But EA has been flexing its competitive muscles as well. Judging by the company’s string of successes developing video games based on blockbuster movies – such as its chart-topping Harry Potter and Lord of the Rings franchises, as well as a forthcoming release based on Batman Begins – and its expanding interests in music production, EA is broadening its reach beyond just video games by leveraging its game technology and its tremendous consumer reach to bolster revenues.
Since hiring a new executive of music and audio, Steve Schnur, EA has been progressively broadening its interest in music, most recently by teaming up last November with Cherry Lane Music Publishing to create Next Level Music LLC, a publishing company that will sign, publish, and license EA’s existing music assets to commercials, films, film trailers, ring tones, and other commercial media, which EA in turn will promote through its games.
But Brown contends that, in spite of the company’s expanded interests in music, “we’re not moving aggressively in anything but the games space.” Even the Cherry Lane partnership, he says, is driven by a desire to improve the music in the video games, not necessarily to sell music.
Given the gaming giant’s better-than-average track record of scoring hit games to be released alongside blockbuster movies, moving further into that business might seem to be a good fit. Many film production companies, like Lucasfilm Ltd. through its LucasArts unit and Disney through its Buena Vista Games unit, have moved more of their video game production in-house. And EA has insisted it doesn’t plan on moving into the movie production business.
“They might try to license a property like The Sims’ to the movies,” says Pachter at Wedbush Morgan Securities. “But I don’t see them starting up a film company.”
Angela Emery, a spokeswoman for Buena Vista Games, says her company and EA are indeed “competitors on the game side,” but she doesn’t see the company as a rival in the movie space – and doesn’t see the competition as limiting their potential to work together on video games in the future. Buena Vista does about 60 percent of its own games, but works with other publishers, such as THQ and SquareEnix, on the other 40 percent.
Indeed, while lines between film production and game production may be blurring, Pachter believes the trend of film companies trying to produce music and games is “a fluke” and won’t threaten EA. Deals like Time Warner’s arrangement to license distribution of “The Matrix Online” to Sony, announced last Friday, will do little to make a dent in EA’s core gaming business. “ ‘The Matrix Online’ sucks,” analyst Pachter says, “It’s like if Warner Bros. bought the rights to Gigli 2’. Who cares?”
While EA might not be gunning for Disney or Warner Bros. anytime soon, DFC Intelligence’s Cole believes that the company may well be looking to move into “new entertainment opportunities” if it expects to maintain its growth and become less dependent on the ebb and flow of the new gaming platform releases. If EA wants to justify its $15-20 billion market valuation, Cole says “they need to break away from their profitability being tied so closely to the console cycle.”
Just how will EA manage that? Cultivating a base among a growing number of portable, handheld and cell-phone gamers, EA’s Brown believes, will help insulate the company against the downturns that come with a major console transition. Protecting its core franchises in sports and movie games, which tend to appeal to a broader base of mainstream players, will continue to bolster EA, says Brown.
In addition, the company is seeking to expand its range of new games – which Brown admits are a bit more risky than proven standards like Madden NFL or a movie tie-in, but give the company a more diverse mix of products. For instance, Spore, developed for EA by the maker of their popular Sims franchise, took top honors from game critics at last month’s E3 trade show.
Ultimately, though, analyst Cole is confident that, although EA has hit some rough spots, it remains in the lead. As an independent third-party publisher, “they’re in a league of their own,” Cole says. “Their biggest challenge is really keeping up with their own success.”
Karen Epper Hoffman writes about business and technology issues from her home in Poulsbo, WA.