Tuesday, December 11, 2012

What Is Wrong With Electronic Arts?

I am a video-game enthusiast and I know quality games from the majority of poor ones that are released. Electronic Arts Inc. (EA) has put out a lot of high quality games this past year: Mass Effect 3 (the whole ending controversy aside), Madden 13 (the most innovative iteration in years), Tiger Woods 13 and the more recent Fifa 13. Sure, EA has had some duds this year as well, Medal of Honor Warfighter was downright terrible, but which major game publisher hasn't bombed out at least once a year?

With brand name, marquee franchises like Crysis, Battlefield, The Sims, Madden, Need for Speed, Fifa and Mass Effect (most of which are capable of churning out releases annually) one could think EA is in prime position to lead the video game sector. The problem is I've been thinking that for years now and it just never happens.

2012 was without a doubt a terrible year for the video game giant. The company sank over $100 million into a bungled Star Wars online multiplayer game that produced lackluster subscriber growth and soon went free-to-play, it managed to upset its consumer base at almost every turn (including skimping out on a proper ending for the much beloved Mass Effect series) and it won the dubious award of 'worst company in America' from voters at The Consumerist, EA wrestled that title away from Bank of America. As bad as the news was for Electronic Arts in 2012, the stock's performance was even worse. Take a look at the following one-year chart of EA's stock price, courtesy of Yahoo! Finance:

EA is down over 30% in the past year alone and is no where close to its all time highs set back in the mid 2000's, currently off more than 70%. The company has also managed zero equity growth over the last five years and almost zero Return on Capital growth. For the year ending March 2013, the average analyst estimate is for $4.1 billion in revenue, which is about 1% lower than last year's $4.14 billion. On top of that, debt and liabilities have been increasing quickly.

So, I ask again, what is going on?

Clearly, management has a part to play in such pathetic results. They have proven themselves unable to guide this company in the right direction. Current CEO John Riccitiello has been the subject of many rumors for dismissal but so far has managed to keep his job despite his company's terrible performance. Peter Moore is thought to be his future replacement.

The disturbing slowdown in overall video game sales has to be a big factor as well. Sales of games have dropped dramatically over the last year. But the real reason could be that of the impending console update. If you take a look at the sale figures for each major console in 2012 compared to the same time period for 2011, the results are not good: the Xbox 360 sold about 2.6 million fewer consoles, the Playstation 3 sold about 2 million fewer consoles and the Wii sold about 4 million fewer, which is a drop of over 50%. The Wii system's dramatic drop can be partly attributed to the release of the new Nintendo WiiU, but that still sold only about 800,000 units. Check out these latest results and more at VGChartz.com.

With most rumors suggesting a 2013 release for at least one of the big next-generation systems, Microsoft's Xbox and Sony's Playstation, gamers have simply not been buying new consoles like they used to. Less console sales equals less video games sales, that is an easy correlation to make. This slowdown in big hardware has no doubt affected games sales negatively over the last year.

But don't take my word for it, take the word of Yves Guillemot, CEO and co-founder of video game giant Ubisoft. He recently told Polygon, "We need new consoles. At the end of the cycle generally the market goes down because there are less new IPs, new properties, so that damaged the industry a little bit. I hope next time they will come more often." Check out the full article here.

So, are Microsoft and Sony partly to blame for Electronic Arts's struggles as of late? I'd say they definitely aren't helping much, that's for sure. It is obvious that EA is suffering through a downturn in the market in which they operate but any good management team has to have a plan to overcomes such difficulties. With the new console generation fast approaching I am curious to see what EA has in store for both consumers and investors.


Disclosure: I have no position in any of the stocks mentioned in this article.

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