Electronic Arts Inc. (NASDAQ:EA)
June 12, 2013 11:00 am ET
Blake J. Jorgensen - Chief Financial Officer and Executive Vice President
Frank D. Gibeau - President of The EA Labels
Peter Robert Moore - President and Chief Operating Officer
Good morning, everyone, and welcome to EA's E3 Investor Breakfast. I'm Rob Sison, Vice President of Investor Relations.
The following presentation and panel discussion may contain forward-looking statements, which involve risks and uncertainties. Such -- actual results may differ materially from expectations. As such, please note the Safe Harbor on the screen and the risk factors on Form 10-K for the year ended March 31, 2013, which is on file with the SEC.
With that, let me introduce Blake Jorgensen, our Chief Financial Officer of Electronic Arts.
Blake J. Jorgensen
Thanks, Rob, and welcome. Good morning to everyone. Thank you for coming. I thought Rob was going to add to the Safe Harbor that you risk having your brains eaten by zombies if you come in the room. So I appreciate everyone coming here early this morning to go through a little bit on the updates of Electronic Arts. This morning, we're going to try to cover off on a series of components today about the markets, talk a little bit about what's going on in the marketplace. Frank will get up and talk about our product strategy, and then I'll come back and talk briefly about our financials.
If we take a look at the interactive market, this is something many of you have lived with over the last 7 or 8 years as we've gone through this cycle. The interesting thing about this cycle is massive growth in all components of the business, in particular the PC part of the business, that's the lowest part of that chart, and the mobile part of the business, the upper part of the chart. The console business in the middle has seen growth and decline as you would typically see in the tail end of a cycle, but overall, the market during this last cycle has gone on from $25 billion to what we estimate to be around $60 billion now. And most interesting of the entire graph is the fact that 20% of the market was digital back in 2005. Over 70% of the market is digital when you look at the PC and the mobile component most particularly.
If you look at the growth of the digital mix over that time frame, you can see that the key parts of that have been really driven by both PC and mobile. I think most people think of mobile as a critical component of the digital growth, but they have not thought about PC as much, huge component of digital growth and a big driver for us going forward. We see that mobile and digital and handheld are all driving increased number of gamers into the marketplace, both casual gamers, as well as serious gamers, and continuing to see innovations in the business model servicing the digital growth part of the business.
This is a chart, I think, many of you have seen, and some of you may have seen it in multiple cycles. But if you go all the way back to the original PS1 and Xbox, you can see the start of that cycle back in the '90s. And in each cycle, we've tended to see growth in the console business. But in each cycle, we also tend to see a peak and trough in those businesses. And right now, we're at the trough part of the most recent cycle, where we expect to see strong growth over the next couple of years as we roll into the new consoles. Interesting component here as well, in the console side of the business, we've gone from virtually no digital business at all to very small amount of digital businesses to now roughly 10% of the console business going digitally. We believe that has huge upside to it in the future console cycle as we roll into it.
With that, I would like to turn the time over to Frank Gibeau. Frank, as all of you know, is the President of our labels, and he is going to talk a little bit about the product side and why we're excited about 2014.
Frank D. Gibeau
Thanks, Blake. This morning, what I'd like to do is walk you through 4 strategies that we're employing in our studios to drive both margin and quality inside these market conditions. We see a tremendous growth opportunity happening over the next several years. We're making several moves as it relates to our development model, our portfolio, our engine technology and of course, our digital services to maximize those things. Let's start with our model. Our model is essentially a multi-platform, fully connected development model. In order to see how and understand how it's employed, what we're going to do is walk you through a little bit on each of the user scenarios or how customers play and understand each of the components of that and then how we bring it all together.
The first scenario is the living room. It's the console experience. It's the console that you traditionally know as Sony, Microsoft. It's an experience that is controller-based. It's about extended game sessions. You sit down on the couch, you play for extended periods of time, well over an hour. It's a place where you have a very large and vocal core community of gamers. It's also a market that employs primarily a premium business model, but it's starting -- new models are starting to emerge like microtransactions, subscriptions, and it's largely a Western opportunity for us.
The next user scenario or platform that we consider when we're developing games is the mobile gaming platform, and this is tablets and smartphones. It's Android and iOS predominantly. It is absolutely a touch control device. So when we're building a game there, we have to start by thinking about how it's great from the touchscreen out. It is very much quick sessions. Session lengths here are measured in minutes, with multiple sessions per day. It's a mass market 8 to 80 opportunity, men, women, very globally diverse, and it's all premium at this point in terms of how we're going to market. The premium business model for mobile devices has really been taken over by freemium offerings.
And then finally, what Blake talked about is the PC, a very fragmented market when you look at how it's currently configured worldwide. It's basically Windows and Mac, but it's very much a keyboard-and-mouse environment, very different than the other 2. Very interesting that you do have quick sessions where people pop on a break, play a quick game, but then you have also a very core community that will play for hours and hours. Primarily, it's been a premium business model market. But over that period of time from 2005 to now, freemium has now become the primary business model for the PC, especially in Asia and emerging markets. It is a broad-based opportunity for us, meaning that it is very global and it is very diversed demographically.
