Electronic Arts Strategic Position Analysis
EA Leadership
Frank Gibeau President, EA Labels In 2011, Frank Gibeau was appointed President of EA Labels where he leads the transformation of the company into a digital entertainment powerhouse by bringing world-class properties to all gaming platforms – Console, PC, Mobile and Social. He is responsible for product development, worldwide product management and marketing for all packaged goods and online offerings within the four EA Labels; EA SPORTS, EA Games, the Maxis Label and the BioWare Label. Mr. Gibeau’s global operation spans a dozen studio locations with more than 5,000 employees. Mr. Gibeau comes to this role after a four-year tenure as President of the EA Games Label. During that period, Mr. Gibeau led a turn-around that greatly increased product quality and on time delivery while dramatically driving down costs. Blake Jorgensen Chief Financial Officer Blake Jorgensen is Chief Financial Officer of Electronic Arts, the world’s leading developer and publisher of interactive entertainment. Mr. Jorgensen joined EA in September 2012 with over 20 years of experience in finance spanning across different industries, with a deep understanding of technology, consumer products, online commerce and entertainment. Andrew Wilson Executive Vice President, EA SPORTS Andrew Wilson is the executive vice president of EA SPORTS, where he provides strategic leadership over one of the most recognized brands in sports and entertainment. Mr. Wilson assumed his position in August 2011 after previously leading worldwide development for EA SPORTS. With more than 11 years of experience at Electronic Arts, Mr. Wilson is responsible for strategic leadership of the brand, from product development and global marketing and planning for all packaged goods and digital services. Gabrielle Toledano Executive Vice President and Chief Talent Officer Gabrielle Toledano, Executive Vice President and Chief Talent Officer, Electronic Arts is responsible for EA's global staffing and resourcing, benefits and compensation, organization and leadership capability development, rewards and recognition, Facilities and Corporate Social Responsibility.
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Table of Contents
Introduction ..............................................................................................................5 Environment Analysis ..............................................................................................5 Industry Structure ..............................................................................................7 Industry Performance ......................................................................................10 Growth .............................................................................................................10 Profitability......................................................................................................11 International Threats/Opportunities ................................................................13 Company Analysis/ Report .....................................................................................14 Overall Strategy and Functional Identification and evaluation .......................14 SWOT Analysis: .....................................................................................................16 Balance sheets from 2009-2013: ............................................................................16 Assets ..................................................................................................................16 Analysis ...........................................................................................................26 Competitive Advantage Through Low-Cost and Differentiation ...................28 Alternative Solutions/Strategic Responses .............................................................34 Recommended Solution ..........................................................................................36 Implementation .......................................................................................................37
Ryan Stanford
Taylor Dechant
Daniella Perez
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Trey Blackman
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Introduction Electronic Arts Inc. is an interactive entertainment software company that was founded in 1982 and has grown to become one of the worlds leading publishers of interactive software for internet-connected consoles, personal computers, mobile phone, tablets, and social networks. According to the United States Census Bureau, Electronic Arts Inc. operates in the Software Publishers Industry (NAICS code 511210, SIC 7372). Companies in the Software Publishers Industry are primarily engaged in computer software publishing or publishing and reproduction. Companies in this industry carry out operations necessary for producing and distributing computer software, such as designing, providing documentation, assisting in installation, and providing support services to software purchasers. These companies may design, develop, and publish, or publish only (U.S. Census Bureau).
Environment Analysis The industry is facing a wave of new competition as a result of new mobile platforms. Large companies in this industry operate through economies of scale in manufacturing, marketing, distribution, and selling while small companies have primarily relied on gaming creativity in order to remain competitive. However, mobile platforms have allowed for direct digital distribution, which has removed a significant financial barrier to entry for small software gaming publishers. This rapid adoption of mobile and phoneintegrated games is part of the technological advancements that affect the software gaming industry. Additionally, the two major gaming consoles produced by Microsoft and Sony are being completely redesigned and set to launch late in 2013, which will
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provide an entirely new competitive landscape for video game software companies. Consumers constantly seek new styles and versions of games, but more importantly they want the best graphics and fluid gaming experience which stems of the rapid evolution of the hardware systems on which the games are played (Hoovers industry description). The popularity of this new console hardware will directly affect sales of prepackaged console games released by software publishers to the market. In terms of regulation, a majority of video game publishers in the United States have agreed to support parental controls and pledged not to offer games that do not have a rating giving by the self-regulated Entertainment and Software Rating Board (ESRB). However, these regulations differ by country and with other countries such as Japan, Canada, France, South Korea, and the United Kingdom being the largest producers of video games outside of the U.S. video game companies face significant challenges in localizing their products (Hoovers industry Description). Language translation, conforming to local customs, cultural mores, and laws are all involved in localizing video game products in order for them to be adopted in the targeted geographic market. Also, while the United States has its own parental guidance governance for the industry, companies must be aware of the differing policies from country-to-country on game violence and sexually explicit content.
