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Summary

  • EA's packaged goods revenues have been in decline the past 4 years, while is digital platform revenues have been steadily increasing.
  • The online platform is helping to create a more direct customer-publisher relationship, not just from a customer service standpoint.
  • The online/digital space will strengthen EA against used game retailers.

Packaged games flying off shelves used to be the only way to determine whether a publisher was producing hit titles. However, digital games are slowly replacing that archaic notion.

The great thing about digital titles is the cost of the games directed to the consumers is reduced which in turn increases sales of games. Margins are generally much higher. With packaged games, publishers have to fight for shelf space and take into consideration the cost of the physical format such as the disk and case.

In the 2010, Electronic Arts (NASDAQ:EA) acknowledged that the consumer trends are shifting away from the traditional physical product to the digital interface such as online and mobile game. This is the reason EA has made a push to offer many of its physical products as a digital download.

The past four years highlight the trends between the packaged goods and the digital platform. I have not included the distribution revenue as I find that immaterial.

There are a few things to notice. The digital platform has seen a significant rise and its composition of total revenues has been steadily increasing every year.

(Source: Self-made using 10-k data)

Also, it appears that EA is creating a symbiotic relationship between its physical and digital counterparts. For instance, EA's FIFA and Madden series, which have traditionally generated a bulk of EA's packaged goods revenues, have helped generate over $380 million in 2014 with the Ultimate Team game modes DLC.

This trend toward digital games/offerings is likely to continue in the future. In 2012, EA president Frank Gibeau made the claim that the future of video game publishers is 100 percent digital. His colleague, EA's COO, Peter Moore, predicts EA's digital revenues will surpass physical revenues two years from now. Given the company's historical result, the scenario is not too farfetched.

Mr. Moore stated that the online capabilities help EA to create a direct customer relationship. I really do think he is on to something. When a customer used to purchase a game, they would go to a retailer. The entire experience was in the physical format. If there were any bugs or glitches in the game, it was never fixed. Nowadays, if there are any technical problems it is addressed with an online patch. If the game sells well enough, the publisher extends the experience of the game through a DLC. Thus, the publisher now has an opportunity to directly earn the trust of its customers and boost revenues with without having to invest significant resources on another game.

In addition, the online/digital platform will strengthen EA against the used games retailers. Used games revenues do not go back to the publisher but to the store that sells the games. These stores have plagued numerous publishers since their inception. Gamestop (NYSE:GME) is the prominent seller in this category of physical space. However, Gamestop's model may not last for long, and could possibly vanish like Blockbuster video stores. EA has taken steps to thwart Gamestop's business model such as charging users for online access.

Conclusion
EA has shown that its strong franchises translated well into the digital space and have the potential to generate much more revenue than their physical counterparts. In this respect, I think EA has shown that it is one of the top publishers that will be able to survive in the digital revolution.

Source: Electronics Arts Embraces The Shift To The Digital Platform