Lazard Capital Markets analyst Colin Sebastian recently held an investors meeting with several executives from Electronic Arts to get some insight into EA's strategy. It's clear that for EA, the traditional video game business model will eventually give way to "games as services."
Sebastian notes that the “pay first/play later” model may be outdated. "EA views the Internet as the single largest long-term growth driver for the video game industry (and threat to the disk-based model), including premium downloadable content (DLC), browser-based casual games, iPhone applications, and social networking games," he said. "Interactive entertainment has absorbed consumer market share from passive forms of media over the past decade — notably television, cinema, and music — and EA now sees the traditional video game model under pressure from users increasingly engaged with online applications. In particular, EA views the social networking platforms (e.g., Facebook) as a large growth opportunity, with relatively low barriers to entry, high margins, and attractive viral marketing characteristics."
Sebastian continued, "We believe over the long-term that EA’s strengths in the sports, racing (Burnout, Need for Speed), and shooter titles will translate into share gains online; however, crucial questions remain with respect to the size of the revenue opportunity and the nature of the business model. Along those lines, we continue to expect healthy year over year increases in EA’s Digital Services revenues, yet still representing a small portion of the overall business (~15%)."
In the near term, EA is expected to focus on fewer franchises but put more marketing muscle behind its releases. "Management indicated titles scheduled for launch in F4Q (March) are progressing well and should garner high quality ratings (e.g., Bad Company 2, Dante’s Inferno, Mass Effect 2); however, heavy competition early next year may require more aggressive marketing initiatives," Sebastian said. He also noted that EA is looking to integrated technology and outsourcing as a way to bring down its R&D costs.
Finally, Sebastian also pointed out that games like Madden appear to be selling a bit better now, following a weaker than expected start. "While we believe these two key EA F2Q franchises [Madden, Need for Speed] continue to track below plan, our most recent channel checks indicate sales may have firmed a bit at retail, in part due to the hardware price cuts, and also a more visible ad campaign," he said.
