Report from Inside Electronic Arts' Shareholders Meeting

Electronic Arts (ERTS) has a history of fun shareholder meetings. Its previous CEO, Larry Probst, seemed to enjoy being in the spotlight and demonstrating new games. In previous years, he had a member of the Board play a new skateboarding game in front of shareholders. ERTS also provides great sweets every year--no real food, but the non-Costco chocolate chip cookies, mini-cheesecakes and Starbucks coffee are more than enough. The cafeteria is a few yards away from the auditorium where the meeting is usually held, and the panini I had was great. Wearing a buttoned shirt and slacks, I was obviously out of place among the jeans and t-shirt employee crowd. A group of employees was playing touch football on the lawn across from the cafeteria.

Mr. Probst was replaced by John Riccitiello in 2007. Mr. Riccitiello brings an East Coast bluntness to ERTS and is more intense than Mr. Probst. ERTS usually has a great video showing new and old games and its different franchises, such as Harry Potter, Spore, and other famous games. This year, the video seemed shorter. It was still a good video, but it's clear Mr. Riccitiello seemed to take the meeting as a more serious matter than a time to show off his company's numerous games. Some people in the audience privately complained no images of the new Batman game were shown. No live demonstration of any new games occurred.

The slides and presentation during the informal part of the meeting seemed to have two themes: cost-cutting through outsourcing, and the Pogo acquisition. ERTS has several top-selling titles, while competitors such as Take Two (TTWO) only have one (Grand Theft Auto). Riccitiello talked about cutting costs by using engineers overseas, and singled out Romania and India as desirable locations. ERTS also has workers in Shanghai and Montreal.

ERTS indicated the mobile segment was the new growth area and it was well-positioned to do well. Yahoo made a similar point in its annual meeting.

The Q&A session was brief. Only two people asked questions, including myself. One person asked about an online forum that criticized some ERTS games (I am not sure about the exact website, but the speaker basically asked about how the company responded to online criticism of its games). ERTS mentioned it had no control over the online forums but generally listens to consumer complaints.

I asked about diversity and whether ERTS was concerned about having a 100% Caucasian-looking management while its workers and employees were incredibly diverse. I received a stock answer about the company's commitment to increasing diversity. The officer pointed out there were now three women on the board, which was an improvement. Being in California and a tech company, it seems unusual to have no Asians or Indians on the Board or in upper management.

My second question was about the rumored Take Two (TTWO) acquisition. I asked how ERTS planned on incorporating a controversial game like Grand Theft Auto into its portfolio, which includes many games geared to teenagers and children, like Harry Potter, Spore, Pogo.com, Simpsons, Madden football, and many more. Riccitiello first declined to answer my question because of ongoing discussions with Take Two. I then asked him to speculate and pretend as if the company might end up buying Take Two. Riccitiello said ERTS had several Mature-rated games (MA rated), and the Godfather games were similar to Grand Theft Auto. He smartly added that ERTS was looking to increase the diversity of its gaming portfolio, a jab back at my criticism of the company's homogeneous management look.

There are a couple of problems with his comments. One, Grand Theft Auto was actually rated "AO," or "Adults-Only," at one point, not Mature. Thailand just banned sales of the game after a Grand-Theft-Auto-related homicide.

Two, there was no mention of the potential backlash from conservative-minded consumers. Riccitiello did not seem to take seriously a potential backlash from marketing sex and violence to children. In 2006, the FTC reported, "In 2002 consumers purchased nearly 40 percent of M-rated video games for children younger than 17 years." Also, "69 percent of unaccompanied children aged 13 to 16 years participating in its mystery shopper survey successfully purchased M-rated video games." If ERTS is going to sell many games to children and teenagers, it needs to take its public image seriously. This juggling act of selling games to children and adults is made more difficult because Grand Theft Auto revels in its smashmouth, rebel-without-a-cause persona. If you're a one-trick pony like Take Two, having an in-your-face image is fine--but when you're a larger company with ties to Hollywood and major media outlets, there are other considerations at stake.

After the meeting, I went to the ERTS company arcade and played some games. I always look forward to my annual John Madden playtime. A new game was there this year, a very realistic EA NASCAR racing game--I had a great time playing it. Some sports items were in the arcade also. I had not noticed these items before. Several autographed items were in clear locked boxes, including an autographed Karl Malone basketball shoe. My favorite was the picture of a young Michael Jordan in a Bulls jersey typing on a 286 desktop computer (with the old floppy drives and tiny green screens). That one was classic--if anyone at EA is reading this, one hit at next year's meeting would be having copies of that picture for shareholders.

As for my thoughts on shares, I bought Take Two shares after the meeting. If ERTS is successful in buying TTWO, then their stock price might take a small hit when the deal is announced. I continue to believe ERTS should have bought TTWO prior to both companies' earnings releases. Back then, TTWO's share price was in the mid-teens and represented a good value. TTWO has since released great earnings, while ERTS released not-so-great earnings. Any stock deal that occurs now will be more dilutive of EA's stock.