So we think of these scenarios and these different attributes when we're working through each of our games and we're thinking about our portfolio. We bring it all together in the following development model, which is focused on providing a customer with an experience with what we call a brand universe. It starts with FIFA, Battlefield, The Sims, take any one of the products that we build. And we express it and build it so that it works across multiple platforms. And ultimately, it's connecting with a single user using the technologies that our CTO, Rajat Teneja, is building, and it has an opportunity for us to connect these platforms.
And why that's important is that, right now, gamers have up to 5 game-enabled devices in their lives. And what we found through telemetry and analytics based on what we've been building over the last of years is that if we connect the customer across multiple platforms, we see lifetime values of that customer 2 to 3x higher than if they're on a single platform. That's the insight that's driving our goal here as it relates to multi-platform and looking at how we bring brand universes to life across multiple platforms.
Some of the figures there on the slide call out the size of the audience that we're currently entertaining. We have over 3 -- or almost 300 million names inside of our databases that we have great relationships with and have the ability to contact and bring in the new franchises, as well as reacquire efficiently for new product launches. We are currently serving 2.5 billion game sessions per month inside of arranged structures, and that's a conservative estimate. We actually think the number might be higher, but that's the numbers Rajat signed up to. And then, of course, we've been looking at game installs. We have over 2 billion game installs out there in the marketplace with varying levels of interactivity and connectivity.
This is how this starts to manifest itself inside of a gamer's life. This is a real scenario, and this is what you'll be able to do this fall in Battlefield 4. When you wake up in the morning, you're going to grab your smartphone, you're going to log into Battle Log, which is our social layer inside Battlefield, and you're going to be able to check your stats, see what your friends are doing, understand what the news is. You're going to have a cup of coffee, maybe you'll drop into the PC and have a quick multiplayer session, pull up a quick match, play for 10 or 12 minutes.
You're then going to get on the train, go to work, and you're going to be able to pull up your tablet and you're going to able to watch the forum and news and understand what's coming next inside of Battlefield premium service, a new expansion pack, a new weapon, looking at your load-out through your soldier. At lunchtime, you're going to actually engage with a bunch of people playing on the Xbox 1 or on the PC through your tablet in Commander Mode, something that we're demonstrating on the floor at our booth that I'd love for you guys to come stop by and see. It actually gives you the ability through a tablet to play the game and engage with other players.
On the way home, you're going to start pinging your friends to set up your clan match for that night, and then, you're going to drop in front of the television, hopefully with a beer, and you're going to play, for a few hours, Battlefield. All of those instances are all connecting back to our back end and all -- and through our single user ID. So we know what they're doing, we understand how they're playing, and we're going to give them opportunities throughout their day to access our game. So it's being able to access our brand universes anytime, anywhere on any device that you want. It's a pretty powerful concept, and it's actually working right now. It's working in FIFA, it's working in our different properties, Battlefield 4. Again, this will be the user scenario that you'll see this fall.
The next strategy that we're employing to drive quality and margin is building a portfolio of powerful IPs, both new and proven brands. As you know, we've adopted a Fewer, Bigger, Better strategy over the last several years, where we've been bringing down our title count while increasing the output and leverage inside of those titles. In fiscal '14, that gives you a total title count of around 11 on PC and HD, as well as 14 titles on mobile. And one thing I you would remind you is that we have many, many live services that we have launched in '12 and '13 that continue to operate into '14. So it's not -- these are new titles of our releases, not existing services that we continue to maintain, much like The Simpsons. This title count will increase going forward from here as Gen4 continues to expand and grow.
We segment our IP portfolio in the following ways. We think about existing proven IPs that are wholly owned, and it's a pretty powerful list. It starts with Battlefield, Need for Speed, Mass Effect, Dragon Age, The Sims, SimCity, Plants vs. Zombies, Bejeweled, Real Racing. These are 100% wholly-owned IPs from Electronic Arts, and they're in a great position in terms of their health and their future growth opportunities in front of them. We balance that with proven license properties, predominantly in our sports business, but also with key opportunities like Tetris, Monopoly and as well, The Simpsons. In sports, it's the biggies, it's FIFA, it's Madden, it's the NBA properties.
And so we look at how we make the big bigger, our existing franchises. But at the same time, we want to constantly refresh our portfolio and bring in new IPs. The new IPs that we talked a bit about this week, about Mirror's Edge and also the Command & Conquer properties. We have Ultimate coming back on mobile devices, and we also talked about Star Wars, UFC and Titanfall. There's probably another 5 or 6 IPs on here that are wholly owned that we have not announced yet. Just to give you a sense that we're continuing to build new intellectual properties as we look at how the Gen4 platforms, mobile and PC, unfold over the next several years.
At our press conference, we showed you a pretty powerful lineup of IP, and we've had a great reaction this week. It starts with Battlefield 4. This multi-platform shooter is reaching new heights of excitement and new technology. We're very excited about the opportunity this fall with Battlefield 4. Also, our Need for Speed Rivals product that we demonstrated is on the form playable on the PS4. It's getting a great response, and we believe that we can grow Need for Speed well into the next generation.