Demographics The average age of consumers who play video games is 34 years old while the average age of most video game purchasers is 39 years old. This statistic shows the impact that adult consumers who do not actually play video games have on the industry. The ‘2010 Gamer Ages’ graph to the right shows the percentage of consumers who place video -6-
games categorized by age range. Another key demographics that impacts advertising and consumer engagement for the industry is that 40% of all video game players are females. Of all females who play video games, 80% own a Nintendo Wii console, 11% own an Xbox 360 and 9% own a PlayStation 3. Male video game console owners are more diverse with 41% owning a Wii, 38% own an Xbox and 21% owning a PlayStation. Additionally, 67% of all households in the United States play video games, meaning that the video game industry impacts roughly 77 million households in the United States.
Industry Structure Driving Forces With the video gaming industry in a time of uncertainty and change, driving forces play a key role in the unpredictability. Key driving forces for the industry include the dependence on consumer’s acceptance of console platforms (Playstation and Xbox), the impact of market share from mobile games and success of digital revenue through freeto-play (in-app) purchases. !
Product Innovation – The next generation of Microsoft’s Xbox, now the “Xbox 1,” has been announced at its official reveal presentation several weeks ago. There has been some positive and negative feedback from gamers about new aspects of the console. The issue of hand that makes this a driving force for the video game publishers industry is that it is hard to predict how quickly consumers will adopt new generation consoles. The popularity of video games depends foremost of the popularity of the consoles and platforms that they are available on
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which to play. Additionally, these new console have new technology which allow games and software to utilize new technological innovations of their own to increase graphics and provide more fluid gameplay then was available in previous console generations. !
Emerging platforms – The most recent and rapid trend in the industry has been the adoption of mobile games, such as those played on phone and tablet platforms. Consumers have steadily shown a transition of interest from console gaming to mobile gaming over the last several years. With the introduction of new generation consoles, popularity will depend on consumers discretionary spending and whether they will transition back toward console gaming. Additionally, new gaming styles are also being developed for the mobile platforms, such as the “free to play” gaming model which allows for games to be played for free, but required a range of small in-game purchases for the user to upgrade.
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Distribution channels – The mobile and online gaming platform allows for digital downloads and completely cuts out the pre-packaged goods primarily produced by software publishers in prior years. Digital download cuts down on operation cost for publishers and minimizes risk by not having to predict the volume of tangible video game disks to manufacture. However, this new aspect of digital download has also made competition from smaller publishing firms much more fierce because now they can compete directly with large publishers in the same mobile store marketplace.
Key Success Factors -8-
Key success factors are particular product attributes, competitive capabilities, market achievements and competencies that have the greatest impact on future success in the competitive marketplace. There are several key success factors that directly affect the gaming software publishing industry: !
Product Differentiation – With the array of digital gaming platforms available, product differentiation has gotten a bit easier for software publishers. Consumers want a variety of elements including high definition graphics, increasing online capabilities, and fluidity in gameplay, which has been the primary goal on a single platform. However, now publishers must differentiate that strategy and programming code among an array of platforms.
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Knowledgeable Workforce – Companies in the software publishing industry are very labor intensive. Thus, it is important that employees are knowledgeable and efficient in order to be able to develop continually better games. Communication is vital to the dispersion of that knowledge through different businesses in the company in order to apply that knowledge to other games and platforms.
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Brand Recognition – A crucial element for companies in the video game and software-publishing industry is the importance of building a strong brand, not simply as a publisher but converting most popular product lines into individual recognizable brands. Consumers are not looking for publisher branded games when browsing store shelves but rather the most popular brands that are distributed by publishers. Madden NFL, Need For Speed, and Sims are among the most popular product brands published under the Electronic Arts umbrella.
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Adaptability – Technology is one of the fastest moving facets of innovation. Game developers and publishers have been forced on an annual cycle in order to keep up with competition and the frequent change of technology. In order to adhere to this cycle, which is now expected by consumers, video game and software publishing companies must be able to adapt to the ever-changing industry environment. The key adaptability point is to publish games and software compatible on the devices to which consumers have gravitated. Current trends show consumers favoring mobile games more then console game, leaving many large publishers having to scramble to adjust strategy.
