IndustryGamers - Informing the Games Industry

EA CEO: Betting on PS3 Put Us in a Position of Weakness

Posted December 9, 2009 by James Brightman

When we pressed Riccitiello on the skepticism around the company, he noted that the transition EA is now facing was made even more challenging by the fact that they initially bet on the wrong horse coming into this current console generation. That said, he completely understands why investors would be skeptical. 

“I don't know how long it's going to be for everyone to sort of buy into our vision. At a bare minimum, they'll do it a year after the results have been recorded and it all comes back the right way. And some might do it earlier. I hate blowhard CEOs who don't recognize that these transitions aren't easy; they don't come easily or quickly. If they did, the newspaper industry would have done it as opposed to ignoring it, the music industry would have done it, the auto industry would have done it... And it was hard for the record industry to imagine how they would sell songs versus vinyl or CDs, and they ultimately lost their business model to intermediaries like Apple. ... The economic hiccups we've had this year with double-digit unemployment and the rest of it makes investment in transition all the more difficult to swallow for an investor. We have a history of great success at EA, but there's no question that 3,4,5 years ago as we went through the last [console cycle] transition, we lost some of what made us successful," he explained. "So following on from that, you can look at it in one of two ways: you can dig deeper into the hole you're in or you should break out and go after tomorrow. It would have been easier to go after tomorrow if we were bounding from great success through the last transition – unfortunately that's not where we were. We made the call that PS3 was going to be bigger than the Wii, and we allocated resources accordingly. We got that wrong, and that put us in a position where we probably underinvested in our intellectual property and some of it went into a kind of wane period. What makes this all the harder, and harder on investors, is that we have to come, if you will, from a bit of weakness to rebuild our core and drive transition. So I get the skepticism."

Ultimately, Riccitiello is not surprised by investor reaction. He noted that other big companies like Apple faced similar challenges during their transitions. And he added that just because EA is steering towards digital does not mean it intends to yield any leadership position in traditional packaged goods.

“When I go back to those winner and losers relative to dynamic industry transition, it's not uncommon for the long-term winners to have had 1-3 years where the investor had a little hard time buying into the story because of the narrow or short-term nature of their focus. How long was Apple's stock down or Amazon's stock down? One of the interesting parts about that is their profits were down while they were investing in the future but for the most part they managed to grow revenue. And EA's revenue for the first half was up 13% while most of our competitors were down. Why did we grow 13%? Because we're doing dynamic, interesting new things that yielded growth in a flat to down market (in packaged goods). ...The digital growth is enough to offset that and then some, so we've got a growth industry still. And I expect it to be even stronger next year, so I look at that and I feel like I'm in a great industry, but the clear and right strategy for a company like EA, the market leader in the space from a packaged goods perspective, is to become the market leader in digital given the respective growth rates and margin opportunity," he said. "Digital reaches probably a billion or more consumers whereas packaged goods reaches a little fewer than 200 million people. So there are all sorts of reasons to suggest that digital approach is the right one, but NOT forsaking packaged goods. We're going to put out, just in the next quarter alone, Army of Two, Dante's Inferno, Battlefield: Bad Company 2, which I think is a healthy rival to Modern Warfare (Activision's biggest franchise), and Mass Effect 2 coming from BioWare, which promises to be a big hit. So we're still doing these things; we're just doing fewer of them and putting more resources behind them.”

James Brightman has been covering the games industry since 2003 and has been an avid gamer ever since the days of Atari and Intellivision. He was previously the EIC of GameDaily Biz.