In sports, it starts with FIFA, our largest franchise inside that brand. You'll be able to go inside our EA SPORTS lab on the floor and see the new technologies that are bringing this to life on PS4 and Xbox 1. Madden, it's back, it's big. The quality of this title on next gen is really remarkable. We've had great response from our press conference. We're in the basketball business. We're shipping again this fall. NBA Live is back. UFC is a great new IP for our sports business. That won't be launching within fiscal '14, but with a new franchise for us to continue to grow sports for the years to come. Titanfall has had a great response at the show. It was at the Microsoft press conference, as well as ours. The lines to play the game are around the block and coming out of our booth. This is a great product from our partnership with Respawn.
Mirror's Edge, a cult, classic great fan reaction at the show. We're bringing Faith back in this open-world action adventure game. And of course, Star Wars: Battlefront, we showed 28 seconds of footage at our press conference, and it went to #1 on Twitter. This is the first product inside of our relationship with Lucas and Disney, and we're very excited about the potential here. And we can't forget about the zombies. We showed -- we tried a little bit of a twist here by bringing Plants vs. Zombies to the console with a new type of experience, a 3D experience that you drop into a very family-oriented action adventure game. We have very high expectations for this title, and the feedback has been great this week.
Now this show has been predominantly a Gen4 show, so we haven't spent that much time talking about our mobile business or our PC business. But I would like to highlight that we continue to add expansion content to The Simpsons. That business continues to grow, and in fact, it's hitting record weekends and daily active users and revenue each month that we go through. We have a new pack coming out around the boardwalk, and Homer gets to go to the sea -- to go to the beach.
Real Racing is off to a great start. We're coasting through 20 million to 30 million installs at this point, very broad base of users. It's a very strong franchise for us that we'll continue to grow over the next several years. Plants vs. Zombies 2 on iOS, tablets and mobile phones will be launching in the near future. We have very high expectations for this game, and it's coming together very strong. And of course, we've announced a new Bejeweled coming this fall. That will get into the casual category in a more significant way. It would be able grow from the great business that we've created inside of Bejeweled Blitz.
On the PC, The Sims 4 has been announced and has had a terrific fan reaction so far. You'll learn more about this game at games con. And we have Command & Conquer free-to-play running on Frostbite 3 tech. That was going to be going into beta in just a few months, and you'll be able to play that game and experience a re-imagination of the great RTS franchise that we've built way back when.
The third strategy that we're going to drive quality and margin is our new engine tech, and it's really focused on driving quality and efficiency and margin. The path to these 2 engines, EA Sports Ignite and Frostbite 3, has been an interesting one. We, at one point, had over 20 different development environments inside of our studio, which was highly inefficient and very costly, and we've taken a very aggressive action to consolidate around 2 core technologies that are built for Gen4 and will be able to last us for the whole cycle. And that is with EA Sports Ignite and Frostbite 3. Both of these engines really have proved themselves this week with the quality of the imagery and the quality of the gameplay that they've been able to provide.
The efficiency that we gain from this is tremendous. In the past, it was very difficult at times to move personnel from 1 project to the next because they would have to learn a new engine. In this case, we're able to move people seamlessly from 1 project to the next. It helps us manage our account and our workforce much more effectively. These platforms will stay -- or these engines will stay proprietary to Electronic Arts, and we believe that we will be able to evolve them over the long term into very powerful engines that will last for years.
The last strategy that I'd like to touch on before we go back to Blake and Q&A is the fact that we are moving to games as a service as our business model. We no longer release packaged goods, fire-and-forget products. We no longer release premium versions of mobile games that don't have a service component. Everything we build has a service component that has an ongoing relationship with the customer. And that extension of the service is a powerful idea, and we're seeing it happen inside of key businesses like The Sims, FIFA and Battlefield. The black line that you see on this chart is daily active users for FIFA. The white line is a non-games as a service chart on the daily active users.
Typically, in the past, what you'd see is most of the action would happen in the first 30 to 60, 90 days, and then it would taper off and the game would be basically no longer an active community and essentially, dormant or inactive. With FIFA, we're 10 months in and we're seeing our highest peaks of DAUs inside of the service. The same is true with Battlefield. The same is true with The Sims. This gives us the opportunity to have an ongoing relationship with our gamers to give them more opportunities to play episodic content, to employ new business models like Battlefield Premium or microtransactions as it relates to FIFA Ultimate Team.
But what's most key to this is the fact that we hold onto customers longer, they play the games longer with us, and by giving them access to these universes through multiple devices, we develop a very rich and powerful relationship with each of those customers. And this is a platform and an idea that has worked for us in practice and in action over the last several years and is being expanded across our entire portfolio going forward. You have already seen Ultimate Team make its way into Madden last year, and we'll continue to expand it. And you're also starting to see further development of online services as it relates to our RPGs and action games. Blake, in his section, will give you a sense of what this looks financially and how it's impacted the our overall shape of our company.
