2008 EA raised its bid for Take-Two, offering $2.0 billion in a hostile takeover move.

In the past smaller companies who pose threats to Electronic Arts have been acquired. EA has acquired smaller game developers such as Digital Illusions, Mythic Entertainment, Headgate Studios, Phenomic and SingShot in the past. EA also took a $105 Million stake in Neowiz in order to expand its presence in the online-game market.

References

1. ↑ "ERTS Second-Quarter 10-Q" 11/09/2009
2. ↑ "EA Reports Record Q2 Non-GAAP Net Revenue of $1.15 Billion" EA Investor Relations, 11/09/09
3. ↑ ERTS 2009 10-K pg. 3,4  
4. ↑ Electronic Arts Press Release "EA to acquire Mythic Entertainment" June 20, 2006
5. ↑ SFGate The Tech Chronicles "EA buys up two more studios" October 11 2007
6. ↑ "Electronic Arts Acquires Playfish" Electronic Arts investor relations, 11/9/09
7. ↑ ERTS 2009 10-K pg. 3  
8. ↑ Electronic Arts FY 2008 10-K "Selected Five Year Consolidated Financial Data" pg. 28
9. ↑ Electronic Arts FY 2008 10-K "Research and Development" pg. 46
10. ↑ Electronic Arts FY 2008 10-K "Acquisitions and Investments" pg. 32
11. ↑ Electronic Arts FY 2008 10-K "Restructuring Charges" pg. 42
12. ↑ Electronic Arts FY 2008 10-K "Cost of Goods Sold" pg. 39
13. ↑ Electronic Arts FY 2008 10-K "Note 18: Segment Information" pg. 104
14. ↑ Electronic Arts FY 2008 10-K "Note 18: Segment Information" pg. 104
15. ↑ Electronic Arts FY 2008 10-K "Note 18: Segment Information" pg. 103
16. ↑ Wikipedia.org "Command and Conquer 3: Tiberium Wars"
17. ↑ Wikipedia.org "Madden NFL"
18. ↑ Electronic Arts FY 2008 10-K " EA Casual Entertainment Label" pg. 7
19. ↑ San Jose Mercury News "EA'S FUMBLE" May 27, 2007
20. ↑ Mythic Entertainment Press Release "EA TO ACQUIRE MYTHIC ENTERTAINMENT" June 20, 2006
21. ↑ Vivendi (EPA: VIV)
22. ↑ Gamasutra "Report: EA To Buy 19% Of Chinese MMO Firm The9" April 9, 2007
23. ↑ Parks Associates Press Release June 29, 2006
24. ↑ Joystiq.com "Ubisoft Buys Gameloft India Studio" April 16, 2000