ERTS clearly has a strategy of acquisitions to feed its growth. To be fair, it's hard to create a lasting video game franchise, so acquisitions are a good way to grow in the video game business; however, timing is everything when it comes to buy-outs, and ERTS's timing is not ideal. ERTS might want to wait a year or two, when TTWO might miss their numbers, causing a correction in its stock price. When any company bets its future on one franchise, especially one like Grand Theft Auto, it takes a large risk. Meanwhile, ERTS is more diversified and can afford to wait.

I still don't blame EA for its impatience--if EA doesn't buy Take Two, it runs the risk that Microsoft (MSFT) might, especially after the failed Yahoo deal. EA cannot afford to have a competitor like Microsoft get immediate talent and a firmer foothold in the gaming industry because MSFT could potentially limit EA's future X-Box game sales. At the end of the day, EA's impatience may be TTWO's gain.

Comments

[Gaucho420:]

Shouldn't you have asked what games EA has coming out that arent' dependent on a sports license, Harry Potter license, or Godfather license, that will actually be worth playing? Is there any bitg game they make that someone, somewhere, doesn't make money on because EA can't come up with its own original IPs?

EA needs TTWO and badly...Madden, Potter and the rest of their tired stable of games just isn't cutting it. GTA in one week in sales almost totaled EA's entire revenue for the entire quarter...who cares about backlash, we're going on now the 4th installement of the game and its a best seller every step of the way. Clearly, at $500 million out the gate...the backlash is a non-story. Thailand is an insignificant market, where the government turns a blind eye to child prostitution among other ridiculous crime...might as well be the middle ages over there... so I doubt anyone at TTWO, ERTS or MSFT cares what the Thai government thinks on morales.

I got in at TTWO in the mid teens, knowing a buyout would happen. I think you're worried for the wrong reasons about EA and your #1 concern should be that the core gaming market that GTA rules has very little interest in what EA puts out....licenses of books, movies and sports can only take you so far and gamers are getting bored with EA.

Beleive it.

2008 Aug 04 05:07 PM

[GamePolitics:]

You're really out of date on the FTC data. You're quoting a 2006 report that is talking about 2002 data. But in April of this year, FTC data showed that underage buyers were successful only 20% of the time... Moreover, EA has had a number of M-rated games already. GTA San Andreas was re-rated from M to AO in 2005 because hidden sex animations were found in the game. The game was pulled from shelves and re-issued as an M rating with the sex scenes removed. GTA IV, launched this year, was rated M. There basically are no AO rated games since the console makers won't license them and the retailers by and large won't carry them... And this new story out of Thailand, it just happened. Are you confident that the Thai government is putting out the straight story?

2008 Aug 04 06:26 PM

[Writin_Reg:]

I'm pretty darn sure that online site mentioned in the article is the site known as The Prism, as it is a site dedicated to helping gamers whose pcs have been made impossible to run properly, if at all, after players have ran any of EA's newly released games over this past year, and all because of EA's so called iron-clad contract with Sony DADC's SecuRom DRM. Between the shoddy coding of such games like the Sims 2, the change to Securom DRM, and nearly no customer support from EA (which by the way is not a toll-free call), players often go limping into The Prism seeking their help. I have been there. They are a dedicated group of amazing individuals that help players get back the full use of their pcs - of course sans EA's games, as there is just no way with this DRM to do both.

I would disagree with that CEO, EA does not listen to their gaming communities. Instead they bury complaints about the games and Securom from consumers off the main boards of each forum. I know at the Sims 2 board that if you post on their General forum about Securom, even to ask a question, the Simmasters on that site threaten to ban the posters for doing so. I have heard the same thing is happening on the Mass Effect game forums.
Many of EA's customers that have been with this companies games for as long as ten or more years recieve hardly more than grief from EA. I was even hung up on for calling for tech support for my own pc when Securom disabled my dvd-rom and one of my two firewalls among other things, on my pc. I got told by a very rude young man at EA that "Securom doesn't do that" in a loud and gruff manner, then he slammed the phone down. In the end a technician at a pc shop which reformatting my pc, confirmed that Securom did do that. EA was no help to my technician either, as they told him they did not have a tool to remove Securom from my pc, which was why there had to be a reformat to begin with. It does not uninstall with unstallation of EA's software.

I just know one thing a lot of customers are awfully angry with EA over this move to Securom, and main kernal memory leaks from broken coding in games that are never fixed. To add to insult EA has even began using an even harsher form of Securom in this new seasons game that give customers a limit on the amount of times they can activate their games, and even their offline games must have an internet connection to activate. Customers are not happy and angry customers will stop buying EA products in the long run.

2008 Aug 05 02:04 AM

[melante:]

I don't understand why people keep saying that TTWO has ONLY one franchise... Their sport titles are on average better than EA's and have recently released very successful titles (Bioshock, for instance). True, none of these is as popular as GTA, but which other gaming IP is?

As I live in SE Asia I think I should do some clarification regarding Thailand. The local government has nothing to do with this story. It was simply a decision by the local distributor to withdraw the game. What happened was that an obviously insane teenager killed a taxi driver to see whether it was as easy as in the game. He will likely be sentenced to death. A very sad story but I guessed such a person would have killed someone anyway soon or later.

2008 Aug 06 01:46 AM