So in summary, we're going to continue to drive the company forward on quality and margin by employing those 4 strategies: a connected multi-platform development model; a powerful IP portfolio of new and original IP; new engine tech that will last a full cycle and provide world-class gameplay and graphics; and then finally, making all of our games, games as a service that extends the life and engagement model with our customers. And with that, I'll hand it back to Blake.
Blake J. Jorgensen
Thanks, Frank. Very exciting, particularly when you look at the longer-term new IP, as well as the current opportunity around our product set. I think most of you know the guidance we've given for 2014, but I thought I'd give a little color to that. First and foremost, we finished 2013, our fiscal year, at $3.797 billion, and we've given guidance to $4 billion for 2014 fiscal year. The big drivers in that are the product slate that Frank walked through, and in particular, Battlefield 4, which will come out at the end of October. As everyone knows, we did not have Battlefield in 2013, and so a major driver in the comp difference is purely the Battlefield 4 component. But along with that, we've got a strong sports calendar, and much of that growth will be driven by FIFA within the sports calendar as it continues its global strength.
Most of our product for 2014 will be in Gen3. The sports products will all ship before the new Gen4 boxes. And as many of you know, the sports games are played in groups, and so many people will continue to play those on Gen3 for the sports season. And then, Gen4 will probably be stronger for us in the tail end of the year and then as we move into fiscal '15.
If you look at our digital revenue as part of the overall business, you're continuing to see the growth of the digital business. We show here fiscal '10 through our forecast in fiscal '14, and you can see 31% cumulative growth in the digital components of our business. I think, as most of you know, we break that into 4 key areas: mobile, extra content, subscriptions and full game downloads. The note that's critical here, as you can see, the massive growth of the extra content part of our business, as well as the emergence of mobile as a critical component in the growth our digital activity. Most of the full game downloads are still driven by FIFA on -- or excuse me, PC business that includes Battlefield and The Sims, so SimCity and Sims 4 going forward or our large PC titles, and Battlefield has also been a large PC title. That's the bulk of our full game download business. As Frank mentioned, the extra content business and the subscription business are being driven by core properties like FIFA, Battlefield, as well as many of the other properties that all have extra content as part of their overall mix for the consumers, and as we're seeing those products stretch out in lifetime beyond simply the disc being shipped or the original download being completed.
So if you look at our overall financial picture, historically, you'll see a couple of key things that are critical for us going forward in the future. First, the expansion of our gross margin. This is directly linked to the digital business that we just showed you and the growth in the digital business. We've seen our gross margins grow from roughly 55% to now 66%, driven by the digital components that are obviously delivered at lower cost and better margin profile for us.
As part of our history, we've seen operating expenses climb and actually counterbalance some of the benefits that we have from our gross margin expansion. But as you know, from our activities that we've been focused on for fiscal '14 and beyond, we're actively working to bring down the operating expenses, and we are expecting for fiscal '14 an operating expense level that's flat to overall expenses in fiscal '13, which will help us drive operating margin expansion during the year. And as you can see, we're forecasting $500 million in operating income during the year and an operating margin now approaching the 13% to 14% range that we've talked to investors about. We are continuing to focus on this activity of improving our operating margins, while, at the same time, building out very high-quality, exciting IP. And we think this is a great combination for future shareholder value growth.
With that, I'd like to summarize it and then open the floor for some questions. We're well positioned, we believe, for the future, particularly for next generation, with all of our great titles. We're driving leadership in digital. We don't think anyone else has a broad a platform digitally as we do. We're continuing to focus on improving our margins to really drive our cash flows and growing those cash flows over time and doing everything possible to continue that trend as we move forward.
What I'd like to do is invite a couple of members of management up on the stage. We've got Larry Probst here, who is our Executive Chairman. We've got Peter Moore, our COO. We've got Rajat Taneja, our CTO, as well as Frank and myself. Also in the audience, we have Gabby, I think she'll join us on the stage, our Head of our HR and Facilities. And we've got Andrew Wilson and Patrick Söderlund who run our sports and our games businesses here as well. So we're all open for questions. We hope -- we've spent about 30 minutes going through that, and we hope -- I forgot, Joel Linzner there in the dark, our Business Development Head and Legal Head. Thank you.
So with that, why don’t you bring the chairs up and turn the lights up and come on up on stage here team.
Blake J. Jorgensen
All right. I think everybody knows everybody. But Rajat's in the middle, Gabby, Peter, Larry, obviously, Frank and I. With that, questions? I'll sit down and just receive it right here. Okay, someone is going out there. Grab the...
What's your take on used games? It's obviously been a very controversial topic. Where does EA stand on the topic?
Blake J. Jorgensen
Frank, why don't you take that.
Frank D. Gibeau
Yes. Certainly a topic of discussion this week. Look, EA has a position of looking at used games from a very much a customer-first standpoint or a gamer-first standpoint. Microsoft released their policy last Friday, and as well, Sony gave a bunch of information earlier this week. So we are formulating our strategy and our policy based on the information that they released. So we will come back to you with a summary of what those strategies will be. But in general, what I'd like to make you understand is that we will definitely be looking at gamer first, and we'll create an opportunity for us to continue to use -- have relationships with used gamers such that it's a very positive experience.