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Strategic Group Map
Industry Performance Growth According to research done by Hoovers, companies in the entertainment and game
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software industry globally have combined annual revenues of about $50 billion and with the rapid adoption of new gaming platforms, industry sales are expected to increase to $70 billion by 2017 (Hoovers Industry Description). Currently, the United States alone accounts for one-fifth ($10 billion) of global video game sales. Entertainment and games software industry growth is expected to be in the middle 50 percent of industries in terms of growth over the next 12 to 24 months. This is due to the fact that demand for these products are driven my personal income, discretionary spending, and gamer demographics. The biggest risk affecting this industry is how economic health and consumer behavior will have an effect on the shift of new console platforms in comparison to the increased popularity of mobile platforms that offer freeto-play games. However, some indicators of rising growth in the industry include a 2.5 percent rise in US personal income in March 2013, which drives consumer spending for luxury items like entertainment software, compared to the same month in 2012. Also, total US revenue for software publishers rose 21.4 percent in the fourth quarter of 2012 compared to the previous quarter.
Profitability Early in the establishment of the industry, software and games were very profitable due to the consumer interest in the new products and industry. Games were very basic and did not require extensive programming and thus demanded less labor-intensive strategies (think Pac-Man). This climate is what allowed many early game publishers to flourish. However, as the industry has evolved, gamers expect to be subjected to new technologies that continually improve the gaming experience. In order to provide these increased graphics and complexities publishers began involving more development operations in- 11 -
house to gain control of the end product. These operations consisted of larger personnel staffs, larger development teams, larger budgets, and longer development periods, which raised production costs and has made profitability an increasing challenge among some companies in the industry. However, the introduction of digital download on mobile platforms and online computer games has lowered the production cost that is related with the physical distribution of prepackaged games and is increasing profitability in the industry for firms of all sizes. Through sales of popular games such as Call of Duty: Black Ops, which brought in $650 million in the first 5 days after release, the industry still has a significant impact on the economy.
Capital Intensity The nature of software development requires creativity and knowledge of how to transform that creativity into a software code, making companies in the Software Publishers Industry primarily labor-intensive rather then capital-intensive. Capital required in order for a company to produce a video game primarily includes design and development studios. Software publishers are often responsible for conducting their own market research to determine the appropriate inventory to produce for product releases, which is also more labor intensive. Since the Software Publishing Industry is labor-intensive, there is a significantly higher level of labor compared to the capital investment. The costs that go into a labor-intensive industry include employee wages, salaries, and benefits, recruitment and training. Many minds go into the development and production of a single video game and each [successful] company in the Software Publishers Industry has several hundred to several
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thousand employees. To demonstrate the proportion of capital versus labor, Electronic Arts has 9,200 employees spread across 24 global locations – which boils down to an average of 383 employees per location.
Competitive Analysis: Porter’s Five Forces Model of Competition EA Games directly competes with several different competitors including: console manufacturers, Sony, Microsoft, and Nintendo, twenty other independent game developers such as Activision, Sega, Atari, Square Enix, Take Two Interactive, and THQ, media giants such as Disney, Fox, Viacom, online entities such as Yahoo!, Popcap, MSN, and Real Networks, Massively Multiplayer Online Games producers such as NCsoft and Blizzard Entertainment, and cell phone game producers including Gameloft, Infospace, Mforma, Sorrent, and Verisign Competition intensifies among these firms because many employ new ideas to appeal to different segments and boost market standing in these areas, there are zero to low switching costs, the diversity of competitors from around the globe drives new creative gaming, and the number of competitors that are equal in size and capability to EA has increased. Rivalry among these firms is weakened because the market is fast-growing, the number of firms is great thus diminishing the effect of strong competitive moves, and the product-lines are highly differentiated and appeal to a variety of diverse segments.
International Threats/Opportunities This industry is highly dependent on the success and timely release of new video game platforms. EA derives more than half of their revenue from the sale of consoles for play - 13 -
on video game platforms manufactured by third parties. If and when these platforms developed by third parties are not released on time internationally, revenue will suffer. EA depends on companies like Sony and Microsoft all too much.
International legislation is continually being introduced that may affect both content of products and distribution. For example privacy laws in the US and Europe imposes various restrictions on the company websites. There are laws regulating packaging and content distribution as well. Any of these factors can harm business by limiting products that EA can offer by requiring differentiation between products which can be costly. International net revenue is always subject to currency fluctuations. Since most international sales deal in local currencies, it may fluctuate against the US dollar.
Company Analysis/ Report Overall Strategy and Functional Identification and evaluation Electronic Arts vowed to become known for innovation rather than iteration. They establish this by a broad differentiation strategy for implementation in the video game software industry. EA gains its competitive advantage by increasing sales and profit through innovative technologies, actions and content that players control through their experience which make the game fun and addicting, platform availability, partnership and co-publishing, and marketing and distribution decisions. Developers of EA sports are able to sell their products by offering customer a variety of games. EA has a specific strategy to differentiate their product offerings through several product lines and four mail labels, with numerous studios falling under each one.
