Like the embattled hero of one of its own video games, Electronic Arts (TR Large Cap 100) is facing a spate of challenges – including a difficult and costly console transition phase and increasingly tough publisher-rivals – that may force the world’s largest video-game publisher to expand into new arenas.
These challenges came into sharp focus in early May when EA announced that its profits had plunged more than 90 percent in its last fiscal quarter (ending March 31), from $90 million a year earlier to just $8 million. To make matters worse, EA executives announced that they anticipate the company will take a hit in the current quarter as well – with net revenue expected to come in around $300-340 million for the fiscal quarter ending June 30, compared with $432 million a year earlier. A release from the Redwood City, CA company cited “lower net revenues at a lower gross margin and higher operating costs” as the reason for the sharp slide in net income.
In other words, EA isn’t making as much profit on its games. And it’s been forced to spend a lot more lately to develop games for all the new consoles coming out over the next year – at a time when the competition for game quality and price is fierce.
But EA may be positioning itself to be less dependent on the cycle of new console releases and to be less easily shaken by price competition. Known for its sports and movie game franchises, the video-game publisher has recently gotten into music publishing, and may more actively leverage its technology and intellectual property into other sectors as well.
Industry experts think it’s unlikely that EA will try to remake itself into a movie production company, though – a la Sony, Warner Bros., or DreamWorks. But the idea of EA more closely partnering on media or technology deals to diversify itself is a good bet. Michael Pachter, a research analyst with Wedbush Morgan Securities, says the company will likely expand its success in console games into the emerging handheld and online gaming markets, as well as into new markets outside the United States. Also, he suggested, EA will further leverage deals with ESPN and the NFL and their hugely successful sports franchise by offering more services tied to fantasy sports leagues.
While its market may expand in the long term, right now EA is focused intently on console gaming. And with three of the biggest video hardware manufacturers –Microsoft, Sony and Nintendo – set to ship new consoles within the next year, the video game business appears to be on the verge of a new boom.
When Nintendo launched its GameCube and Game Boy Advance and Microsoft first offered its Xbox in 2001, U.S. retail sales for video games soared 43 percent over the previous year, to $9.4 billion. But until Microsoft’s Xbox 360, Sony’s PlayStation 3, and Nintendo’s Revolution actually hit stores, EA and other game publishers are in a Catch-22: They need to lay out money to publish games for all these platforms – while game buyers wait for the new systems and games to come out.