What Is Electronic Arts Doing Wrong?

| About: Electronic Arts (EA)

For very many years Electronic Arts (ERTS) were the biggest game publisher on earth. They have an income of billions every year and they employ thousands of people all around the globe. EA are very important indeed for the video games industry. But they are no longer undisputed number one. The marriage of Vivendi and Activision (NASDAQ:ATVI), fed by the cash cow that is World of Warcraft, with mega hits like Modern Warfare and Guitar Hero and very ably led by Bob Kotick, are now probably established at the top of the heap, especially when it comes to profit. (Amazingly they were bankrupt in the early ’90s.)

So again, very unsurprisingly, Electronic Arts have issued more bad financial results (Conference Call Transcript). They lost $82 million in the quarter ended 31 December (the best time of year for video games!). Their stock price took another hit. They can’t blame the industry, big global publishers like the aforementioned Activision, and also Ubisoft (UBI) have done very well indeed. Even Sega (OTCPK:SGAMY) have managed to get themselves back into profit. I have written about EA’s problems on here before. Repeatedly.

So what is going wrong?:

It is not all doom and gloom. The losses are less than they were. The management are cutting out the non blockbuster games. EA moved away from licensed products, so they have built up the beginning of a portfolio of good IP that they actually own. There are huge economic advantages of scale in publishing, which positions EA very nicely indeed. The world’s consumers will spend more on games in the future than they are now. The next generation of home consoles will reward those with enough clout to invest heavily in middleware. And EA do have some excellent employees.

So where does the future lie? I still think that EA are a prime M&A target. They would make a perfect acquisition for Microsoft to give them ammunition in their console wars against Sony and Nintendo. They, too, would be a perfect fit for Apple, if and when Apple launch their own home gaming console. To both of these companies EA would be far more valuable than it is for its current stockholders. And both of them have the cash sitting in the bank to buy EA with ease.

Disclosure: No positions