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EA Games
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EA Interactive
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EA Sports
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EA maxis
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EA Bio ware
EA success comes from operating through several business segments. Some of these include, but are not limited to, EA Games, EA sports, The Sims, and EA causal Entertaining. EA’s functions are exceedingly diversified, and it collects noteworthy revenues from the mobility platform. EA outperforms its main domestic competitors such as Activision Blizzard and Take-Two Interactive.
EA Sports - This label distributes EA’s sports affiliated games. Most of these games have contract agreements with major leagues for annual tittles. Some include !
Madden NFL -‐ Agreement with the NFL, Madden has become the most successful American Football software tittle
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FIFA -‐ They have been around for generations and hit many times the million units sold. Soccer is the number 1 most followed sport in world. EA has been able to use this to its full advantage at attacking this key market.
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The Sims -‐ Due to the great success of this game, a entire new label has been created to publishing tittles under this franchise.
EA uses a co-publishing strategy to engage with other game development companies. These aids EA grow through more titles and revenues while simple providing service to
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these smaller partners. EA partners with competitors like Sony in Japan to help with the distribution of EA products. EA strategically partners with NFL, NCAA, Tiger Woods (PGA), NBA, World Cup, and NASCAR. These relationships are continuous strategies employed by EA and have been paying off with its continuous control of the market.
SWOT Analysis:
Balance sheets from 2009-2013: Assets Fiscal year is April-March. All values USD millions.
2009
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2010
2011
2012
2013
Fiscal year is April-March. All values USD millions.
Cash & Short Term Investments
2009
2010
2011
2012
2013
2.52B
2B
2.34B
1.88B
1.68B
Cash Only
490M
629M
100M
31M
1.29B
Short-Term Investments
2.03B
1.37B
2.24B
1.85B
388M
-
-20.79%
17.08%
-19.55%
-10.64%
53.87%
42.96%
47.42%
34.24%
33.14%
118M
208M
335M
366M
312M
116M
206M
335M
366M
312M
Accounts Receivables, Gross
333M
423M
639M
618M
512M
Bad Debt/Doubtful Accounts
(217M)
(217M)
(304M)
(252M)
(200M)
Cash & Short Term Investments Growth
Cash & ST Investments / Total Assets
Total Accounts Receivable
Accounts Receivables, Net
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Fiscal year is April-March. All values USD millions.
Other Receivables
Accounts Receivable Growth
Accounts Receivable Turnover
Inventories
Finished Goods
Work in Progress
Raw Materials
Progress Payments & Other
2009
2010
2011
2012
2013
2M
2M
0
0
0
-
76.27%
61.06%
9.25%
-14.75%
35.69
17.57
10.71
11.32
12.17
217M
100M
77M
59M
42M
210M
92M
69M
59M
-
-
-
-
-
-
7M
8M
8M
0
-
0
0
0
0
-
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Fiscal year is April-March. All values USD millions.
Other Current Assets
Miscellaneous Current Assets
Total Current Assets
2009
2010
2012
2013
265M
281M
283M
304M
291M
191M
215M
194M
219M
291M
3.12B
2.59B
3.03B
2.61B
2.33B
2009 Net Property, Plant & Equipment
2011
2010
2011
2012
2013
354M
537M
513M
568M
548M
1.04B
1.09B
1.13B
1.22B
-
143M
347M
355M
339M
-
11M
65M
66M
64M
-
Computer Software and Equipment
663M
480M
504M
575M
-
Other Property, Plant & Equipment
188M
170M
172M
193M
-
Accumulated Depreciation
681M
548M
614M
651M
-
Total Investments and Advances
0
0
0
0
-
0
0
0
0
-
0
0
0
0
-
1.03B
1.3B
1.25B
2.09B
1.97B
Net Goodwill
807M
1.09B
1.11B
1.72B
1.72B
Net Other Intangibles
221M
204M
144M
369M
253M
Property, Plant & Equipment - Gross Buildings Land & Improvements
Other Long-Term Investments Long-Term Note Receivable Intangible Assets
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2009 Other Assets Tangible Other Assets Total Assets Assets - Total - Growth
