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Electronic Arts (ERTS)Stock (Video Games Industry, Multimedia & Graphics Software Industry, Toys & Games Industry)
 Electronic Arts (EA) is the world's largest publisher of video game software. EA generated $4.02BN USD in non-GAAP revenues[1] in FY 2008 (ending March 31).[2] #2 competitor Activision, in comparison, generated $2.90B in revenues in FY 2008.[3] EA's major franchises include Need for Speed and a number of EA Sports titles, including John Madden's NFL franchise. In FY 2008, EA distributed the new hit, Rock Band on behalf of MTV Games which represented approximately 10% of the company's overall revenues.[4] 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. Recent purchases include Bioware[5], creator of many popular role-playing video games, and Mythic Entertainment developer of Massively Mulitplayer Online games (MMOs).[6] In an industry where one title can greatly benefit the bottom line, EA must develop mega-hits to stay abreast of the competition. This need has driven the company's multiple attempts to acquire rival Take-Two Interactive Software (TTWO), publisher of the popular Grand Theft Auto franchise.[7] Other opportunities for growth include continued build-out of the casual/mobile/cell phone gaming business, as well as online-gaming. [edit] Business & Market DescriptionEA operates under several publishing labels, and reports revenues separately for a number of other associated business units. [edit] Labels
[edit] Global PublishingThe global publishing unit handles sales and marketing for the company's games, as well as physical distribution of titles. It operates in North America, Europe, and Asia. [edit] Major Titles and Franchises
[edit] Financial AnalysisNote that the following analysis is performed on GAAP figures, while EA occasionally reports non-GAAP for press releases, as quoted above. Primary differences lie in revenue recognition as well as how stock based compensation and depreciation are treated in expenses. In addition, EA is on a March 31 fiscal year, so the majority of FY 2008 actually corresponds to CY 2007
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%.[13] In addition, acquisitions of additional studios such as Mythic Entertainment also added more developers to the staff, the primary cause of costs.[14] Margin's further eroded during FY 2007 to FY 2008 due to one-time costs, such as restructuring fees of $97MM[15], 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.[16]
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 (ATVI) and Take-Two Interactive Software (TTWO). 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.[19] While that has been the core business, it will not be EA's future primary growth opportunity.
EA's revenues come primarily from North American and European markets, with 53% and 42% revenue contribution respectively in FY 2008.[22] 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. [edit] Trends and forces[edit] Flawed integration of acquired studios caused ERTS' developer attrition in the pastThe company has grown via acquisitions for several decades, acquiring developers along the way. These included Origin Systems in 1992[23], creators of the Ultima franchise, and Westwood Studios in 1998[24] , creator of the Command & Conquer franchise. However, the company admitted that its acquisition and integration strategies often ended up demoralizing the acquired studio, leading to staff departures.[25] For example, Westwood Studios suffered from continuous attrition after its acquisition until the studio was closed in 2003, and no successful Command and Conquer games (the studio's primary franchise) were published until the series was relaunched in 2007 by Command and Conquer 3. EA is now seeking to give its acquired studios more autonomy and more creative freedom, so that they may retain their individual cultures. In the long-run, poor management of developers leads to the employee attrition that the company has already experienced, which in turn causes decreased game quality, which in turn will lose customers. [edit] Poor bets on preferred gaming platform have misaligned the company's game software portfolioGamers’ 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.[26] Electronic Arts and its competitors want to provide software for platforms which will garner the most users because this translates to more units sold. [edit] Increasing demand for online-publishing an opportunity for revenue growthEA 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.[27] 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[28]) as well as EA's own equity investment and 19% stake in Chinese MMO operator The9 (NCTY).[29] 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. [edit] EA games has built out more capacity for mobile gaming development than competitorsEA'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.[30] Competitors Take-Two Interactive Software (TTWO), Ubisoft Entertainment SA, and Activision (ATVI), 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[31], highlighting the importance of this platform to the competition's projections for growth. [edit] Bid for Take-Two Interactive and its lucrative "Grand Theft Auto" FranchiseEA is seeking to purchase rival developer/publisher Take-Two Interactive Software (TTWO), publisher of the popular Grand Theft Auto franchise. The company was initially rebuffed by the competitor, which argued that the company was undervalued given the pending release of the blockbuster game GTA 4[32], which ended up selling $500MM its first week in the market.[33] As of late June, the offer is still pending, open until July 18, 2008.[34][35] [edit] CompetitionIn 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 (ATVI) and Take-Two (TTWO) 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. Since 2003, Electronic Arts has consistently boasted the highest margins among its competitors, with a trailing 5 year average gross margin of 58.9%[36], compared with 39.6% for ATVI[37] and 30.6% for TTWO[38].  [edit] Market ShareElectronic Arts is the industry's largest revenue generator, beating out domestic competitors ranging from Activision and Take-Two, to international competition such as Vivendi Games and Konami. The potential acquisition of Take-Two Interactive Software (TTWO) and its entertainment properties would do well to add to EA's share of the industry's total revenues.
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