Can you talk a little bit about the forecast for this year, very little digital growth relative to the kind of growth rate that you've put up the last few years? And presumably, going forward, is there something unusual about title release schedule or why the number would seem somewhat conservative on the digital growth for this year?
Blake J. Jorgensen
Yes. We've got a couple of factors in play here. If you remember, last year, we recognized, in the fourth quarter, roughly $125 million of Battlefield 3 Premium. This was the Battlefield 3 service component that was shipped starting with the Battlefield, and we fulfilled a commitment to game users by shipping, every quarter, a new expansion pack for Battlefield 3. We recognized that all at the tail end, once we have delivered all those packages to consumers. And so in some ways, it expanded our digital revenue during the FY '13. We have not yet announced the Battlefield 4 Premium. But either way, since Battlefield 4 ships in third quarter, even if we had a premium service, most of that would fall outside of the year. And so you're seeing that as a year-over-year comparison. The second piece of the puzzle is that Battlefield, since it didn't exist as a full game in 2013 and does in 2014, it will be a fairly large both packaged goods and digital business, and the large packaged goods component somewhat masks the digital growth because it's such a large title for us. Those 2 combinations put a slight damper on the overall digital growth, but we'll still see very strong growth in the mobile component, in the full game download component and the extra content component.
With the next generation, do you think there's a pricing opportunity or do you think downloadable content is the best way to monetize the game?
Blake J. Jorgensen
Peter Robert Moore
Yes. I think it's the latter. We announced -- we're aggressively getting after the preorder business coming out of the momentum we had on Monday's press conference. And so if you go online, you're seeing a $60 price point for a next gen product for us. I believe is that we'll add to that with DLC full game downloads, of course, which Microsoft in particular announced, allowed us -- day-to-day download of our content will allow us to be able to deliver digital aspect of that business very aggressively. But looking at the customer more from an ARPU perspective rather than a packaged goods perspective, we think there's a great opportunity to get $70, $80, $90 from that consumer. But upfront from the clients, it's a $60 price point.
Could you disclose the gross margin for the various digital businesses, mobile, full game downloads, subscription, where it is right now and kind of where you see those trending longer-term targets?
Blake J. Jorgensen
Yes, we don't break out gross margin by each of those businesses. But what I can tell you is, in general, our gross margin for digital is substantially higher than our gross margin for packaged goods. And you can see that in the trend that's going on, 55% to 66%, so you should assume that gross margins in the packaged goods business are in the low-50s and gross margins in the digital business can be as high as in the 80s. It doesn't vary dramatically by different components of that digital mix. All of them are strong gross margin contributors, and we'll continue to see that push gross margin upwards as more and more of the business goes digital.
You mentioned the path towards operating margin expansion for fiscal '14 and beyond. Can you just talk about -- if revenue was flat, let's say, for the next 2 or 3 years, could you still expand operating margins? How much of the operating expansion is dependent on revenue growth?
Blake J. Jorgensen
Yes, so we're working our focus on real expansion without revenue growth. Obviously, we're focused also on revenue growth and using our products to drive that. But part of what we're trying to do internally is drive efficiencies around marketing, around R&D and around G&A expenses. So we can continue to see operating margin growth even absent the growth of revenue. Frank detailed the use of the engines inside of the games and sports labels. That's driving real savings across all of our R&D components. We're being very careful with future IP and make sure we're green lighting things at the right time and not overexpanding our footprint in either digital or social or some of the components of the -- excuse me, mobile or social and some of the components of the digital business. And we're working diligently on how to consolidate more of our marketing efforts and really move to more -- move away from some of the traditional marketing into more 1-to-1 marketing with consumers because of the connection we have with those consumers. We believe all of those will continue to help us keep our costs down over the next couple of years, independent of the top line growth. And then, with top line growth, we believe that even fuels margin expansion to that much greater level.
Now that we have some of the console news out in the public domain, can you talk about some of the things you like about the console news that we've heard this week and some of the things you think might be headwinds or have been disappointing?
Blake J. Jorgensen
Frank D. Gibeau
Overall, I think that Sony is having a great show. I think that they've done a very good job putting the right mix of services, policies, price points and capabilities together, and we really like the reception overall to all the consoles that have been demonstrated this week. But Sony is really striking the right balance. Microsoft has shown some very killer capabilities that we've known about for a while, and we're able to demonstrate. But I think if you take a step back, what's really awesome is the fact that people have stopped talking about whether the Gen4 consoles are going to be a big enough growth driver. They're really identifying that they are, they're proving that. And people are talking about how things are going to unfold this fall. So we really like what we see in the capabilities. We like the reception. We think that Sony has had a good show.
As you guys think about the console transition, what do you see are the biggest risks for your fiscal '14 revenues? And then, how should we also think about fiscal year '15? Just give us the high level.