2010
2011
2012
2013
115M
175M
80M
185M
170M
68M
139M
58M
83M
170M
4.68B
4.65B
4.93B
5.49B
5.07B
-
-0.68%
6.07%
11.42%
-7.67%
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Liabilities & Shareholders' Equity 2009 ST Debt & Current Portion LT Debt
2010
2011
2012
2013
0
0
0
0
-
Short Term Debt
0
0
0
0
-
Current Portion of Long Term Debt
0
0
0
0
-
152M
91M
228M
215M
136M
-
-40.13%
150.55%
-5.70%
-36.74%
-
-
-
-
-
Other Current Liabilities
984M
1.48B
1.77B
1.91B
1.78B
Dividends Payable
-
-
0
0
-
Accrued Payroll
142M
177M
232M
233M
-
Miscellaneous Current Liabilities
842M
1.31B
1.54B
1.67B
1.78B
1.14B
1.57B
2B
2.12B
1.92B
0
0
0
539M
559M
0
0
0
539M
559M
Non-Convertible Debt
0
0
0
0
-
Convertible Debt
0
0
0
539M
-
0
0
0
0
-
-
242M
192M
189M
0
(19M)
(50M)
(12M)
(34M)
(52M)
Deferred Taxes - Credit
42M
2M
37M
8M
1M
Deferred Taxes - Debit
61M
52M
49M
42M
53M
366M
99M
134M
177M
326M
366M
99M
134M
177M
326M
0
0
0
0
-
1.54B
1.92B
2.36B
3.03B
2.8B
0
0
0
0
-
Accounts Payable Accounts Payable Growth Income Tax Payable
Total Current Liabilities Long-Term Debt Long-Term Debt excl. Capitalized Leases
Capitalized Lease Obligations Provision for Risks & Charges Deferred Taxes
Other Liabilities Other Liabilities (excl. Deferred Income) Deferred Income Total Liabilities Non-Equity Reserves
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2009
2010
2011
2012
2013
33.01%
41.26%
47.97%
55.24%
55.29%
0
0
0
0
-
Redeemable Preferred Stock
0
0
0
0
-
Non-Redeemable Preferred Stock
0
0
0
0
-
3.13B
2.73B
2.56B
2.46B
2.27B
3M
3M
3M
3M
3M
800M
123M
(153M)
(77M)
21M
0
0
0
0
-
(2M)
70M
95M
91M
-
191M
158M
124M
82M
-
Revaluation Reserves
0
0
0
0
-
Treasury Stock
0
0
0
0
-
66.99%
58.74%
52.03%
44.76%
44.71%
3.13B
2.73B
2.56B
2.46B
2.27B
66.99%
58.74%
52.03%
44.76%
44.71%
0
0
0
0
-
Total Equity
3.13B
2.73B
2.56B
2.46B
2.27B
Liabilities & Shareholders' Equity
4.68B
4.65B
4.93B
5.49B
5.07B
Total Liabilities / Total Assets Preferred Stock (Carrying Value)
Common Equity (Total) Common Stock Par/Carry Value Retained Earnings ESOP Debt Guarantee Cumulative Translation Adjustment/Unrealized For. Exch. Gain Unrealized Gain/Loss Marketable Securities
Common Equity / Total Assets Total Shareholders' Equity Total Shareholders' Equity / Total Assets Accumulated Minority Interest
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Income Statements 2009-2013 Fiscal year is April-March. All values USD millions. Sales/Revenue
2009
2010
2011
2012
2013
4.21B
3.65B
3.59B
4.14B
3.8B
-
-13.25%
-1.78%
15.44%
-8.35%
2.19B
1.92B
1.56B
1.64B
1.42B
2B
1.73B
1.38B
1.43B
1.15B
189M
192M
180M
216M
264M
117M
123M
104M
102M
-
72M
69M
76M
114M
-
-
-12.17%
-18.92%
5.46%
-13.59%
2.03B
1.74B
2.03B
2.5B
2.38B
Gross Income Growth
-
-14.41%
17.18%
23.07%
-4.92%
Gross Profit Margin
-
-
-
-
62.65%
Sales Growth Cost of Goods Sold (COGS) incl. D&A COGS excluding D&A Depreciation & Amortization Expense Depreciation Amortization of Intangibles COGS Growth Gross Income
2009 SG&A Expense
2010
2011
2012
2013
2.38B
2.28B
2.2B
2.44B
2.27B
Research & Development
1.36B
1.23B
1.15B
1.21B
1.15B
Other SG&A
1.02B
1.05B
1.05B
1.23B
1.12B
SGA Growth
-
-4.32%
-3.42%
10.86%
-7.05%
Other Operating Expense
0
0
0
0
-
539M
158M
156M
6M
(10M)
(539M)
(158M)
(156M)
(6M)
10M
Non Operating Income/Expense
(9M)
(14M)
37M
(27M)
39M
Non-Operating Interest Income
48M
10M
8M
9M
-
-
0
0
0
-
Unusual Expense EBIT after Unusual Expense
Equity in Affiliates (Pretax)
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2009 Interest Expense
2010
2011
2012
2013
0
0
0
20M
21M
Interest Expense Growth
-
-
-
-
5.00%
Gross Interest Expense
0
0
0
20M
21M
Interest Capitalized
0
0
0
0
-
(855M)
(706M)
(279M)
18M
139M
Pretax Income Growth
-
17.43%
60.48%
106.45%
672.22%
Pretax Margin
-
-
-
-
3.66%
233M
(29M)
(3M)
(58M)
41M
(17M)
(6M)
(29M)
39M
-
26M
27M
23M
(11M)
-
Income Tax - Deferred Domestic
237M
(61M)
5M
(91M)
-
Income Tax - Deferred Foreign
(13M)
11M
(2M)
5M
-
0
0
0
0
-
Equity in Affiliates
0
0
0
0
-
Other After Tax Income (Expense)
0
0
0
0
-
Consolidated Net Income
(1.09B)
(677M)
(276M)
76M
98M
Minority Interest Expense
0
0
0
0
-
