Whyos

I remain a big fan of EA. They have a lot of smart and forward-looking people, but it’s hard to stay as flexible as this industry demands with that large a company, and that has been an ongoing challenge for them. They recently announced Q3 results showing unfortunate results, apparently as a result of three elements:

• Too little emphasis on the well-performing Wii platform.
• Too large a percentage of sales coming from lower margin co-publishing efforts.
• New titles didn’t take hold.

EA’s recent announcement of about 50% of their efforts now going to the Wii sounds not so great; it just makes you think of open barn doors and horses. Announcing an emphasis on Wii two years ago might have been very clever and insightful, but it will be hard for this action to do everything they need it to do at this point. EA’s salvation by Wii will face two challenges; the first is that they are assuming that they’ll achieve hitherto unseen levels of third-party success on a Nintendo platform. The second is that they’re assuming that FY 2010 is a fairly predictable extension of 2009 in terms of consumer usage of technology, including Wii trends. Of course, it will be to some extent, but, there may be significant variations, both because of where all the consoles are in their respective life-cycles, and changes to the television and PC game environments, and this variation will likely not favor EA’s goals.

One element that may come into play relative to these environments is that it’s long been difficult (and unattractive) to directly invest in game development. This has led investors to a few different paths in game investment. One impact of this was last year’s excessive flowering of MMO titles. Perhaps more significant in the long term will be the investments in infrastructure for PC titles and the casual PC-game industry in general. Invariably, some of these efforts will bleed toward the gamer audience, because that’s where the big money still is. These new casual publishers, developers and tech plays are much more flexible than a conventional frontline publisher can be, and invariably will come into competition. If EA leans strongly toward the Wii, it is leaning into soft competition with casual, and in short order may find itself in a position where it could be difficult to keep the margins it depends upon. Casual can be a dangerous place for EA; their core casual offering is large but simply a white-labeled Oberon offering. Last year EA closed their casual division, and while they presented that as representing a realization that casual could touch all categories (quite true), in practical terms, it’s a different beast, with different demands and opportunities, and it can’t be prioritized, built and sold by exactly the same folks as $60 core titles.

Regarding EA’s issues with co-publishing deals representing too much of topline sales, and driving down margin dollars; this seems like it could be troubling to investors. EA is in a very strong position to represent a title to a retailer, and push product out, so getting that part of the deal is only dependent upon beating a very limited pool of competition (Activision, Take2…) to a title with name developers, or in production or complete. Not much vision is required in this. So, if at this moment EA is too dependent upon sales of co-published titles, that might indicate that they are neither identifying nor acquiring enough successful new IP early and also not generating enough of it internally (Dead Space aside). This would be a real problem…