Blake J. Jorgensen
So clearly, the big risks on '14 have less to do with the console transition and more to do with the key products. Most of our sports products ship in the September, early October time frame. And people tend to play the sports products along with the sport themselves, and they tend to play them in groups. And so all of that together means that most of those titles will ship on Gen3 before the real Gen4 boxes all roll out at Christmas time. In terms of the risks, clearly, we were riding a lot on Battlefield. We think we've got an amazing reception to the product. Most of you have got a chance to see it. If you haven't, go by our booth and make sure you get a chance to try to play. I've talked to a few people yesterday that played, one that only lasted about 8 seconds in the mix, he's got to back and work on his controller skills. But at the end of the day, I think you'll see that the Battlefield product, while we're expecting a lot from it, should really be able to deliver. We're also relying on the continued growth of our FIFA franchise. But we know that the sports business, because of the end -- of the tail end of the Gen3 world, will be somewhat muted. And so we're feeling fairly strong about the overall guidance we've given. We're not giving guidance for '15 yet. But as you can see, Frank and the team and Peter and the team announced some exciting titles that will come in '15 like UFC, like Titanfall, like Dragon Age. All those will be great additions to our product mix for fiscal '15. Peter, I don't know if you have anything to add to...
Peter Robert Moore
Yes. I think, to Blake's point, my team in the field around the world are looking at next gen as a huge opportunity, but we're probably going to enjoy it for about 120 days of the fiscal year. Still a great focus on current gen. Our plans call for us -- probably for every next-gen title we sell, it's probably going to be 4.5 to 5 units of the same title on current gen. As we roll into FY '15, as the installed base of hardware grows, we get our attach rate up, then we're going to see the full benefit of what we're seeing right now with the launch of the Xbox 1 and PlayStation 4. But a lot of focus on making sure we deliver Battlefield 4, a lot of focus on FIFA and a lot of focus on making sure that we deliver the downloadable content that's available in both of those games to be able to drive the top line revenue. So less of a risk for us this year in next gen, a lot more reliance on that in FY '15.
With some of the lean-back trend in the Android and PC area coming up, do you expect to bring the sports franchises to that platform?
Frank D. Gibeau
Yes. We have very clear plans for both mobile and emerging market PC for our sports franchises. They have very broad-based appeals in the cases of FIFA, UFC and others, and so we have efforts underway right now. We believe that we can make sports a killer app on the mobile devices, and we believe that there's a big opportunity in free-to-play as it relates to emerging markets. We have a very strong product in Korea with FIFA. That's been a huge success for us over multiple years. We're going to try and replicate that success especially as the World Cup hits Brazil. And in some of the other markets, we see a big opportunity.
One of the things that tripped you guys up a little bit during the last console transition was ultimately making bets on which consoles were going to succeed, which weren't. Seems like you're doing a little bit of that again with Titanfall in making that exclusive on Microsoft. I guess, if you can talk a little bit about the decision-making process, making that an exclusive game and what assumptions you're making, if any, with regards to sort of how the manufacturer kind of console battle is going to play out.
Frank D. Gibeau
I'll start on that. I might characterize the last transition slightly differently, which is I think we made mistakes in technology management that put us a little bit behind where we wanted to be. We tried to deploy a different kind of technology at that time called RenderWare that didn't work. And we learned from that, and for this cycle, we've started early on Ignite and on Frostbite 3 and de-risked the technology engine component of making the transition. So from the standpoint of picking the wrong platforms, I think we did a pretty good job there but we've mismanaged the technology. That's not happening this time around. When you look forward in terms of how things are going to unfold, I think a key thing that's considered here is that we are a platform-agnostic company. We've been that way for 30 years. We're going to continue to be that way. We have a very balanced portfolio across both Sony and Microsoft. FIFA, Madden, Battlefield, Need for Speed, our entire lineup is going to be deployed on both platforms. So strategically, we're going to be multi-platform, platform-agnostic, and our history shows that we go where the audience is, and so we will do that. However, there are tactical opportunities from time to time on a title or on a service component like DLC pack that we do enter into a relationship with 1 or 2 of the first parties on that particular opportunity, and we'll execute on it. Titanfall is an example of that, where it's a product that came in through our EAP group. It's a partnership with Respawn. And there was an opportunity for Microsoft, EA and Respawn to create a tactical opportunity to make Titanfall exclusive to Microsoft. But if you look at our entire lineup beyond Titanfall, it's really focused on being multi-platform. And over the life cycle of these, we're not tilting one way or the other. We're very balanced, and we're going to continue to support both equally.
Can you just speak a little bit about the technology capabilities that the new platforms have, which will allow you to do things that you couldn't do before? What are you most excited about? And any differences in terms of the technology from Sony versus Microsoft that you find more or less appealing?