(1.09B)
(677M)
(276M)
76M
98M
Net Income Growth
-
37.78%
59.23%
127.54%
28.95%
Net Margin Growth
-
-
-
-
2.58%
Extraordinaries & Discontinued Operations
0
0
0
0
-
Extra Items & Gain/Loss Sale Of Assets
0
0
0
0
-
Cumulative Effect - Accounting Chg
0
0
0
0
-
Pretax Income
Income Tax Income Tax - Current Domestic Income Tax - Current Foreign
Income Tax Credits
Net Income
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2009 Discontinued Operations
2010
2011
2012
2013
0
0
0
0
-
(1.09B)
(677M)
(276M)
76M
98M
0
0
0
0
-
(1.09B)
(677M)
(276M)
76M
98M
(3.40)
(2.08)
(0.84)
0.23
0.32
-
38.82%
59.62%
127.38%
39.13%
Basic Shares Outstanding
320M
325M
330M
331M
310M
EPS (Diluted)
(3.40)
(2.08)
(0.84)
0.23
0.31
-
38.82%
59.62%
127.38%
34.78%
320M
325M
330M
336M
313M
(166M)
(352M)
12M
278M
375M
EBITDA Growth
-
112.05%
103.41%
2,216.67%
34.89%
EBITDA Margin
-
-
-
-
9.88%
Net Income After Extraordinaries Preferred Dividends Net Income Available to Common EPS (Basic) EPS (Basic) Growth
EPS (Diluted) Growth Diluted Shares Outstanding EBITDA
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Analysis
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Competitive Advantage Through Low-Cost and Differentiation
Potential New Entrants While many opportunities for rapid industry growth and profit exist, the threat of new entrants in the video game software market is somewhat limited because of sizable barriers to entry and learning/experience curves. The profits draw new entrants to the industry, however, they shortly discover that they do not possess sufficient expertise and resources to become successful as exemplified by small game developers. These firms also were more capital constrained, had less predictable revenues and cash flow, lacked product diversity, and were forced to spread fixed costs over a smaller revenue base. Notable barriers to these new entrants include: sizable scales of economies of scale in production and operations, learning curves, strong brand loyalty to established publishers, high capital requirements, and difficulty establishing networks of distributors and retailers. While profit incentives continue to lure new entrants into the market, these extremely formidable barriers simultaneously prevents and deters new entrants from exerting strong competitive pressure. The ease of entry into the Software Publishers Industry is extremely low because of the high degree of knowledge and technological know-how required for success. Not only is a strong background in video games software development a necessity for a new entrant, an extremely strong financial backing is required. As time has progressed, customers demand greater graphics while playing video games. This has greatly increased the costs needed to develop new video games. A stream of new titles with mass appeal must continuously be produced to catch the eye of the consumer, and marketing efforts are
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needed to aid in the increase of customer awareness of the product. These tasks also cost a large amount of money.. In terms of exiting, many firms in the industry have not been able to compete with the demanding costs and constant development of new technologies.
Substitute Products Three main factors determine the strength of the competitive force exerted by sellers of substitute products: whether substitutes are readily available and attractively priced, whether buyers view the substitutes as being comparable or better in terms of quality, performance, and other relevant attributes, and whether the costs that buyers incur in switching to the substitutes are high or low. While an argument is made that movies, television, and music exert a strong competitive force because they are readily available and attractively priced and cause buyers practically no switching costs, many consumers do no associate these varying media to compare to the same type of performance and interactivity that games offer; therefore they serve completely different functional purposes. For this reason, it is more logical to view the substitute products as exerting a low competitive force on the industry.
