Electronic Arts: What Is the Problem?

Electronic Arts (ERTS) infuriate me. In John Riccitiello, this company has one of the most perceptive, incisive and lucid managers in the whole video gaming industry. Yet as a company they continue to under perform.

The value of shares in a company is decided by just one factor, sentiment. So it is instructive to look at the share price of Electronic Arts over the last five years. Basically it has been going nowhere, fluctuating between around 40 dollars and around sixty dollars then collapsing to 22 dollars in the recent turmoil. So for five years investors have seen no improvement in the value of Electronic Arts at a time when the gaming industry has been booming like crazy.

Other big global publishers, like Activision (ATVI)and Ubisoft, have performed much better.

There are two things, and only two things, that have value for a gaming publisher and which build profits and growth. The first is having the right people and the second is having the right IP. If you have these then everything else follows. Yet many times EA has spent fortunes buying companies only to squander the IP and lose the key staff. The new mix and match, user chooser, approach to corporate acquisitions should serve it better. But where is the organic growth? By making the best of what you already have and know well you can generate far more profits from a given investment.

I also wonder about the nature of much of EAs IP. 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 Warhammer 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. EA have moved with the likes of Rock Band and Spore. But it could move a whole lot further.

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 subscription business models. And it leads the direct to consumer charge.

Over the last year it has been trying to buy Take Two (TTWO) primarily in order to get the IP of GTA and also to get a virtual monopoly on sports games. This involved billions of dollars. Instead it could have done a Saint’s Row making its own game compete with GTA and could have grown its existing sports business organically.

And if it really wanted to take someone over then it would have done better buying the huge storehouses of IP that are EIDOS/Sci, Atari/Infogrames and Sega (SGAMY.PK), all three of whom were available very cheaply.

Now EA has announced further disastrous results. (Call Transcript) Last year the company lost $454 million, so far this year the losses are $310 million. You would wonder how it manages this on such strong sales. Its response is a 6% cut in its workforce. This seems strange to me, as an efficient organisation like theirs surely hasn’t got that much dead wood. So isn't it limiting its potential for future organic growth? Surely it would be better knocking the $50 million saving off the marketing budget and forcing the marketeers to make up the difference by being creative. That’s what they are paid for.

If staff really have to go I hope that means every executive assistant, secretary and PA before a single development person goes. And I presume that every executive is handing their frequent flyer rewards back to the company.

I still think that EA is a good long term proposition. But more than that, with a market capitalisation of under $9 billion, it is a ripe takeover target.

Disclosure: None

Comments

[Gaucho420:]

Take over target?

I can't say I can argue with that logic, given the stock collapse. But one has to wonder what one would be buying with EA? Spore? The Sims? The sporting games? I don't know...I would hope for better and newer IPs, outside of SPORE I guess.

Either EA's leaving the faucet running or the its developers are way over paid, as clearly, its costs are way out of line with its revenues. No wonder it wanted TTWO (who beat out earnings, what 5 quarters in a row now?).

It'll be interesting to see who, if anyone, makes a bid. Disney? Universal (GE?)? Time Warner? Merger with UBIsoft or someone else?

I must say the price of the shares are very attractive due to their slide, but their current weak performance is very unattractive...if EA can't make money in this environment, it speaks of severe internal cost issues and mismanagement.

2008 Nov 03 11:52 AM

[Writin_Reg:]

One word as to why EA is failing - SECUROM 7.

It could have the best games in the business, but if Securom 7 is on it - like all EA games have since last summer (2007) and you get bit by the nasty side of this draconian DRM, you are going to avoid that companies games like a plague.

Myself, I love EA's games. My now grown family loves EA games and have been buying their games and investing in their stocks since the early 90's - then they switched to Sony DADC rootkit-like DRM and damaged my pc. EA's reply is denial, denial, denial. So they are being sued by not one but three different lawsuits due to this Securom 7 and the damage it does to pcs that EA refuses to acknowledge. In fact their CEO had the nerve to call all it's buying, money spending consumer base pirates if they complained. Like we should just dismiss the fact their DRM borks new pcs, and say thank you - may I have another.

No thank you!!! I love your games EA, but don't like you very much and can't stand your DRM. So I'm not about to buy your products - anymore, and I sold your stock - thank goodness back while it was still in the high 40's. Oh and EA, I'm not alone. There are many of us casual gamers following suit.

Simply put, you want us back - drop Securom 7, but rest assured we are not going away - we just aren't buying your products, your stocks, or you BS explanations and excuses. What's more we are many and we tell our many friends.

That Mr. Everiss is what is wrong with EA and erts stock.

2008 Nov 03 03:43 PM

[Mumbles:]

You start your commentary above by saying "In John Riccitiello, this company has one of the most perceptive, incisive and lucid managers in the whole video gaming industry." Well if he is how come over a dozen very senior development execs have left EA since his return? How come all the new hires seem to be marketing people, most with no knowledge of development? And isn't the marketing budget the big new cost blowout area?

2008 Nov 03 08:26 PM