With Madden, FIFA, Battlefield and other core IP having been extended to digital platforms, it's clear that Electronic Arts is taking the transition to digital quite seriously. In fact, with its recent fiscal announcement, EA CFO Eric Brown noted that EA's "digital businesses are expected to grow approximately 30%."
At first glance, the idea of taking your valuable IP to as many devices as possible seems like a smart move. Deutsche Bank analyst Jeetil Patel, however, disagrees with EA's strategy for growth.
"While a narrow but deep lineup is the key to success, EA management on its conference call indicated that its 'new short and fat' strategy is the 'new tall and thin,' implying that taking content across all platforms and media and devices may be more optimal to the core console business. We are not sure of this strategy as consoles monetize differently (and very high for that matter) over emerging media such as social gaming, iPhones, casual Internet, free-toplay, microtransactions, etc. While underlying operating margin percentages are higher in newer media, we think that the profit dollar generation may be far lower currently than scaled console profits while fully risking franchise and content positioning by going too aggressive to the masses," Patel noted.
He continued, "In other words, could $10-$20 in immediate operating profits on a per-console software unit basis to hardcore/mass market gamers be compromised by $1-$5 in operating profits over one year from a casual gamer looking to play Need for Speed? We believe that EA is clearly risking its franchises to potentially lower monetization ahead by taking its core franchises to too many media/platforms/devices (which carry lower economics) as opposed to only exploiting its newer/weaker IP for such an environment."
Patel added that this feels all too similar to what happened in the music industry. EA could be in for a rude awakening, if he's right.
"Note that in the music business, the transition from full-length CDs to individual songs (driven by proliferation media) has led to a shrinking industry, with most participants (labels, content owners) feeling the effects of the lower economic opportunity, begging the question as to how it plays out for EA to self-inflict a potentially similar outcome against its core IP," Patel said. "Given the uncertainty on the outcome of its 'new fat and short' approach, we believe that investors should remain even more cautious on how fiscal 2011 unfolds, especially in light of guidance (2H-loaded), lack of profits in the core publishing business and lofty valuation."
Deutsche Bank reiterated a "Sell" rating and $12 price target on EA's stock (ERTS).
2 Comments
May 12, 2010
While the analysis may be correct as regards short-term profitability (especially since EA itself lowered its guidance), I think the long-term analysis is at odds with industry trends. EA's making the correct choice to "eat its own young" rather than let someone else dine on them. The long-term prospects for sales of console software at the current price points through standard retail distribution don't look all that rosy. The trends continue to be lower average unit sales and lower average prices. I'd be more concerned about a publisher that was blithely continuing with its old business model. EA is making the effort to change things, and while there may be problems, it's better to encounter them now before the need to change becomes overpowering.
May 14, 2010
EA is run by a bunch of incompetent fuckwits
they have basically zero presence on the two most popular systems this gen (Wii and DS). now they'r trying to charge people extra to play games online
they've been circling the drain for a while now so hopefully we'll soon see the end of them