Suppliers In the video game software publishing industry, the three main suppliers, Nintendo, Sony, and Microsoft, exert one of the strongest competitive forces as they all three have a considerable amount of bargaining power over independent publishers. First, all three suppliers grant the license and technology from their platforms to the independent publishers such as EA Games. With three highly differentiated consoles, independent - 29 -
publishers face high switching costs to switch from platform to platform. If EA Games develops a game for Nintendo Wii, the license and technology that Nintendo grants the publisher will create a completely different technology than say the same title for Microsoft’s Xbox 360. Software publishers must now decide specifically which supplier will grant the inputs that give a title the desired result; moreover, this differentiation means that suppliers now maintain exclusive licenses for diverse and unique technology Finally, the suppliers have for a considerable amount of time employed forward vertical integration to develop and market games for their respective platforms Because the number of suppliers are relatively limited, possess differentiated inputs, and have forward integrated to the software publishing level, suppliers have considerable bargaining power. It is also worth noting that EA Games also has third-party vendors as suppliers who handled the production of EA’s PC-based game titles. These suppliers have lower competitive pressure and bargaining power because EA has many sources of supply for all the functions that were outsourced to third-party suppliers, which often allowed them to negotiate volume discounts.
Buyers On a large scale, buyers have moderate bargaining power because they can and often do switch brands willingly without switching costs based on the title and genre of the game they want to play, they often have information from game reviews on the products, prices, and costs, and have the discretion of whether and when to purchase games however, on a smaller scale, if a buyer wants a specific title and genre bargaining power will be reduced.
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After evaluating the collective strength of the competitive forces, it becomes clear that the video game software publishing industry is extremely profitable once a firm gains the requisite learning and experience curves necessary to penetrate the market. Although there are limitations to dealing with suppliers that are vertically integrated forward and demand royalty payments, should a firm gain experience, it will enjoy high levels of profitability because of rapid industry growth, competitive forces preventing new entrants, and weaker forces from substitute products and buyers.
Competitive Strengths Electronic Arts ability to publish interactive software games for multiple platforms is the main strength of the company. The products that are designed to play on consoles and mobile platforms are published under license from the manufacturers of the platforms and EA pays them a fee for technology and intellectual property. The company also invests in facilities and equipment that allow them to create and edit video and audio recordings that are used in their games. The interactive software games that they develop and publish are broken down into three categories: 1. EA studio products 2. Co-publishing products 3. Distribution products In comparing the costs of EA and their main competitors in an analysis, the best practice for EA is that it exploits the opportunity for digital downloading. This is a very useful function because it is cost effective due to its digital nature therefore cutting out manufacturing and packing costs. EA has also begun offering free demos at EA.com for popular games on different systems, such as Xbox Live. By allowing the consumer to get - 31 -
have a taste of the game before they purchase it is a great way to get them coming back for the whole game and it is then when you make a profit.
EA figured out a way to build revenues with little cost and a decent return, called “Microtransactions.” These microtransactions are small purchases where the gamer can purchase more clothes for his/her character for a particular game, extra designs for a race car, etc. These little purchases really add up in the end and they are great for the consumer because it gives them more options while leaving EA with higher revenues. Finally, to successfully execute benchmarking for EA, suppliers Sony, Nintendo, and Microsoft had approved that EA can be licensed. When this occurs, it is branding EA while also getting their product out there for the consumers to experience. Licensing from these brands better positions a company in the mind of the consumer.
It is essential that consumers of EA Games see value in the products that EA produces and bundles with. In order to appeal to the consumer at all it is essential that brand or the product relates the consumer properly. EA utilizes their “ability to localize games or launch games on multiple platforms in multiple countries in multiple languages” to effectively reach the consumer. By doing this, they are able to release the same game on the same day in number of countries and languages; it is with this ability that truly separates them from their competition.
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Problem/Opportunity Statement We have assessed that EA is facing multiple threats heading into the immediate future. Products in the software developing industry are highly vulnerable to consumer income and discretionary spending. They face the problem of the rise of mobile technologies that offer free-to-play games that make money off micro transactions and don’t necessarily need to involve full game packages as EA offers for a premium price. Madden, Tiger, NHL and FIFA may well be cash cows but they are going nowhere and EA doesn’t even own the rights, it just rents them. Even with the Warhammer game, the company is borrowing someone else’s IP. But times have changed; we live in the age of Wii Fit. The market is now everyone, not just the narrow niches that gaming historically served. Electronic Arts' stock has lost almost 40 per cent of its value since the start of this calendar year - and in fact, since the middle of last holiday season. The company's stock has been in a steady decline, which has now whipped close to 50 percent off EA's valuation. Although the overriding factors in EA's valuation collapse are internal, it's important to look at wider factors within the industry as well - because the reality is that this is not a situation that's confined to EA. Many games publishers face a tough transition, not merely to next-gen console hardware next year (which is tough enough in itself), but also to a world of new business models and new competitors. While it's not unusual for small companies' share prices to fluctuate this strongly during times of trouble, EA is not a small company. This fluctuation represents billions of dollars moving out of the company's valuation, and the fact that it's a trend that has persisted for six months, suggests that investors are genuinely concerned about EA.