Yes, I can start on that. We are very excited. This is a gigantic leap for the industry, as you've seen with the demos this week. Both Microsoft and Sony have adopted very high-end silicon and constructed it in a very unique model using a systems-on-a-chip architecture, which makes both the CPU and the GPU and the shared memory that they access very high end, giving a lot more compute, graphics and connectivity capabilities to our games. So it's a path where we would have to ration some of these capabilities as we did motion, as we did clothes, as we did rendering, as we did living world. We can remove those rationing of resources and begin to really open up the potential of the games. When you combine that with the connected aspects of these consoles and the new ways to interact with them, for example, with deep 3D perception, musculature for things like Kinect, there will be so many more ways we can entertain our consumers in the future.
Frank D. Gibeau
Let me -- I'll add a few things to that. We're really excited about the fact that it's about 8x faster than last gen. We're going to be able to create experiences that are going to be 60 frames a second, 1080p. We're going to be able to use the memory to have real-time physics, so you'll have much more lifelike experiences. Characters will look and feel more human. The worlds will be larger, they'll be dynamic. We'll be able to -- in the case of Battlefield 4, we knocked a skyscraper down right in the middle of the game. That's kind of stuff you just couldn't do on Gen3. So from a fidelity standpoint, from a depth standpoint, these experiences are going to feel really dynamic, really alive and really fresh and much more lifelike. We're very excited about the connected capabilities of both machines to help extend the games-as-a-service model that we've adopted. And we see great ways to increase social engagement models for our customers there. Last time around, the 2 platforms were radically different, very different architectures on Sony and Microsoft. We had to do a lot of rework between the 2 in order to get product out simultaneously. So there was a lot of incremental cost to get a 360 and a PS3 game out. Now the architectures are more alike than different underneath the hood. Now they do very different things with them. But at the core, using Ignite and Frostbite, we're able to gain a lot of efficiencies based on having the architecture being more similar than different. And in fact, if you look at R&D in the last transition, it was up 30% year-on-year through the transition. And this year, we've guided to flat to slightly down. So I think that's an indication of our confidence in how technology and the similarity of the underneath-the-hood architectures of the systems is allowing us to releverage and create margin.
In an always-engaged environment that you're referencing, you talked about it with Battlefield 4 throughout a given day. Can you talk about the monetization opportunities above and beyond the $60 price point? Are you looking at a subscription services-type engagement model? Are you looking at you buy the Commander product individually and you get all these other facets to it? Can you talk to the pricing model as it relates to maybe Battlefield 4, but what it means longer term to the business in this always-engaged format?
Peter Robert Moore
Sure. So Battlefield is a great example, and we have a similar slide, we can do the same with FIFA, in which this 24-hour-a-day engagement with the consumer across multiple platforms fits into their lifestyle or whatever opportunities they have to play a game in any given day. We had, of course, huge success with Battlefield 3 Premium. Two things that it did for my team on the ground is that it allowed us to continue to sell the Battlefield 3 client for the best part now of 18 months. The engagement levels started to grow, which is the opposite of what we've seen traditionally in this industry, with more and more people playing the deeper we've got into the cycle of the game itself. Battlefield, when it came out, obviously was a $60 client. You add in a $50 Battlefield Premium subscription service that was 5 map packs over about a 12-month period, and you get attach rates of 20% to 30% over the lifetime of that. You can do the math. You book a FIFA, for example, as well on top of that, and you've got again a $60 client. And it holds its price incredibly well. It's a tremendous catalog product. Those of you who are looking at the charts last week saw that FIFA '13 was the #2 title last week in the U.K. It shows the power of what we do with a sport that's 365 days a year almost. The ability for us to be able to do the add-ons, to your point there, is focused on FIFA Ultimate Team. It's a mode that sits on top of FIFA that allows you to be able to buy and trade players, stadiums, chemistry, managers, cultures. Everything that allows a football fan, a soccer fan to be able to build their ultimate team. It's a multi-hundred million dollar opportunity each year for us on top of the core client. And as we get closer, and pay attention to Frank's comment of Brazil World Cup 2014, with our FIFA relationship, even bigger opportunities then to be able to leverage that as we go into emerging markets, where that type of behavior, DLC, microtransactions, subscription services are more prevalent than we see in the Western world. So we tend to look at our consumer as something to be engaged 24 hours a day, 365 days a year. It's a games-as-a-service mode more than it is simply selling plastic nowadays and our ability to deliver fresh content not only in the console business, but you saw a good example with The Simpsons: Tapped Out. As we deliver more and more content that refreshes the experience of the consumers on mobile platforms, it gives us a greater opportunity to deliver digital and thus, to be able to enhance our margins, as Blake mentioned at the outset this morning.
Blake, you have a couple of titles -- 3 or 4 titles, I think, coming out, where -- both current gen and next gen, but the current gen version's come out ahead of the launching of the consoles. So can you talk about what the implications are for the marketing expenses related to those launches? Are you splitting it between the 2 or does it ramp up? And what are the implications for your operating margin targets?
