The game publisher that brought the world Madden NFL, The Sims and Battlefield has shed nearly 60% of its value in the last year, and its stock is down more than 80% from its all-time high. Why are investors so sour? Because despite being one of the world's largest game publishers, EA still doesn't seem to understand its customers or business.
The Basics
Electronic Arts is probably the best-known brand in gaming. For years, the company has dominated PC and console gaming on the backs of high-quality, big-budget games (so-called 'AAA titles') like The Sims, SimCity, FIFA, Madden NFL and Command & Conquer. While some of its content was original, EA was best-known for acquiring successful game developers - such as BioWare - and incorporating their franchises. As the gaming market has diversified, so has EA, purchasing the social game publisher PopCap, maker of Plants vs. Zombies and Bejeweled.
The Problem
The gaming world is changing, and publishers need to adapt. To its credit, EA is acutely aware that the days of AAA titles dominating the market are numbered. With its traditional business of leveraging existing franchises as sequels (derided as 'buying and bleeding' or 'gutting and dumping' by many hard-core gamers) on the decline, EA has diversified into other platforms and business models, most notably mobile/social games and Free-to-Play (F2P) titles where the revenue comes from add-ons. Unfortunately, its execution shows a distinct lack of understanding of how gamers think. Here are four key examples:
1: Star Wars: The Old Republic. Thanks to massive hubris and overconfidence in the Star Wars brand, EA vastly over-invested in Star Wars: The Old Republic. With a massive 500,000 paying users needed to break even and subscriptions falling from 1.7 million to somewhere under a million in just seven months, EA was forced to offer a Free-to-Play (F2P) option just to keep players involved. There's nothing wrong with F2P ' even the ever-popular World of Warcraft is now free for the first 20 levels - but SW:ToR has not come close to matching its lofty expectations. A more modest effort might would have been much more profitable and allowed progressive, organic growth.
2: Predatory Profitability. There's no such thing as a free lunch, but there is a right way to make diners pay without making them feel ripped off. Dozens of game-makers earn solid profits selling game-enhancing add-ons. But EA's greed threatens to kill the goose that lays the golden eggs.
According to comments made at a shareholder's meeting, EA's CEO sees potential for a more 'leveraged' micro-transaction payment model: "When you are six hours into playing Battlefield and you run out of ammo in your clip and we ask you for a dollar to reload, you're really not very price-sensitive at that time."
To many gamers, this kind of gameplay-affecting pinch crosses the line by tilting the playing field toward players with the deepest pockets.
3: Drinking the 'Social' Kool-Aid. In 2011, EA acquired PopCap Games for $650 million in cash, $100 million in stock and an earn-out that could raise the total cost to nearly $1.3 billion. On its face, the deal gives EA a solid foothold in the social gaming market, but as Zynga's flopped acquisition of OMGPOP shows, past performance in social games doesn't necessarily translate into future performance. A good, new game is far more important than a legacy of good games, and paying a premium for an existing user base doesn't make sense when the very nature of social games makes viral exposure cheap and easy. EA should have been smart enough to smell a bubble - that billion dollars could have built the company a whole lot of new social games.
4: Gamers Hate It. To many gamers, EA is the Dark Side, minus the cool Sith duds. Some of that comes with simply being big, but much of it is EA's own fault. The company has done little to counter its reputation as a Borg-like behemoth that buys cool indie publishers and bleeds them dry.
EA recently won Consumerist.com's 'Worst Company of 2012' award, beating Bank of America nearly 2-to-1.
The Players
John Riccitiello, CEO: John Riccitiello has a solid corporate past as a brand manager and executive, plus an MBA from a top-tier school, but the most unusual thing about him is that he's actually a gamer. Even as the company he runs appears oblivious to the needs of its customers, Riccitiello seems to understand the industry. While his company-wide reorganization and the PopCap deal might have been an overcorrection, Riccitiello has seen the diversified future of gaming world for some time, and he also seems to get the details.
So what's behind EA's clunky moves? Is he just incredibly shortsighted, or under the thumb of a board that never got over its old ways of doing things? While the rumored appointment of Peter Moore to EA's throne might have been an improvement, Riccitiello may still have the soul of a gamer.
The Prognosis
EA won't be shutting down any time soon. It also won't be acquired. Its brand portfolio remains valuable, but few companies could afford the price tag - and none of them are capable of returning lagging brands to their former glory. EA will probably muddle on for some time, rarely releasing a Game of the Year but occasionally hitting middling expectations with playable, unremarkable games. It will probably get some growth in social gaming as the sector grows, but unless it gives PopCap room to breathe, don't expect anything groundbreaking.
Can This Company Be Saved?
EA can absolutely rescue itself from mediocrity - but first it needs to stay out of its own way. That starts with treating its studios with respect, creating an environment that encourages developers to stay on and remain creative. Next, the company needs to extend that trust to gamers - and make sure everyone knows its change of heart. If EA can make the move from miserly bean-counting evil overlord to hip, in-the-know incubator and marketer, it has the resources to reclaim the industry's top spot. But that hardly seems to be the company's strategy. (Filing copyright lawsuits against competitors like Zynga probably won't help that effort. )
Instead, the company is crowing that its most recent quarterly losses weren't as bad as expected, and spending $500 million on a stock buyback.
The Deathwatch So Far
Research In Motion: Things are hurtling downhill even faster than expected. Massive losses - more than 11 times worse than expected - and new delays in its Hail Mary BlackBerry 10 operating system update have made the company's dire situation even harder to ignore. And over the weekend, a federal jury found RIM liable for $147 million in patent damages to Mformation Technologies.
HP: No change in status
Nokia: The mobile phone giant's quarterly revenue and earnings exceeded expectations and it has reduced its cash burn rate, but the company lost money yet again and saw its debt ratings cut to junk status. And it still hasn't cracked the U.S. smartphone market as it halves the retail price of its flagship Lumia 900 to $49.99.
38 Studios: No change in status
Barnes & Noble: No change in status
Sony: No change in status
Groupon: Groupon's stock price recently hit an all-time low on a downgrade from Evercore Partners, and a perceived weakness in social companies, led by Zynga.
T-Mobile USA: No change in status
Netflix: No change in status
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