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Alternative Solutions/Strategic Responses One thing EA is doing better than anyone else is gearing for the future. This company got into casual gaming big and early. It is pushing micro transactions and subscriptions successfully in it’s business model but still needs to expound on those features. EA needs to continue to focus on convincing the markets that their market plans is going to work out, of course, but it's also clear that there's a wider challenge here for the entire games industry. The next transition of platforms, which has already started, is going to be the toughest one the industry has ever faced - the stock market knows it, and until the industry can show itself to be ready to cope with that transition, investors are going to steer well clear of videogame-related stocks.
The gaming industry is in a state of transition away from what has been EA’s key revenue source for years: Pre-packaged games. The slowdown in both console and even PC sales require an emphasis on the tablets and smartphones where casual gamers are passing the time. The difference that has been hurting EA is that the digitization of games requires an entirely new revenue strategy, which is why EA’s profitbaility has been struggling. It’s tough to sell a $60 console game when consumers have the convenient option of instantly downloading a 99-cent game right to their phone. EA has the brands that matter to consumers, but EA’s revenue streams need to be readjusted in order to be able to compete on these new platforms and the free-to-play business models.
Luckily, free-to-play business models have not made their way onto console platforms, however digital distribution is a cornerstone that has not been used to it’s full potential.
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Currently, publishers push out game updates frequently online directly to consoles but have not distributed full games directly to consoles via digital download. This is a strategic option for EA that would allow them to be first to market while cutting down production costs and allowing them to cut prices to undercut competitors while simultaneously increasing profitability. In order to promote this tactice effectively, EA should parter with its most profitable console maker to develop and virtual console “game marketplace” which will add to not only the manufacturers product vitality but also to EA’s new market credibility.
While EA continues to battle on the forefront of it’s mobile presence in terms of software, there are also some unique partnerships that could be utilized to bolster there popularity on mobile platforms. Phone cases that promote mobile gaming are evolving and aiding in the popularity of the mobile platforms. Gamers grew up on buttons, not touch screens. If EA shows its true to its core gamers and bring a little sense of “true gaming” to their mobile games they are sure to find success. The positive aspect of EA partnering with a mobile phone case menufactuer is that it would not incure additional production costs. EA could use this partnership as a marketing and advertising outlet while simultaneously giving the case company exposure. The negative aspect of this strategic initiative is that EA risks losing the ability to control the quality of a product that it endorses. Should there be a defect with the case or unsatisfied customers there will be a backlash towards EA that would hurt their mobile presence.
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A third option EA could venture into is the scope of combing mobile games with a console experience. The technology exists for mobile devices to be connected via wireless home internet directly to television screens. EA could be the first major gaming publisher to offer this option in their mobile games. This option would provide a sort of “bridge” between mobile gamers and console gamers to where connectivity could be established between the two platforms. Of course this initiative would likely incure a new pricing model as to not damage the profitability of current console games. The risk of this strategy is that it can be done through partnerships with television manufacturers, console manufacturers, Apple TV, or through a software function coded into the game. If EA is first to market with this strategy and does not execute in the most efficient and popular manner, they have esentially created a beast that competitors will improve upon.
Recommended Solution After increasing weakness from sales of pre-packaged games, EA was successful in adding to its bottom line in the fourth quarter of 2012 due to $120 million brought in via the company’s offering of it’s “Battlefield Premium” service. This service is a feature of EA’s popular first-person shooter franchise, Battlefield, which can be purchased on top of the pre-packaged game. The success of this service shows that there is a market for gamers willing to buy products via game console marketplace. As a result, we recommend that EA dive into the realm of digital download for console games. Since EA has relied on building it’s business around providing pre-packaged games for years, it’s simply not feasible or realistic for EA to be expected to think about exiting the aspect of console game publishing. Instead EA needs to adapt it’s products and pricing model to
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regain it’s popularity with console gamers and the proper avenue to do that is through the introduction of Console digital download.
Implementation We first recommend that EA stops absorbing smaller companies to gain market control and work from the inside out to fix their valuation and customer problems. After they stop losing money by destroying other smaller companies and failing to merge customer bases, management needs to cut prices of their products. After they regain customer support, they can begin to strengthen their bandwidth connections so they have less complaints and drops of product. Once that is in effect, they can continue to act as an industry leader and benchmark other leaders to regain valuation and profits. They can expand into the mobile market more than they have been and even get into the tablet software developing. Those are the future industries and without straying from the PC and console industry they will never regain the popularity they had in the 90’s and early 2000’s. EA has cycled through multiple executives in the last decade and if they can’t find the proper fits for their company, they will never succeed.
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