Blake J. Jorgensen
Yes, it's a good question. And I can start and Peter might want to add in. But the core marketing for the products will be in the Gen3 announcements and Gen3 introductions of those products, particularly because they're kicking off at the same time the sport seasons are kicking off. So with Madden, the start of the football season; with the FIFA, the start of the soccer season. We will do some additional promotions as we roll into the Christmas season, but we were typically promoting those products as well going into a Christmas-buying season. Those will get more focused on Gen4 and the new boxes. We'll have partnerships with both Microsoft and Sony to co-promote. And so we've been very conscious of trying to avoid the double-promotion strategy and really leverage the promotion across all of the cycle from both the start of the sports cycle and through the introduction of the Gen4 boxes.
Peter Robert Moore
Yes, I mean, that's my other comment about engagement. We engage our consumer every day. We don't reacquire anymore. This is about retention. If you're buying a Gen3 product, Shawn [ph] , and I know what you're doing every day, every touchdown on that, every goal scored in FIFA, as the Gen4 product becomes available, we use more direct-to-consumer marketing, which is more cost-effective and certainly, from an ROI perspective, better than big TV campaigns that then you have to do again in November or whenever the 2 boxes are ultimately going to ship. So it's about continuing to engage with our consumer and when we want to migrate them to the next box, giving them opportunities, maybe we offer some downloadable content, some digital content that would then motivate them to move into the Gen4 environment. The great thing for us is certainly that we have changed our marketing over the years from being a major advertiser on television to being one that we still have our big franchises up on TV, but more, as I call it, put charms in the water then to attract them so we can engage with them digitally. And so the cost efficiency we have now because of the core competency of this company and building a digital platform where we can market to you directly, the 300 million people that we've talked about engaging with allows us to ride out of transition in a far better way than we're able to do it from a marketing perspective.
I have a 2-part question. One is do you see room for a fourth console to ever enter the market? And then also, if you could elaborate a little bit more on the marketing. In dollar terms, should marketing spend be flat to down? And then how do you look to tie in that 1-on-1 relationship with third parties like GameStop?
Peter Robert Moore
Yes, let's talk about marketing. Again, I've been in this business 14 years. This year, this is my 14th E3, and I've seen marketing in this environment, in this industry change radically. Because we're in the connected entertainment business, it allows us to go away from the broad entertainment-based marketing campaigns, that are incredibly cost-heavy, and move into more direct engagements. So our ability to be able to manage our marketing spend is going to be the key to our success here. Our ability to be able to manage costs, more importantly, from a variable versus fixed is something that we're very, very focused on. We now have an organizational structure that reports directly into me that's focused on delivering very efficient, very nimble, very cost-effective marketing based on the digital platform we've built and relying less on, if you will, third parties like TV networks, cable channels, print media to be able to spend outside of that, and we're keeping that internal.
Blake J. Jorgensen
If your question was, will marketing as a percentage of revenue come down, the answer is yes. Frank, do you want to talk about another console?
Frank D. Gibeau
In terms of a fourth console, there's a lot of small guys trying some different things right now, Android-based devices that have low price points, some other boxes and ideas like from Steam and Valve. Frankly, if you look at the scale economics required to put out a consumer electronic device at this power and this capability and to be able to sustain it over a long period of time, not that many people after Sony, Microsoft and Nintendo can get that done or at least have the core capabilities to do that. Having said that, we are a multi-platform company. So if a new platform comes in and it makes sense as a viable economic model, it has a big audience and more importantly, our game teams can create some really great experiences there, we'll go after it. Ultimately, we make the ammunition in the hardware wars. And so when this type of a competition occurs, it's good for customers, it's good for publishers and ultimately, I think, it grows the market, so we would -- if something viable comes along, we'll look at it, and we'll figure out a strategy. But I don't see that much room right now for dark horse fourth company to come in with a new console.
We're starting to see free-to-play mobile titles achieve revenue levels which are competitive with what a AAA console title could do, and the trend line is clearly going up there. You got a great global brand with FIFA. I'm just wondering why we haven't seen you launch a free-to-play version of FIFA on mobile. Is it because you're concerned about cannibalization of the console title? Or is there something else going on?
Frank D. Gibeau
I think that you'll be very pleased this fall.
Blake J. Jorgensen
So one more question here.
Two questions, please. Can you talk a little bit about how you're thinking about the cloud-based distribution? It looks like Samsung and LG are coming out with embedded cloud system even after Gaikai was bought by Sony. So is that something that's meaningful for you, especially because you have a cross-platform model where you will have the PC-based version of your games? And the other question is, it looks like the new-gen consoles are going to come with higher power -- computing power. But is that mainly for raising the quality of the games, but not for changing the way that the extra contents or price or means of the pricing works? Does that allow you to come up with new ways to increase the extra content sales?
Peter Robert Moore
So on the first part of the question, which was around new technologies that are emerging for bringing the cloud closer to the experience in the client, we are constantly evaluating all the technologies that are there, including with the companies that you spoke about. We are testing the various experiences that we can bring forth by using processing power that is in the cloud, by using servers that are giving us economies of scale and being able to use the appropriate power of the client that fits with our consumers. So we are constantly testing, engaging and partnering with them.
Blake J. Jorgensen
With that, we'll wrap up the morning's meeting. Thank you, everyone, for coming. We appreciate everybody's interest, and we look forward to seeing you on the floor at E3.
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